NBFC Sector Update: Regulations and weak markets to impact performance By Motilal Oswal Financial Services Ltd
Regulations and weak markets to impact performance
Profitability trend to be muted sequentially
* Across segments, the regulatory environment is likely to influence the performance of non-lending financials in 3QFY25. While F&O regulations are anticipated to have an impact on BSE/ANGELONE, new surrender charges will affect LI players. GI players will be impacted by the changes in the reporting of gross premiums for long-term policies.
* Nifty for the quarter was down 8.4%, which will impact AUM growth for AMCs/CAMS/ KFin. However, SIP flows have held up strong in Oct’24/Nov’24 at more than INR250b. Yields are likely to be stable given the limited impact of telescopic structure in 3QFY25. Most notably, other income will see a sharp fall due to market correction.
* BSE’s premium turnover has been stable despite a sharp decline in notional turnover due to F&O regulations. Additionally, the decline in notional turnover will aid margin expansion as regulatory fees have a direct linkage. On the other hand, ANGELONE’s order flow is expected to be weak during the quarter. Lower cash volumes will have an adverse impact on CDSL’s transaction charges.
* Wealth managers will incur an MTM hit from the market corrections, which would be partially offset by the inflows. Transaction revenue would also be down sequentially.
* LI players are seeing through the implementation of surrender charges wherein product IRRs and commissions have been altered. VNB margins will be influenced by: 1) product mix – the share of ULIPs remained strong, 2) some benefits of non-par repricing, and 3) the impact of surrender charges. For our coverage universe, we expect a change of -40bp to +70bp sequentially.
* GI players will face an impact from the implementation of the new practice of reporting GWP on a 1/n basis for the long-term business. This will lead to a higher opex ratio, driving up the combined ratio. The health segment’s loss ratios will also remain elevated.
* We maintain our high conviction on the capital market plays as highlighted in our recently released thematic report (click here). The current weak trends are transitory and will reset the base for longer-term growth. Our top picks in this space are BSE, ANGELONE, HDFCAMC, and Nuvama.
* Insurance stocks have seen a sharp correction due to media articles on the regulator constraining the role of the bancassurance channel (https://tinyurl.com/4y6zp26k). In such a scenario, we expect LIC and IPRU to outperform, given their lower dependence on the bancassurance channel.
Demat monthly run-rate declines; volumes dip after the new F&O regulations
* Cash ADTO continued its MoM downward trajectory during the first two months of 3QFY25 with declines of 12%/6% MoM in Oct’24/Nov’24. A slight recovery was witnessed in Dec’24 with a 3% MoM growth in cash ADTO.
* In the F&O segment, options volumes witnessed a significant decline after partial implementation of the new F&O regulations in Nov’24, resulting in F&O ADTO dipping 3.5%/14.8%/33.1% in Oct’24/Nov’24/Dec’24.
* BSE’s market share in the options segment continues to scale up in terms of notional/ premium turnover, reaching 29%/15% in Dec’24 vs. 27%/13% in Sep’24.
* Incremental demat account additions declined from 4.4m/month in 2QFY25 to 3.5m in Oct’24 and 3.2m in Nov’24. Similarly, incremental NSE active client count has fallen to 1m/0.7m in Oct/Nov ’24 from an average of 1.2m in 2QFY25.
* MCX has maintained its momentum with volumes remaining above INR50t in Nov’24/ Dec’24. Futures ADTO increased to INR280b in 3QFY25 from INR270b in2QFY25. On the other hand, Options ADTO rose to INR2.04t in 3QFY25 from INR1.94t in 2QFY25.
* For BSE, despite an 18% drop in notional ADTO, the premium ADTO for 3QFY25 increased to INR88b from INR82b in 2QFY25. This would drive revenue growth while sequential EBITDA margin expansion of 330bp will be fueled by lower regulatory and clearing & settlement costs.
* We expect ANGELONE to report a revenue decline of 19% QoQ due to a 14% QoQ dip in the number of orders and the impact of true-to-label charges. Lower customer acquisitions, and consequently lower opex, will offset the impact partially.
Mutual Funds: SIP inflows remain strong; equity inflows down from the peak
* Mutual fund AUM grew 43%/40% YoY during Oct’24/Nov’24, driven by 57%/50% growth in equity AUM. While Oct’24 witnessed strong equity inflows of INR587b, a slight slowdown was observed in Nov’24 (INR401b). SIP flows scaled new heights and stood at INR253b for both Oct’24 and Nov’24.
* The AUM of HDFC AMC/Nippon AMC/ABSL AMC/UTI AMC grew 44%/51%/24%/31% YoY at the end of Nov’24, reflecting market shares of 11.5%/8.3%/5.6%/5.2%.
* Equity AUM’s share dipped ~70bp in Oct’24 and ~60bp in Nov’24, reaching 57.3%.
* We expect AMCs to register strong revenue growth of 25-38% YoY, propelled by healthy AUM growth. However, their profitability is likely to be hurt by a sharp fall in other income owing to MTM hit on equity exposure in the investment book.
* CAMS and KFin are expected to register healthy revenue growth led by AUM growth and continued momentum in non-MF businesses. Profitability should remain healthy given scale benefits.
* For wealth managers, we expect some hit because of MTM that will be offset by inflows. For 360 One, scaling up in the loan book will also provide support to earnings.
Life Insurance: Mixed performance likely; VNB margin to be stable QoQ
* Private life insurance companies experienced 18%/44% growth in APE in Oct’24/Nov’24. For Dec’24, we expect industry growth momentum to remain stable.
* The industry’s VNB margin would be influenced by: 1) product mix – share of ULIPs remained strong, 2) some benefits of non-par repricing, and 3) the impact of surrender charges. For our coverage universe, we expect a change of -40bp to +70bp sequentially.
General Insurance: Accounting changes to affect expense ratios
* Excluding crop, the general insurance sector witnessed GWP growth of 20%/3% in Oct’24/ Nov’24. The health segment grew 47%/dipped 1% YoY in Oct’24/Nov’24 (+3% in 2QFY25). Retail health growth was impacted by the change in accounting for long-term policies. The motor segment was hit by low automobile sales and grew 13%/4% YoY in Oct’24/Nov’24 (+6% in 2QFY25).
* For ICICIGI, premium growth in Oct’24/Nov’24 was below the industry average of 3%/-3% YoY. While the retail health segment grew in the high teens, weak motor growth and a decline in the group health segment resulted in a tepid performance.
* For Oct’24/Nov’24, STARHEAL experienced a soft premium growth of 5%/8% YoY, with retail growth of 6%/8% and group health decline of 12%/growth of 2%.
* While there is no change in operational efficiency of insurers, the change in accounting for long-term health policies will result in elevated opex ratios. Loss ratios are anticipated to remain elevated, especially in the health segment.
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
