IGI Logo

Second Covid wave and lockdowns – weak growth and asset-quality deterioration:

After analyzing the Q1FY22 performance of most vehicle financiers, we can see a steep decline in AUM growth, mainly due to weak disbursements (see Exhibit 1), along with a sharp deterioration in asset quality in the absence of moratorium. Borrowers had a more challenging second wave due to the higher mortality rate among own employees. Overall collection efficiency was impacted the most in May’21. However, overall trends witnessed an improvement in Jun’21.

Bajaj and Mahindra Finance are the worst-affected, while SHTF and SCUF have been outliers:

In our coverage universe, Bajaj Finance (2W/3W portfolio) and MMFS have been the worst-affected with both seeing absolute declines in AUM yoy and a steep rise in NPAs as well (Exhibit 2). With 19% GNPA in the auto portfolio of BAF, overall underwriting of the company remains questionable (see Exhibit 5). On the contrary, Shriram Transport has performed better in relative terms, followed by SCUF and LTFH, with relatively better growth and superior recoveries.

Passenger cars, private buses and 3W worst hit; tractors on a better footing:

Among vehicle portfolios, most lenders have indicated continued stress in the passenger vehicle segment (cab aggregators) due to the lockdowns across the country, as well as elevated fuel prices and sluggish tourism activities. School and private buses were the other portfolios that remained under stress, along with two and three wheelers. Tractors and private cars have witnessed relatively better trends.

Surge in OTR 2.0 seen across lenders; mixed trends in Covid-specific overlays:

With the RBI’s announcement about restructuring of retail assets, most lenders have witnessed a steep surge in OTR 2.0, which is mainly contributed by self-employed and low-income segments who preferred to conserve cash during the uncertain times (Exhibit 4). However, some players, like SHTF, have avoided restructuring to regularize repayments and strengthen overall collection efficiency. Similarly, the Covid-related management overlay has witnessed volatile trends, with some companies creating additional reserves (e.g., SHTF). However, CIFC has opted to utilize the existing pool 

Surge visible in Stage 2 – prefer to remain cautious about trends in fresh slippages:

Most lenders have kept the restructured book under Stage 1 and 2, leading to a surge across buckets. With the rise in LGDs, bucket movement should keep overall provisioning under pressure. Although collection efficiency for most lenders should normalize in the coming months, in the case of an adverse bucket movement, we may see provisioning charge remaining elevated, along with write-offs or otherwise a dip in overall coverage. Hence, we are keeping a close eye on asset-quality trends in the coming quarters.

If third Covid wave comes, things could get even worse – so we prefer to remain watchful:

As mentioned earlier, the second wave has been more damaging than the first wave due to higher mortality rates. However, with vaccination drives conducted by most of them, the majority of lenders remain confident about facing a third one. However, any new lockdowns due to a third wave could be devastating for all lenders as overall collection efficiencies will again be affected as customers prefer to conserve cash during such times.

SHTF, SCUF and CIFC remain our top picks:

Although Q1 was tough for all vehicle financiers, we expect the situation will improve from here. The risk of a third wave persists and we stick to our preferences for promoter-backed, moat-driven, well-governed NBFCs with stable liability franchises. SHTF (Buy, TP Rs1,750) remains our top pick among vehicle financiers, followed by SCUF (Buy, TP Rs2,100) and CIFC (Buy, TP Rs650).

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer