MOSL: FINANCIALS - NBFCs 2QFY18 Preview-Strong growth across segments-Better profitability aided by declining cost of funds

​FINANCIALS - NBFCs 2QFY18 Preview: Strong growth across segments; Better profitability aided by declining cost of funds

• We expect gradual improvement for microfinance institutions (the most impacted segment post demonetization) and vehicle financiers (led by better monsoon). Post implementation of GST, while growth has moderated, we expect improved loan demand from SMEs due to inventory restocking and cash flow mismatches (increased receivables).
  
• Core housing growth has moderated due to RERA implementation, and tier II and III locations are the key growth drivers. For housing finance corporations (HFCs), we expect the share of non-retail loans in the overall portfolio to inch higher. Post implementation of RERA, we expect opportunistic growth by large players.
  
• Festive season-related demand, coupled with better availability of credit, is likely to keep growth rates healthy for segments like consumer durables, two-wheelers (2Ws) and vehicle finance. Backed by easy liquidity and cheaper cost of funds, NBFCs have become more competitive in the corporate lending segment.
  
• Farm loan waivers and normal monsoon have lifted sentiment in the rural economy. Focus on collections has also helped companies ensure strong recoveries. Vehicle financiers are expected to report healthy asset quality and growth.
  
• BAF, CAFL, LTFH, PNBHF and MMFS (off a low base) are likely to post earnings growth of 30%+ YoY, which is commendable, in our view. We expect positive surprises from MMFS, SHTF and DEWH. Our top picks in this space are HDFC, DEWH, BAF and SHTF.