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21_India Asset financing NBFCs – Resilient rural model

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22
India – Asset financing NBFCs Resilient rural model Clyton Fernandes +9122 6626 6744 [email protected] India I Equities 26 March 2014 Kaitav Shah +9122 6626 6545 [email protected]
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Page 1: 21_India Asset financing NBFCs – Resilient rural model

India – Asset financing NBFCsResilient rural model

India – Asset financing NBFCsResilient rural model

Clyton Fernandes+9122 6626 6744

[email protected]

India I Equities

26 March 2014

Kaitav Shah+9122 6626 6545

[email protected]

Page 2: 21_India Asset financing NBFCs – Resilient rural model

2

Summary AUM growth still resilient, multi-product NBFCs fare better■ MMFS, Bajaj Finance and Chola displayed resilient AUM growth, led by a combination of

diversified product mix and deeper penetration

■ Disbursement growth for NBFCs slowing down, led by the M&H CV sector

NIM stable, likely to improve■ While NIM declined, yoy and qoq, on account of the implementation of liquidity-tightening

measures by the RBI, they are still high

■ Partial rollback of extraordinary measures by the RBI combined with a 25-50bps likely fall in interest rates in 2HCY14 is likely to curtail a further fall in NIM

Asset quality slips, high capital adequacy provides buffer■ Asset quality of most NBFCs slips given the sharp slowdown in the CV sector. However, we

expect pace of NPA formation to abate with the recent stabilization in freight rates .

■ High capital adequacy of most NBFCs is unlikely to constrain business growth and offers assurance against further delinquencies.

Prefer■ We expect NBFCs with a diversified asset mix, higher operating leverage and sufficient NPA

coverage to tide over the challenging asset-quality cycle

■ Top Buy: Bajaj Finance ,Chola Finance Top Sell: Shriram Transport

Anand Rathi ResearchSummarySummary

Page 3: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

India Economy - Inflation likely to soften further

■ GDP growth in India further slowed to 4.7% in Q3 (vs 4.8% in Q2)

■ IIP in December came at 0.6%, with no clear signs of growth bottoming out .

■ Inflation (CPI and WPI) has considerably eased. We expect WPI and CPI below 5% in the latter part of CY14

■ Systemic liquidity is in the RBI’s comfort zone

■ Given the slowing growth and softening of inflation, we expect a 25-50bps rate cut in 2HCY14

GDP growth slowing down

Source: MOSPI

IIP growth yet to bottom out

Source: MOSPI

Inflation coming off

Source: MOSPI

Multi product Multi product NBFCsNBFCs fare betterfare better

Liquidity

Source: Bloomberg

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

(Gro

wth

, %)

GDP

-2500

-2000

-1500

-1000

-500

0

500

1000

1500

Apr-1

3

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

(`bn)

Liquidity

-10.0

-5.0

0.0

5.0

10.0

15.0

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

(Gro

wth

) %

IIP

4.0

5.0

6.0

7.0

8.0

9.0

Mar

-12

Apr-1

2M

ay-1

2Ju

n-12

Jul-1

2Au

g-12

Sep-

12O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb-

13M

ar-1

3Ap

r-13

May

-13

Jun-

13Ju

l-13

Aug-

13Se

p-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

(Infla

tion)

%

7.0

8.0

9.0

10.0

11.0

12.0

(Inflation) %

WPI CPI(RHS)

3

Page 4: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

Vehicle sales - Structural slowdown

■ M&H CVs are likely to continue in the midst of a cyclical slowdown in FY14

■ LCVs saw a 22% CAGR in the past 10 years, but this was inflated by the creation of the SCV segment in FY05

■ Since Sep’12 diesel prices have risen faster than truck rentals, impacting breakeven for long-haul fleet operators

■ However, channel checks over the last two months suggest that truck rentals have bottomed out and are looking up

M&H CV prolonged cyclical slowdown

Source: Bloomberg

LCV sales tapering off

Source: Bloomberg

Diesel price rises faster than fleet rental, delaying breakeven for operators

Source: Bloomberg

Multi product Multi product NBFCsNBFCs fare betterfare better

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-1

1Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

Apr-1

3Ju

l-13

Oct

-13

Jan-

14

(Nos.)

M&HCV

10,000

20,000

30,000

40,000

50,000

60,000

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-1

1Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

Apr-1

3Ju

l-13

Oct

-13

Jan-

14

(Nos.)

Light commercial vehicles

4

15,000

17,500

20,000

22,500

25,000

27,500

30,000

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

(`/9ton)

30

35

40

45

50

55

(`/ltr)

Delhi to Mumbai India diesel prices (RHS)

Page 5: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

Tractor, two wheelers save the day…

■ Utility vehicle growth slows down. Rural growth still resilient.

■ The long-term trend for passenger vehicles indicates a sustained growth trajectory from FY02, with a tapering growth rate in the past two years

■ Tractor growth has been healthy; however, ahead it is expected to soften

■ Rising rural disposable incomes driving two-wheeler demand

Passenger vehicles slowing

Source: CSO

Tractors - Structurally better

Source: CSO

Utility vehicles: High base effect playing out

Source: CSO

Two-wheelers – Continuing rural demand

Source: CSO

Multi product Multi product NBFCsNBFCs fare betterfare better

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-1

1Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

Apr-1

3Ju

l-13

Oct

-13

Jan-

14

(Nos.)

Passeger vehicles

15,000

24,000

33,000

42,000

51,000

60,000

Jan-

09

Apr-0

9

Jul-0

9

Oct

-09

Jan-

10

Apr-1

0

Jul-1

0

Oct

-10

Jan-

11

Apr-1

1

Jul-1

1

Oct

-11

Jan-

12

Apr-1

2

Jul-1

2

Oct

-12

Jan-

13

Apr-1

3

Jul-1

3

Oct

-13

Jan-

14

(Nos.)

Utility vehicles

500,000

700,000

900,000

1,100,000

1,300,000

1,500,000

1,700,000

1,900,000

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-1

1Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

Apr-1

3Ju

l-13

Oct

-13

Jan-

14

(Nos.)

Two wheelers

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

FY09

FY10

FY11

FY12

FY13

FY14

e

-5

0

5

10

15

20

25

30

Tractor production Growth

Nos (%)

5

Page 6: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

AFCs: AUM growth better, yet…

■ Despite the prolonged cyclical slowdown in CV markets, AUM growth for most asset-financing companies has been stable. This is on account of a niche model focused on rural and semi-rural areas where consumption is yet healthy

India NBFC : AUM growth

Source: RBI

Multi product Multi product NBFCsNBFCs fare betterfare better

■ A sharp slowdown in M&H CV sales has dried up financing opportunities in the segment. As a result, disbursement growth of most NBFCs is slowing from their past pace. We expect this trend to continue over the next two quarters

Indian NBFC: Disbursement growth slowing down

Source: RBI

-20-10

01020304050607080

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

(%)

Bajaj Finance Chola FinanceMagma Finance Mahindra FinanceShriram City Union Finance Shriram Transport

AUM

-30-15

0153045607590

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

(%)

Chola Finance Magma FinanceMahindra Finance Shriram City Union FinanceShriram Transport

6

Page 7: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

AFCs diversifying into home, gold loans

■ However, most AFCshave diversified their product profiles and are no longer captive financiers

■ Further AFCs have been consistently investing in their branch networks and deepening their penetration levels

■ Multiple products and deepening penetration are driving AUM, and disbursement is faster than the system

Product-mix charts

Source: CSO

Branches

Source: CSO

Multi product Multi product NBFCsNBFCs fare betterfare better

Product presence Bajaj Finance Chola Finance Magma Finance Mahindra Finance Shriram City Union Shriram Transport Capital First

Commercial vehicles

Tractors

Utility vehicles

Passenger cars

Used Car

LAP

Home loans

Consumer durable

Two/Three wheeler

Gold loan

0

200

400

600

800

Bajaj Finance Chola Finance Magma Finance Mahindra Finance Shriram CityUnion Finance

Shriram Transport

Mar'11 Sep'13 7

Page 8: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

NIM stabilizes, further erosion unlikely

■ NIM of most AFCs was lower during the quarter on account of the tight liquidity environment created by the RBI’s extraordinary measures to protect the rupee

■ NBFCs preferred to borrow from banks than from money markets.

NIM falls during the quarter

Source: RBI

NiMNiM stable,likelystable,likely to improveto improve

■ While banks have raised base rates, reversal of the extraordinary measures is likely to offset the higher base rate, protecting further erosion in interest spreads

■ A fall in interest rates, by 25-50bps in H2 CY14 is likely to provide some impetus to spreads

Share of credit to NBFCs by banks at all-time high

Source: RBI

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Dec

-10

J an -

11Fe

b -1 1

Mar

-11

A pr- 1

1M

ay-1

1J u

n -11

Jul -1

1Au

g-1 1

S ep -

11O

ct-1

1N

o v-1

1D

ec- 1

1Ja

n -12

Feb -

1 2M

a r-1

2A p

r- 12

May

- 12

Jun -

12Ju

l -12

Aug-

1 2Se

p -12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b -13

Ma r

-13

Apr-1

3M

ay-1

3Ju

n-13

J ul -1

3Au

g -1 3

Sep-

13

(`bn)

0

1

2

3

4

5

6

7

(%)

Banks lending to NBFCs % of overall credit (RHS)

0

3

6

9

12

15

18

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

(%)

Bajaj Finance Chola FinanceMagma Finance Mahindra FinanceShriram City Union Finance Shriram Transport

8

Page 9: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

Operating leverage playing out, to support RoAs

■ Over FY10-13, most listed NBFCs invested in their branch networks, strengthened their employee base and introducing hand-held devices, increasing costs

■ However, over the last three quarters operating leverage of all NBFCs apart from Shriram Transport has been playing out

Cost-to-assets declining

Source: RBI

NiMNiM stable, likely to improvestable, likely to improve

■ Cost-income for Chola, Bajaj, Magma continues to trend downwards, with scope for further improvement.

■ A combination of more products and deeper penetration has led to better operating leverage, driving improvement in cost-to-assets

Cost-income – improving trend for most

Source: RBI

0.0

1.5

3.0

4.5

6.0

7.5

9.0

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

(%)

Bajaj Finance Chola FinanceMagma Finance Mahindra FinanceShriram City Union Finance Shriram Transport

0

10

20

30

40

50

60

70

80

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

(%)

Bajaj Finance Chola FinanceMagma Finance Mahindra FinanceShriram City Union Finance Shriram Transport

9

Page 10: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

Higher stressed assets, comfort of high tier-I capital

■ Asset quality saw some pain during the quarter with GNPA of all asset-financing companies increasing

■ NBFCs provided conservatively and shored up NPA coverage.

■ Credit costs to be high as asset-quality headwinds persist. However, with fleet rentals stabilizing, the pace of NPA formation is likely to abate.

■ High tier-1 capital offers assurance against further delinquencies

GNPA of all NBFCs rises

Source: Companies, Anand Rathi Research

Credit costs increase

Source: Companies, Anand Rathi Research (*annualized)

To shore up NPA coverage

Source: Companies, Anand Rathi Research

High capital adequacy for most is comforting

Source: Companies, Anand Rathi Research

0

1.5

3

4.5

6

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

(%)

Bajaj Finance Chola FinanceMagma Finance Mahindra FinanceShriram City Union Finance Shriram Transport

0.0

1.5

3.0

4.5

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

(%)

Bajaj Finance Chola FinanceMagma Finance Mahindra FinanceShriram City Union Finance Shriram Transport

0

20

40

60

80

100

120

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

(%)

Bajaj Finance Chola FinanceMagma Finance Mahindra FinanceShriram City Union Finance Shriram Transport

0

4

8

12

16

20

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

(%)

Bajaj Finance Chola FinanceMagma Finance Mahindra FinanceShriram City Union Finance Shriram Transport

10

Page 11: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

India NBFCs: Historical PBV Standard Deviation

Chola Finance

Source: Bloomberg, Anand Rathi Research

Mahindra Finance

Source: : Bloomberg, Anand Rathi Research

Shriram City Union Finance

Source: : Bloomberg, Anand Rathi Research

Shriram Transport

Source: : Bloomberg, Anand Rathi Research

Bajaj Finance

Source: Bloomberg, Anand Rathi Research

Magma Fincorp

Source: : Bloomberg, Anand Rathi Research

CIF +1SD

+2SD

-1SD

-2SD

Mean

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

+1SD

+2SD

- 1SD

- 2SD

Mean

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

MAGMA

+1SD

+2SD

-1SD

-2SD

Mean

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Mar

-08

Jul-0

8N

ov-0

8M

ar-0

9Ju

l-09

Nov

-09

Mar

-10

Jul-1

0N

ov-1

0M

ar-1

1Ju

l-11

Nov

-11

Mar

-12

Jul-1

2N

ov-1

2M

ar-1

3Ju

l-13

Nov

-13

Mar

-14

STFC+1SD

+2SD

- 1SD

- 2SD

Mean

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

SCUF+1SD

+2SD

- 1SD

- 2SD

Mean

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

BAF

0.0

0.5

1.0

1.5

2.0

2.5

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

+2SD

+1SD

-1SD

-2SD

Mean

11

Page 12: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

India NBFCs: Historical PBV Chart

Chola Finance

Source: Bloomberg, Anand Rathi Research

Mahindra Finance

Source: : Bloomberg, Anand Rathi Research

Shriram City Union Finance

Source: : Bloomberg, Anand Rathi Research

Shriram Transport

Source: : Bloomberg, Anand Rathi Research

Bajaj Finance

Source: Bloomberg, Anand Rathi Research

Magma Fincorp

Source: : Bloomberg, Anand Rathi Research

BAF

0.5x

1.0x

1.5x

2.0x

0

500

1,000

1,500

2,000

2,500

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

CIF

0.5x

1.0x

1.5x

2.0x

0

50

100

150

200

250

300

350

400

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

MMFS

1.0x

1.7x

2.5x

3.2x

0

50

100

150

200

250

300

350

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

0.7x

1.0x

1.3x

1.6x

0

20

40

60

80

100

120

140

160

180

Mar

-07

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

1.0x

1.6x

2.2x

2.8x

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Mar

-07

Jun-

07Se

p-07

Dec

-07

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-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

SHTF

1.0x

1.6x

2.2x

2.8x

0

200

400

600

800

1,000

1,200

1,400

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

12

Page 13: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

India NBFCs: Historical PE Chart

Chola Finance

Source: Bloomberg, Anand Rathi Research

Mahindra Finance

Source: : Bloomberg, Anand Rathi Research

Shriram City Union Finance

Source: : Bloomberg, Anand Rathi Research

Shriram Transport

Source: : Bloomberg, Anand Rathi Research

Bajaj Finance

Source: Bloomberg, Anand Rathi Research

Magma Fincorp

Source: : Bloomberg, Anand Rathi Research

BAF

6x

9x

12x

15x

0

500

1,000

1,500

2,000

2,500

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

CIF

6x

9x

12x

15x

0

100

200

300

400

500

600

Apr-0

7Ju

l-07

Oct

-07

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-1

1Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

Apr-1

3Ju

l-13

Oct

-13

Jan-

14

MMFS

5x

10x

15x

20x

0

50

100

150

200

250

300

350

400

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

MAGMA

5x

8x

11x

14x

0

20

40

60

80

100

120

140

160

180

200

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

SCUF

5x

8x

11x

14x

100

300

500

700

900

1,100

1,300

1,500

1,700

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

SHTF

3x

7x

11x

15x

0

200

400

600

800

1,000

1,200

1,400

Mar

-08

Jul-0

8

Nov

-08

Mar

-09

Jul-0

9

Nov

-09

Mar

-10

Jul-1

0

Nov

-10

Mar

-11

Jul-1

1

Nov

-11

Mar

-12

Jul-1

2

Nov

-12

Mar

-13

Jul-1

3

Nov

-13

Mar

-14

13

Page 14: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

Company section

14

Page 15: 21_India Asset financing NBFCs – Resilient rural model

Structural issues; Downgrade to sell■Shriram Transport improved AUM growth to more than 20% AUM growth in 9MFY14. This was largely led by increasing rural penetration and the change in consumer preferences to used CVs (between 3- 5yr-old vehicles).

■However ,the higher growth however was offset by lower NIM, down 94bps yoy to 6.7%, on the higher cost of funds and lower securitization income.

■ Shriram’s productivity has been deteriorating with cost-to-income increasing by 400 bps yoy to 25% . Increasing rural penetration would further cap any productivity gains.

■ Asset quality has deteriorated, with GNPA at 3.6% of advances, the highest in the last three years. A weak macro-economic environment is likely to keep credit costs (200bps on AUM) higher than in the past.

■ At our Mar’15 price target of `655, the stock would trade at 1.6x FY15e and 1.4x FY16e BV. We expect Shriram to continue facing structural challenges. Downgrade the stock to a Sell. Our target is based on the

two-stage DDM (CoE: 15.7%; beta: 1.1; Rf: 8%). Risks:A higher-than-expected NIM could lead to higher income.

Anand Rathi Research

Shriram Transport (Sell)

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Income statement Year end 31 March FY12 FY13 FY14e FY15e FY16e

Net interest income 33,312 34,588 37,546 42,303 48,882

NII growth (%) 12.6 3.8 8.6 12.7 15.6

Non-interest inc 1,015 1,885 2,227 2,672 3,207

Total income 34,327 36,473 39,773 44,975 52,089

Total income growth (%) 9 6.3 9.0 13.1 15.8

Op. expenses 7,835 7,860 9,815 11,029 12,377

Operating profit 26,492 28,613 29,958 33,946 39,712

- 10 8.0 4.7 13.3 17.0

Provisions 7,683 8,451 11,280 11,563 11,821

PBT 18,809 20,162 18,677 22,383 27,891

Tax 6,235 6,556 5,603 7,386 9,483

PAT 12,574 13,606 13,074 14,997 18,408

+(Associates–Minorities) - - - - -

Consolidated PAT 12,574 13,606 13,074 14,997 18,408

PAT growth (%) 2.2 8.2 (3.9) 14.7 22.7

FDEPS (Rs/share) 55.6 60.0 57.6 66.1 81.1

DPS (Rs/share) 6.5 9.0 11.0 13.0 14.0

Key Ratios Year end 31 March FY12 FY13 FY14e FY15e FY16e

NIM (%) 7 7 6 6 6

Other inc / Total inc (%) 3.0 5.2 5.6 5.9 6.2

Cost-Income (%) 23 22 25 25 24

Provision coverage (%) 86 76 70 70 67

Dividend Payout (%) 14 17.6 22.3 23.0 20.2

Borrowings-loans (%) 105 98 99 98 98

Gross NPA (%) 3 3.2 3.8 4.1 4.2

Net NPA (%) 0 1 1 1 1

BV (Rs) 265 317 362 413 478

Adj BV (Rs) 260 306 343 389 445

CAR (%) 24 20 19 18 19

Tier 1 17 17 15 14 13

RoE (%) 23 21 17 17 18

RoA (%) 3.7 3.4 2.7 2.7 2.8

- Tier 1 (%) 17.3 17.0 15.0 14.2 13.4

Dividend Yield (%) 0.9 1.3 1.6 1.9 2.0

15

Page 16: 21_India Asset financing NBFCs – Resilient rural model

Strong parentage, diversified product ■ Diversified loan mix and a diversified customer segment to help drive 23% loan growth over the next two years

■ Customer profile changing; less dependent on agri-income

■ A well-recognized brand in rural and semi-rural areas, along with strong support from the parent to help sustain its high NIM above 9.5%

■ Productivity improvement to continue, with cost-assets to slip to 3.2% by FY15, from 3.4% at present

■ Asset quality slips, with GNPA increasing to 4.8% of NPAs. However, Q4 FY14 is likely to result in greater recoveries on a seasonally good quarter when rural cash flows are highest.

■ High capital adequacy of 18.6% (tier-1: 15.7 %) provides impetus against further delinquencies.

■ We expect the company’s niche rural presence, strong parentage and diversified product mix to support a 3.2%+

RoA over FY15/16.. At our price target of `291, it would trade at 2.8x FY15e and 2.4x FY16e PBV. Our valuation is based on the two-stage DDM (CoE: 15%; beta: 1.1; Rf: 8%) Risks.More than- expected credit growth and delinquencies.

Anand Rathi Research

Mahindra Finance (Buy)

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Income statement Year end 31 March FY12 FY13 FY14e FY15e FY16e

Net interest income 16,478 22,380 27,940 34,658 42,408

NII growth (%) 25.4 35.8 24.8 24.0 22.4

Non-interest inc 265 1,022 360 420 339

Total income 16,743 23,402 28,300 35,078 42,747

Total income growth (%) 24 39.8 20.9 23.9 21.9

Op. expenses 5,920 7,420 9,390 11,645 14,569

Operating profit 10,823 15,982 18,911 23,433 28,177

Operating profit growth (%) 26 47.7 18.3 23.9 20.2

Provisions 1,570 3,190 5,592 6,014 5,810

PBT 9,253 12,792 13,319 17,419 22,368

Tax 3,051 3,965 4,462 5,835 7,493

PAT 6,201 8,827 8,857 11,584 14,875

PAT growth (%) 33.9 42.3 0.3 30.8 28.4

FDEPS (Rs/share) 12.1 15.7 15.7 20.6 26.4

DPS (Rs/share) 2.8 3.6 4.0 5.0 5.5

Key Ratios Year end 31 March FY12 FY13 FY14e FY15e FY16e

Interest spread (%) 7 7 7 8 8

NIM (%) 10.2 9.6 9.3 9.2 9.1

Other inc / Total inc (%) 2 4 1 1 1

Cost-Income (%) 35 32 33 33 34

Provision coverage (%) 78 65.9 46.7 57.6 72.3

Dividend Payout (%) 23 23 25 24 21

Borrowings-loans (%) 80 79 81 82 83

Gross NPA (%) 3 3 4 4 3

Net NPA (%) 1 1 2 2 1

BV (Rs) 57 79 90 105 125

Adj BV (Rs) 55 75 77 93 117

CAR (%) 16 19 18 17 17

- Tier 1 (%) 14 16 15 15 15

RoE (%) 23.2 25.2 18.6 21.1 23.0

ROA (%) 3.9 4.2 3.0 3.2 3.2

16

Page 17: 21_India Asset financing NBFCs – Resilient rural model

Rural foray, high NIM, stable asset quality■ Likely RoE improvement, shored up by stable margins, improving share of fees and stable credit costs

■ High capital adequacy of 17.4% (tier-1: 12.1%) provides impetus for more-than-past credit growth

■ NIM protection in FY14, estimated at 3% over FY14-15, helped by CASA share sustained at over 40%

■ Led by improving business growth across customer segments, we estimate fee-to-average-earning-assets to be higher – 1.5% in FY14 and 1.6% in FY15, compared with ~1.4% over FY10-13

■ Adequate NPA coverage (75.4%); we expect stable credit costs,~64bps over FY14-15, to aid profitability.

■We expect the healthy loan growth, rising proportion of secured lending and high NPA coverage to drive a sustainable RoA of more than 3.3% over FY13-16. At our price target of `1,905 the stock would trade at 2x FY15e BV and 1.8x FY16e BV. Our target is based on the two-stage DDM (CoE: 15.5%; beta: 1.04; Rf: 8.5%) Key risks:Slowdown in the economy

Anand Rathi Research

Bajaj Finance (Buy)

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Income statement Year end 31 March FY12 FY13 FY14e FY15e FY16e Net interest income 12,983 17,191 23,394 28,851 34,731 NII growth (%) 36.1 32.4 36.1 23.3 20.4 Non-interest inc 1,011 1,866 1,553 1,928 2,313 Total income 13,994 19,057 24,948 30,778 37,045 Total inc growth (%) 38.6 36.2 30.9 23.4 20.4 Op. expenses 6,691 8,523 11,196 13,631 16,710 Operating profit 7,303 10,534 13,751 17,147 20,335 Op profit growth (%) 33.0 44.2 30.5 24.7 18.6 Provisions 1,281 1,818 2,853 3,203 4,163 PBT 6,022 8,716 10,898 13,944 16,171 Tax 1,958 2,803 3,651 4,950 5,385 PAT 4,064 5,913 7,247 8,994 10,786 PAT growth (%) 64.6 45.5 22.6 24.1 19.9 FDEPS (Rs/share) 98.4 118.8 145.6 180.7 216.7 DPS (Rs/share) 12.0 14.0 16.0 20.0 25.0

Key Ratios Year end 31 March FY12 FY13 FY14e FY15e FY16e

Interest spread (%) 12 9 10 10 10

NIM (%) 13.0 11.6 11.9 11.6 11.0

Other inc / Total inc (%) 7 10 6 6 6

Cost-Income (%) 48 45 45 44 45

Provision coverage (%) 89.4 82.6 83.5 84.0 84.3

Dividend Payout (%) 12 12 11 11 12

Borrowings-loans (%) 83 78 80 82 84

Investment-Deposit (%) - - - - -

Gross NPA (%) 1 1 1 2 2

Net NPA (%) 0 0 0 0 0

BV (Rs) 492 676 806 967 1,158

Adj BV (Rs) 488 670 796 952 1,137

CAR (%) 17 22 19 17 18

- Tier 1 (%) 17 19 17 15 15

RoE (%) 24.0 21.9 19.6 20.4 20.4

RoA (%) 3.8 3.8 3.6 3.5 3.3

Dividend Yield (%) 0.8 0.9 1.0 1.3 1.6

17

Page 18: 21_India Asset financing NBFCs – Resilient rural model

Rurally entrenched, multi-product play■ AUM growth set to pick up, with improved prospects of the gold-loan financing business. Other products such as SME finance, two-wheeler loans, etc., continue to augment growth. Additionally, SCUF is poised to benefit from customer-sourcing from Shriram Chits. This is likely to drive the 18% loan CAGR over the next two years

■ NIM is likely to improve given the greater share of higher-yielding assets such as SME finance and two-wheeler finance than gold loans

■ Productivity has been stable despite the slowdown in AUM growth. Ahead, we expect expenses to grow in line with asset growth, with cost-to-AUM stable at 4.1%

■ While asset quality has deteriorated, GNPA at 2.5% is lower than peers. Additionally, a 73% NPA coverage ratio is likely to provide a sound cushion against additional delinquencies

■ At our price target of `1,184, the stock would trade at 2.1x FY15e and 1.9x FY16e BV. Our target is based on the two-

stage DDM (CoE: 16%; beta: 1.1; Rf: 8.5%). Risks. Below-expected growth and higher NPA.

Anand Rathi Research

Shriram City Union Finance (Buy)

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Income statement Year end 31 March FY12 FY13 FY14e FY15e FY16e

Net interest income 11,033 16,289 18,784 21,516 25,340

NII growth (%) 43.9 47.6 15.3 14.5 17.8

Non-interest inc 229 397 476 596 715

Total income 11,261 16,686 19,261 22,112 26,055

Total inc growth (%) 46 48.2 15.4 14.8 17.8

Op. expenses 4,236 6,189 7,549 8,807 10,319

Operating profit 7,025 10,497 11,712 13,304 15,736

Op profit growth (%) 47 49.4 11.6 13.6 18.3

Provisions 1,783 3,840 3,914 3,832 4,442

PBT 5,242 6,656 7,798 9,472 11,294

Tax 1,816 2,160 2,597 3,154 3,761

PAT 3,425 4,496 5,201 6,318 7,533

Extra-ordinary - - - - -

Consolidated PAT 3,425 4,496 5,201 6,318 7,533

PAT growth (%) 42.4 31.3 15.7 21.5 19.2

FDEPS (Rs/share) 65.4 81.1 87.7 106.5 127.0

DPS (Rs/share) 6.5 8.5 10.0 12.0 13.0

Key Ratios Year end 31 March FY12 FY13 FY14e FY15e FY16e

Interest spread (%) 9 9 10 10 10

NIM (%) 10.4 11.8 11.8 12.2 12.1

Other inc / Total inc (%) 2 2 2 3 3

Cost-Income (%) 38 37 39 40 40

Provision coverage (%) 75 63.3 62.2 63.0 63.8

Dividend Payout (%) 10 10 11 11 10

Borrowings-loans (%) 90 95 94 93 94

Investment-Deposit (%) - - - - -

Gross NPA (%) 2 2 3 4 4

Net NPA (%) 0 1 1 1 1

BV (Rs) 331 406 483 576 687

Adj BV (Rs) 326 387 465 552 659

CAR (%) 19 18 16 16 17

- Tier 1 (%) - - - - -

RoE (%) 23.2 22.5 20.3 20.1 20.1

RoA (%) 3.1 3.1 3.1 3.4 3.4

Dividend Yield (%) 0.6 0.8 1.0 1.2 1.3

18

Page 19: 21_India Asset financing NBFCs – Resilient rural model

Multi product, high operating leverage■ The NBFC has diversified its product profile over the last two years. Tractor and used CVs now form 36% of the vehicle portfolio, compared to 29% two years back

■ Core earnings to be strong, driven by its multi-product strategy and strong branch-network expansion. The branch network has recorded more than a 40% CAGR over FY10-13

■ NIM likely to improve given the greater share of higher-yielding assets such as tractors and used CVs. The NBFC also does not run any asset-liability mismatch

■ Cost-to-assets has improved from 3.8% in FY11 to 3.3%, still higher than peers. The high operating leverage is likely to help drive improvement in RoAs to 2.3% by FY16

■ While asset quality has deteriorated, GNPA at 1.7 % is lower than peers. We build in higher than past credit costs to factor in a weak macro-economic environment.

■ At our price target of `325, the stock would trade at 1.6x FY15e and 1.4x FY16e BV. Our target is based on the two-stage DDM (CoE: 16%; beta: 1.1; Rf: 8.5%). Risks: Slowdown in the rural economy could lead to lower-than-expected growth and more-than-expected NPA.

Anand Rathi Research

Chola Finance (Buy)

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Income statement Year end 31 March FY12 FY13 FY14e FY15e FY16e

Net interest income 7,421 11,014 14,684 17,575 21,269

NII growth (%) 24.7 48.4 33.3 19.7 21.0

Non-interest inc 428 367 286 342 412

Total income 7,848 11,381 14,970 17,917 21,681

Total income growth (%) 27 45.0 31.5 19.7 21.0

Op. expenses 4,216 5,630 6,587 7,884 9,323

Operating profit 3,632 5,751 8,383 10,034 12,358

Operating profit growth (%) 21 58.3 45.8 19.7 23.2

Provisions 731 1,243 2,718 2,814 2,691

PBT 2,901 4,508 5,665 7,220 9,667

Tax 1,176 1,443 1,813 2,274 3,045

PAT 1,725 3,065 3,852 4,946 6,622

+(Associates–Minorities) - - - - -

Consolidated PAT 1,725 3,065 3,852 4,946 6,622

PAT growth (%) 177.4 77.7 25.7 28.4 33.9

FDEPS (Rs/share) 13.0 21.4 26.9 34.5 46.3

DPS (Rs/share) 2.3 3.3 3.7 4.5 6.0

Key Ratios Year end 31 March FY12 FY13 FY14e FY15e FY16e

Interest spread (%) 6 6 6 6 6

NIM (%) 6.7 7.2 7.5 7.1 7.0

Other inc / Total inc (%) 5 3 2 2 2

Cost-Income (%) 54 49 44 44 43

Provision coverage (%) 63 73.9 75.9 76.9 77.4

Dividend Payout (%) 18 15 14 13 13

Debt / Equity (x) 9 9 10 10 10

Borrowing-Loans (%) 93 92.0 90.6 92.2 91.9

Investment-Deposit (%) n.a n.a n.a n.a n.a

Gross NPA (%) 1 1 1 1 1

Net NPA (%) 0 0 0 0 0

BV (Rs) 107 137 160 189 229

Adj BV (Rs) 104 134 156 185 223

CAR (%) 17 18 18 17 17

- Tier 1 (%) 10.9 11.4 11.3 10.6 10.4

RoE 13.9 18.1 18.1 19.8 22.1

RoA 1.5 1.9 1.9 2.0 2.1

Dividend Yield (%) 0.9 1.3 1.4 1.8 2.3

19

Page 20: 21_India Asset financing NBFCs – Resilient rural model

Diversifying product, inexpensive valuations■ Magma has diversified its product profile over the last two years. Tractor and used CVs now form 36% of its vehicle portfolio compared to 29% two years ago

■ The NBFC underwent a change in accounting norms, which led to RoAs dipping to 0.5% in FY13. Since then the RoA has improved to 1.3% in 9MFY14 .This would stabilize at 1.6% in FY16

■ NIM is likely to improve given the increasing share of higher-yielding assets such as tractors and SCVs. The NBFC heavily depends on banks for financing and is more sensitive to favorable interest-rate movements

■ While asset quality has deteriorated, GNPA at 1.7% is lower than peers. A more conservative NPA recognition policy is likely to keep credit costs higher than in the past

■ At our price target of `89, the stock would trade at 1.0x FY15e and 0.8x FY16e BV. Our target is based on the two-stage DDM. (CoE: 18.5%; beta: 1.2; Rf: 8.5%). Risks: Rural slowdown, leading to higher-than-expected credit cost and lower-than-expected growth.

Anand Rathi Research

Magma Finance (Buy)

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Income statement Year end 31 March FY12 FY13 FY14e FY15e FY16e

Net interest income 3,712 5,531 7,775 9,397 11,550

NII growth (%) 23.6 49.0 40.6 20.9 22.9

Non-interest inc 663 2,220 1,849 2,051 2,324

Total income 4,375 7,751 9,623 11,448 13,873

Total income growth (%) (16) 77.2 24.2 19.0 21.2

Op. expenses 3,020 4,661 5,582 6,296 7,353

Operating profit 1,355 3,090 4,042 5,151 6,520

Operating profit growth (%) (38) 128.0 30.8 27.5 26.6

Provisions 318 966 1,955 2,012 2,106

PBT 1,037 2,124 2,087 3,139 4,414

Tax 259 675 522 942 1,280

PAT 778 1,449 1,565 2,198 3,134

+(Associates–Minorities) 38 41 85 104 119

Consolidated PAT 740 1,408 1,480 2,094 3,015

Key Ratios Year end 31 March FY12e FY13e FY14e FY15e FY16e

NIM (%) 5.5 5.4 5.7 5.6 5.5

Other inc / Total inc (%) 15 29 19 18 17

Cost-Income (%) 69 60 58 55 53

Provision coverage (%) 100 37.3 41.2 49.3 50.7

Dividend Payout (%) 15 11 13 11 8

Debt / Equity (x) 8 9 10 11 12

Borrowing-Loans (%) 90 97.3 93.1 93.8 96.6

Investment-Deposit (%) n.a n.a n.a n.a n.a

Gross NPA (%) - 2 4 4 4

Net NPA (%) - 1 3 2 2

BV (Rs) 58 74 80 90 104

Adj BV (Rs) 58 66 62 68 79

CAR (%) 21 17 16 16 16

RoE 9.2 11.6 10.7 13.6 17.0

RoA 1.1 1.4 1.1 1.2 1.4

Dividend Yield (%) 0.9 1.2 1.5 1.8 1.8

20

Page 21: 21_India Asset financing NBFCs – Resilient rural model

Anand Rathi Research

Valuation matrix

FinancialsFinancials

Source: Bloomberg, Anand Rathi Research

21

Bloomberg code

Price M-cap Target Upside Rating FY13-15 EPS CAGR

Bank Rs Rs bn Rs (Downside) % FY14e FY15e FY14e FY15e FY14e FY15e FY14e FY15e FY14e FY15e FY14e FY15e

HDFC 871.7 1,348.0 965 10.7 Hold 14.9 2.8 2.5 3.1 2.8 2.7 2.4 3.0 2.7 24.6 21.1 21.0 22.1

POWF 185.4 244.7 187 0.9 Buy 12.9 0.9 0.8 0.9 0.8 0.9 0.8 0.9 0.8 4.6 4.3 20.4 18.8

RECL 217.8 215.0 231 6.1 Buy 15.7 1.1 0.9 1.2 1.0 1.0 0.9 1.1 0.9 4.9 4.2 22.9 21.9

IDFC 112.2 169.9 148 32.0 Buy 16.1 1.1 1.0 1.5 1.3 1.1 1.0 1.5 1.3 8.0 6.9 14.7 15.4

SHTF 701.7 159.2 655 (6.7) Sell 5.0 2.0 1.8 1.9 1.7 1.9 1.7 1.8 1.6 12.2 10.6 17.0 17.1

MMFS 252.4 142.1 291 15.3 Buy 14.6 3.3 2.7 3.8 3.1 2.8 2.4 3.2 2.8 16.0 12.3 18.6 21.1

BAF 1,657.0 83.0 1,905 15.0 Buy 23.3 2.1 1.8 2.4 2.0 2.1 1.7 2.4 2.0 11.5 9.2 19.6 20.4

SCUF 1,044.0 57.9 1,184 13.4 Buy 14.6 2.2 1.9 2.5 2.1 2.2 1.8 2.5 2.1 11.9 9.8 20.3 20.1

CIFC 256.8 36.8 325 26.6 Buy 29.6 1.6 1.4 2.1 1.7 1.6 1.3 2.0 1.7 9.5 7.1 18.1 20.5

Magma 67.1 12.7 89 32.7 Buy 21.9 1.1 1.0 1.4 1.3 0.8 0.7 1.1 1.0 8.6 6.1 10.1 13.0

PFCIF 13.7 7.7 19 35.0 Buy 31.2 0.6 0.5 0.8 0.7 0.6 0.5 0.8 0.7 3.9 4.3 15.3 12.6

P/E(x) RoE(%)P/ABV(x) Target P/ABV P/BV(x) Target P/BV

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Anand Rathi ResearchAppendix

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