Better than expected
In the light of recent developments in the NBFC space, we visited branches of NBFCs/HFCs in the outskirts of Pune to ascertain the (anecdotal) impact on key metrics.
As funding to NBFCs reduced considerably post the IL&FS and DHFL debacles, we expected disbursals to slow down across the board. We noticed a slowdown at CIFC while MMFS and Repco reported healthy growth. Magma, too, displayed resilience but on a smaller base.
Given the rise in CoFs for NBFCs, a pass through was certain. The impact on margins is contingent on the ability of the NBFCs to pass on the entire increase in the cost of funds to their customers. All the NBFCs/HFC branches we visited other than Manappuram have raised their interest rates in recent times. CIFC has increased its rates by ~100bps since Apr-18, while Repco has raised its rates by a mere ~30bps since Oct-18.
We do not foresee any major asset quality issues across the retail portfolios of NBFCs. Our stance was corroborated as neither of the NBFC/HFC branches we visited reported significant changes in asset quality.
Surprisingly, disbursals across the branches we visited were resilient. We believe low regional disbursals at CIFC will be balanced by robust performance in other geographies, especially eastern India. Asset quality was stable, in line with expectations. Our constructive stance on CIFC (TP Rs 1,625, 3.25x Dec-20 ABV of Rs 500) and MMFS (TP Rs 500, 2.75x Dec-20 ABV of 175 + Rs 18 for MIBL) remains unchanged.
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❑ Cholamandalam Investment and Finance Company: Regional disbursals slowed down in Nov-18, led by the M&HCV segment (on a/c of poor demand coupled with higher interest rates). However, the focus on collections ensured superior asset quality.
❑ Mahindra & Mahindra Financial Services: Disbursal growth was robust at +30% YoY and ahead of internal targets. While the quantum of cash collections remains high, asset quality improved due to the increasing focus on collections.
❑ Repco Home Finance Company: Disbursals increased gradually as competition from NBFC/HFCs in the area receded. Avg. monthly disbursals were ~Rs 55mn. Interest rates were increased by ~30bps since Oct-18. Asset quality was stable with branch GNPAs at ~1.6%; home loans constituted ~95% of the branch assets.
❑ Magma Fincorp: Regional disbursals in the year averaged ~Rs 65mn/month. In Oct & Nov-18, disbursals were higher at ~Rs 80mn & ~Rs 70mn (on a smaller base) but significantly lower than the target of ~Rs 100mn. The focus was on improving asset quality and productivity from the current levels (higher business/employee and branch).
❑ Manappuram Gold Loans: On an FYTD basis, regional AUM (36 branches) grew ~20% to ~Rs 3.6bn. Gold collateral grew ~2.6% to 1,674kg. Interest rates and discounts offered to customers remained unchanged over the past 3 months. Asset quality was largely stable with no major frauds in the region.