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MOSL: FINANCIALS - NBFCs 1QFY18 Preview-Improving performance across segments-MFI and vehicle finance portfolios showing signs of recovery

​FINANCIALS - NBFCs 1QFY18 Preview: Improving performance across segments; MFI and vehicle finance portfolios showing signs of recovery

• We expect NBFCs under our coverage to report PAT growth of 20% YoY in 1QFY18. Post demonetization, we expect stable-to-improving trends in growth across product segments in NBFCs. Pre-GST buying (especially consumer durables), strong auto OEM growth and asset price inflation (CV) would also aid growth, in our view.
  
• Farm loan waivers and expectations of normal monsoons have lifted sentiment in the rural economy. Focus on collections has also helped companies to effect strong recoveries. Vehicle financiers are expected to report healthy asset quality. Our channel checks suggest that at-par delinquencies have come off in the MFI segment and disbursements have resumed. This would benefit BHAFIN.
  
• We expect continued decline in cost of funds, driven by excess liquidity in the system, to offset yield pressure due to higher competition, thus keeping margins stable.
  
• Within our NBFC coverage universe, BAF is likely to post 40%+ PAT growth, driven by strong performance in CDs and 2W financing. Among HFCs, DEWH and IHFL are likely to post earnings growth of 25%+ YoY, which is commendable. Repco Home Finance and Bharat Financial Inclusion could report subdued performance.
  

Housing finance companies: Barring Repco Home Finance, all HFCs under our coverage are likely to post AUM growth in line with past trends. Loan growth for REPCO may continue to be subdued this quarter. Although the Madras High Court passed the order lifting the ban in March, there was some confusion due to which the registrars did not take the order on board. However, only recently, the Court issued a clarification that all properties that were registered prior to Sepember 2016, even by Gram Panchayats, are acceptable. For other HFCs, we expect stable trends. We expect shift towards LAP for LICHF and towards corporate loans (opportunistic in LRD segment) for HDFC to continue. Core retail housing yields would remain under pressure due to higher competition but benefit on cost of funds and change in product mix would partially offset pressure on spreads.