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MOSL: FINANCIALS – NBFC-FY18 a good year, but outlook divergent; FY19 likely to be a good year for vehicle financiers

FINANCIALS – NBFC: FY18 a good year, but outlook divergent; FY19 likely to be a good year for vehicle financiers, but tough for HFCs

 

• FY18 was a good year for most NBFCs under our coverage. Rebounding from demonetization-period lows, growth was strong across segments. Asset quality was stable for housing finance companies (HFCs) and improved for vehicle financiers.
• To mitigate the impact of rising GSec yields, some smaller HFCs migrated their incremental borrowings toward the shorter end of the curve, where rates are 50-100bp lower. In our view, further migration to short-term borrowings may not be possible, and HFCs will have to bear the brunt of rising rates.
• Vehicle financiers had an excellent FY18, with growth rebounding and asset quality improving materially. They are also well-prepared for FY19 and beyond by investing significantly in branch network expansion.
• Diversified/corporate financiers remain on a strong growth path, led by emerging opportunities in corporate lending on account of asset quality issues for most corporate banks. Further, most of the entities are adequately capitalized in this space.
• We remain bullish on the vehicle finance sector, which not only has favorable tailwinds but also pricing power on the asset side. Fuel prices, however, could play spoilsport. Our top pick in this segment is SHTF. We are also bullish on the housing finance sector over the long term, but see headwinds to margins over the near term. Our top pick in this space is HDFC. In the corporate lending space, we like PIEL and LTFH – both offer attractive entry points at current valuations, in our view.