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MOSL: FINANCIALS: NBFCS | 1QFY23 PREVIEW: Healthy disbursement momentum; steady quarter despite seasonality

• We expect our coverage universe of NBFC - Lending Financials to deliver 26% /26%/175% YoY growth in NII/PPoP/PAT, respectively, in 1QFY23. We forecast a strong YoY growth in earnings for SHTF, BAF and LICHF, while we estimate a decline in earnings for MGFL (driven by muted loan growth and deterioration in margin profile).
• In general, 1Q of a fiscal year is a seasonally weak quarter both in terms of disbursements as well as asset quality. However, we expect 1QFY23 to be slightly different with healthy disbursement momentum across both vehicle as well as housing financiers. The deterioration in asset quality (typical of 1Q) is also not as pronounced this time around with housing financiers likely to report a sequential improvement in asset quality while we expect a minor sequential asset quality deterioration (seasonal) for the vehicle financiers.
• Discussions with NBFCs/HFCs seem to suggest that the incremental cost of borrowings have gone up 30-50bp. However, since most of them were already carrying high liquidity on their balance sheets, the quantum of incremental borrowings in 1QFY23 has been very low. A large proportion of the bank term loans for most of the NBFCs are still MCLR-linked, which will get re-priced on their contracted reset frequency. The increase in the weighted average cost of borrowings is between 5bp and 20bp across NBFCs/HFCs.
• While large HFCs have raised their PLRs to transmit the increase in repo rates to customers, the smaller affordable housing financiers have restrained from increasing the lending rates just yet. Vehicle financiers did increase their lending rates by ~25bp in Jun'22 but on many occasions the increase was selectively done in particular lower-yielding product segments such as HCV, CE, Car, UV and Bus. Hence, the impact on margins was limited in 1QFY23; however, the impact in the remainder of FY23 will be the key to monitor for the cohort of lending NBFCs/HFCs.
• Driven by healthy disbursements and a low base of 1QFY22, we expect AUM growth for the NBFCs/HFCs to be healthy in 1QFY23. However, companies suggest that they are already seeing signs of a demand slowdown particularly in HCVs. Besides, with a projected (further) increase in the repo rates over the next six months, we expect companies to begin discussing about the impact on demand in their respective earnings calls.
• Equity markets continue to remain subdued leading to further decline in cash volumes; however, F&O volumes have managed to sustain its momentum. A sharp decline in IPO activity and muted distribution income will adversely affect the performance of the capital market players in 1QFY23. The momentum in inflows for the Wealth Management space is likely to remain decent.
• Growth in the health insurance industry in 1QFY23 has been mainly driven by strong premium growth in the group health business, whereas retail health business has seen some slowdown. SAHIs continue to gain market share, especially in the retail health segment, whereas PSU players have reported weak performance in both group and retail health businesses. However, claim ratios are likely to see sharp improvement with no material impact of COVID claims. Non-COVID claims are also likely to see some normalization.
• We continue to favor: a) franchises with strong balance sheets and b) those companies which can change their asset/liability mix to mitigate the impact on margins. Our top picks are CIFC, SHTF, IIFL Wealth and Star Health.