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MOSL: FINANCIALS – NBFCS 4QFY19 PREVIEW-Liquidity improves, but normalcy a while away

Financials – NBFCs 4QFY19 PREVIEW: Liquidity improves, but normalcy a while away; Moderation in growth across segments

 

• In recent times, 4QFY19 was one of the toughest quarters (although tad better than 3Q) for most NBFCs under our coverage. While liquidity started improving towards end-3QFY19, a number of events (Cobrapost, Essel Group related, etc.) led to it tightening once again. While short-term money has been more easily available, long-term money access from the capital markets has shrunk significantly. Also, with the pick-up in credit growth and increase in risk aversion towards NBFCs, bank funding was also slow during the quarter.
• We analyzed the borrowing trends from the capital markets (NCDs and CPs) for NBFCs. The NCD market has still not recovered fully due to mutual funds reducing their NBFC exposure significantly. In this space, companies with strong parentage have benefitted disproportionately compared to others.  On the other hand, the CP market has been more active, money has, by and large, been available to all players. However, cost of capital from this source has been very divergent across players – those with higher share of wholesale lending continue to witness much higher incremental cost of funds compared to others.
• The quarter has been tough for vehicle financiers due to slowdown in auto sales and impact of the high base of 4QFY18. We expect disbursements for vehicle financiers under our coverage to remain stable at best, on a YoY basis. Margins should be largely stable as companies were able to pass on most of the cost of funds’ increase to their customers. We also expect incremental migration towards used vehicle financing for most players.
• HFCs with good parentage are likely to witness healthy retail growth (reduction in prepayment rates) despite strong competition from banks. However, the non-retail segment would see some moderation due to funding constraints. For some HFCs, access to credit is still limited. Overall, we expect HFCs to lose market share to banks in the core home loan segment. Also, the quantum of direct assignments is likely to reduce on a sequential basis. This could impact the upfront assignment income. We remain selective in the NBFC space and prefer companies with good parentage. Our top picks are HDFC and LICHF.