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MOSL: FINANCIALS - NBFC: Analyzing the impact of rising G-Sec yields

Financials - NBFC: Analyzing the impact of rising G-Sec yields; Varying degrees of impact across NBFCs; HFCs most at risk

 

• Over the past three years, there has been a notable shift in the liability mix of most NBFCs towards market borrowings on account of the liquidity flush in the system. However, over the past six months, the incremental benefit on cost on funds has been diminishing, as the 10-year G-Sec yield has risen more than 100bp to 7.5%+ currently. Stock price performance, since then, has varied greatly from company to company.
• In this report, we analyze companies based on liability mix, maturity pattern of liabilities, credit rating, and incremental v/s on-book cost of funds.
• The impact of rising yields will not necessarily be margin dilutive across NBFCs, as it would depend upon (a) the amount of liabilities re-pricing in the near term, (b) pricing power/competitive dynamics in the product segment (monoline retail housing companies to be impacted the most), and (c) ability to switch between various sources of funding. Hence, it would be incorrect to paint all NBFCs with the same brush.
• In our view, SHTF and SCUF are poised to reap additional 30-50bp reduction in cost of funds (from 3QFY18 levels), as the NCDs set to mature over the next 1-2 years bear significantly higher interest cost. For LICHF, BAF and CIFC, the impact will be neutral, as incremental and on-book cost of funds is largely similar. However, among them, incremental spreads for LICHF are likely to be under pressure due to limited pricing power in the core housing segment. Our top picks are BAF, SHTF and REPCO.