21 - India Asset Financing NBFCs - Resilient Rural Model

India I Equities
India India Asset Asset financing financing NBFCs NBFCs

Resilient Resilientrural ruralmodel model
Kaitav Shah
+9122 6626 6545 kaitavshah@rathi.com
Clyton Fernandes
+9122 6626 6744 clytonfernandes@rathi.com
26 March 2014
Summary
Anand Rathi Research
Summary
AUM growth still resilient, multi-product NBFCs fare better
MMFS, Bajaj Finance and Chola displayed resilient AUM growth, led by a combination of diversified product mix and deeper penetration Disbursement growth for NBFCs slowing down, led by the M&H CV sector
NIM stable, likely to improve

While NIM declined, yoy and qoq, on account of the implementation of liquidity-tightening measures by the RBI, they are still high Partial rollback of extraordinary measures by the RBI combined with a 25-50bps likely fall in interest rates in 2HCY14 is likely to curtail a further fall in NIM
Asset quality slips, high capital adequacy provides buffer

Asset quality of most NBFCs slips given the sharp slowdown in the CV sector. However, we expect pace of NPA formation to abate with the recent stabilization in freight rates . High capital adequacy of most NBFCs is unlikely to constrain business growth and offers assurance against further delinquencies.
Prefer
We expect NBFCs with a diversified asset mix, higher operating leverage and sufficient NPA coverage to tide over the challenging asset-quality cycle Top Buy: Bajaj Finance ,Chola Finance Top Sell: Shriram Transport
2
Multi product NBFCs fare better
India Economy - Inflation likely to soften further

GDP growth in India further slowed to 4.7% in Q3 (vs 4.8% in Q2) IIP in December came at 0.6%, with no clear signs of growth bottoming out . Inflation (CPI and WPI) has considerably eased. We expect WPI and CPI below 5% in the latter part of CY14 Systemic liquidity is in the RBIs comfort zone Given the slowing growth and softening of inflation, we expect a 2550bps rate cut in 2HCY14
GDP growth slowing down
12.0 10.0 8.0 (Growth, %) 6.0 4.0
-5.0 (Growth) %
IIP growth yet to bottom out

15.0 10.0 5.0 0.0
2.0
-10.0 Sep-13 Sep-12 Jan-13
0.0 Dec-05 Dec-06 Jun-07 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Dec-13 Jun-05 Jun-06 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
May-09
May-10
Source: MOSPI
GDP
Source: MOSPI
IIP
Inflation coming off

9.0 8.0 7.0 6.0 5.0 4.0 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 12.0 11.0 (Inflation) % 10.0 9.0 8.0 7.0
Liquidity
(`bn) 1500 1000 500
(Inflation) %
0 -500 -1000 -1500 -2000 -2500 Jul-13 Jun-13 Aug-13 Sep-13 Oct-13 Apr-13 Nov-13 May-13 Dec-13 Jan-14
May-11
Source: MOSPI
WPI
CPI(RHS)
Source: Bloomberg
Liquidity
May-12
May-13
Sep-11
Sep-10
Sep-09
Jan-09
Jan-10
Jan-11
Jan-12
Jan-14
Vehicle sales - Structural slowdown

M&H CVs are likely to continue in the midst of a cyclical slowdown in FY14 LCVs saw a 22% CAGR in the past 10 years, but this was inflated by the creation of the SCV segment in FY05 Since Sep12 diesel prices have risen faster than truck rentals, impacting breakeven for long-haul fleet operators However, channel checks over the last two months suggest that truck rentals have bottomed out and are looking up
M&H CV prolonged cyclical slowdown
(Nos.) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 10,000 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14
Light commercial vehicles
LCV sales tapering off

(Nos.) 60,000 50,000 40,000 30,000 20,000
M&HCV
Source: Bloomberg
Source: Bloomberg
(`/9ton) 30,000 27,500 25,000
Diesel price rises faster than fleet rental, delaying breakeven for operators
(`/ltr) 55 50 45
22,500 40 20,000 17,500 15,000 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Jun-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Jun-09 Jun-10 Jun-11 Jun-12 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Jun-13 35 30
Delhi to Mumbai
Source: Bloomberg
India diesel prices (RHS)

Tractor, two wheelers save the day

Utility vehicle growth slows down. Rural growth still resilient. The long-term trend for passenger vehicles indicates a sustained growth trajectory from FY02, with a tapering growth rate in the past two years Tractor growth has been healthy; however, ahead it is expected to soften Rising rural disposable incomes driving twowheeler demand
Passenger vehicles slowing
(Nos.) 7,000 6,000 5,000 4,000
33,000
Utility vehicles: High base effect playing out

(Nos.) 60,000 51,000 42,000
3,000 2,000 1,000 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14
24,000 15,000 Jul-09 Jul-10 Jul-11 Jul-12 Oct-09 Oct-10 Oct-11 Oct-12 Jul-13 Jan-09 Apr-09 Jan-10 Apr-10 Jan-11 Apr-11 Jan-13 Apr-13 Jan-12 Oct-13 Apr-12 Jan-14
Passeger vehicles
Utility vehicles
Source: CSO
Source: CSO
Two-wheelers Continuing rural demand

(Nos.) 1,900,000 1,700,000 1,500,000 1,300,000 1,100,000 900,000 700,000 500,000 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14
Tractors - Structurally better

N os 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 FY14e FY09 FY10 FY11 FY12 FY13 10 5 0 -5 (% ) 30 25 20 15
Two wheelers
Tractor production
Grow th
Source: CSO
Source: CSO

AFCs: AUM growth better, yet

India NBFC : AUM growth
(%) 80 70 60 50 40 30 20 10 0 -10 -20 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13
Indian NBFC: Disbursement growth slowing down

(%) 90 75 60 45 30 15 0 -15 -30 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14
3QFY13 4QFY13 1QFY14 2QFY14 3QFY14
AUM
Bajaj Finance Magma Finance Shriram City Union Finance

Source: RBI
Chola Finance Mahindra Finance Shriram Transport

Source: RBI
Magma Finance Shriram City Union Finance
Despite the prolonged cyclical slowdown in CV markets, AUM growth for most asset-financing companies has been stable. This is on account of a niche model focused on rural and semi-rural areas where consumption is yet healthy
A sharp slowdown in M&H CV sales has dried up financing opportunities in the segment. As a result, disbursement growth of most NBFCs is slowing from their past pace. We expect this trend to continue over the next two quarters

AFCs diversifying into home, gold loans

However, most AFCs have diversified their product profiles and are no longer captive financiers Further AFCs have been consistently investing in their branch networks and deepening their penetration levels Multiple products and deepening penetration are driving AUM, and disbursement is faster than the system
Product-mix charts
Product presence Bajaj Finance Chola Finance Magma Finance Mahindra Finance Shriram City Union Shriram Transport Capital First
Commercial vehicles Tractors Utility vehicles Passenger cars Used Car LAP Home loans Consumer durable Two/Three wheeler Gold loan
Source: CSO
Branches
800
600
400
200
0 Bajaj Finance Chola Finance Magma Finance Mahindra Finance

Mar'11 Sep'13
Shriram City Shriram Transport Union Finance
Source: CSO
NiM stable,likely to improve
NIM stabilizes, further erosion unlikely

NIM falls during the quarter
(%) 18 15 12 9 6 3
1,000 2 1 0
Dec -10 Jan -11 Feb -11 Ma r-11 Apr -11 Ma y-1 1 Jun -11 Jul- 11 Aug -11 Sep -11 Oct -11 No v-1 1 Dec -11 Jan -12 Feb -12 Ma r-12 Apr -12 Ma y-1 2 Jun -12 Jul- 12 Aug -12 Sep -12 Oct -12 No v-1 2 Dec -12 Jan -13 Feb -13 Ma r-13 Apr -13 Ma y-1 3 Jun -13 Jul-13 Aug -13 Sep -13
Share of credit to NBFCs by banks at all-time high

(`bn) 3,500 3,000 2,500 2,000 1,500 (%) 7 6 5 4 3
0 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14
500 0

Source: RBI
Banks lending to NBFCs

Source: RBI
% of overall credit (RHS)
NIM of most AFCs was lower during the quarter on account of the tight liquidity environment created by the RBIs extraordinary measures to protect the rupee NBFCs preferred to borrow from banks than from money markets.
While banks have raised base rates, reversal of the extraordinary measures is likely to offset the higher base rate, protecting further erosion in interest spreads A fall in interest rates, by 25-50bps in H2 CY14 is likely to provide some impetus to spreads
NiM stable, likely to improve

Operating leverage playing out, to support RoAs

Cost-to-assets declining
(%) 9.0 7.5 6.0 4.5 3.0 1.5 0.0 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14
Cost-income improving trend for most

(%) 80 70 60 50 40 30 20 10 0 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14

Source: RBI

Source: RBI
Over FY10-13, most listed NBFCs invested in their branch networks, strengthened their employee base and introducing hand-held devices, increasing costs However, over the last three quarters operating leverage of all NBFCs apart from Shriram Transport has been playing out
Cost-income for Chola, Bajaj, Magma continues to trend downwards, with scope for further improvement. A combination of more products and deeper penetration has led to better operating leverage, driving improvement in cost-to-assets
Higher stressed assets, comfort of high tier-I capital

Asset quality saw some pain during the quarter with GNPA of all assetfinancing companies increasing NBFCs provided conservatively and shored up NPA coverage. Credit costs to be high as asset-quality headwinds persist. However, with fleet rentals stabilizing, the pace of NPA formation is likely to abate. High tier-1 capital offers assurance against further delinquencies
GNPA of all NBFCs rises
(%) 6 4.5
Credit costs increase

(%) 4.5
3.0
3
1.5
1.5 0 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14
0.0 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14
3QFY14
Source: Companies, Anand Rathi Research
Source: Companies, Anand Rathi Research (*annualized)
To shore up NPA coverage

(%) 120 100 80 60 40 20 0 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14
High capital adequacy for most is comforting

(%) 20 16 12 8 4 0 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14
10
India NBFCs: Historical PBV Standard Deviation

Bajaj Finance
2.5 2.0 1.5 1.0 0.5 -2SD 0.0 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 BAF +2SD
Chola Finance
3.0 2.5 +2SD 2.0
+1SD
Mahindra Finance
4.0 3.5 3.0 2.5 2.0 - 1SD 1.5 +2SD +1SD Mean
CIF 1.5
+1SD Mean
Mean
1.0
-1SD
-1SD 0.5 -2SD 0.0 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
1.0 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
- 2SD
Source: Bloomberg, Anand Rathi Research
Source: : Bloomberg, Anand Rathi Research
Magma Fincorp
3.5 3.0 2.5 2.0 1.5 1.0 -1SD 0.5 -2SD 0.0 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 MAGMA +2SD +1SD Mean
Shriram City Union Finance

2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 - 2SD Mean - 1SD SCUF +2SD +1SD
Shriram Transport
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mean - 1SD - 2SD STFC +1SD +2SD
11
Bajaj Finance
Magma Fincorp
100
120
140
160
180
20
40
60
80
1,000
1,500
2,000
2,500
500
0 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
BAF

Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
Sep-13
0.7x 1.0x
Mar-14
1.3x
0
1.6x
1.5x
0.5x
100 50 150
1.0x
200
2.0x
250
300
350
400
Chola Finance
1,000
1,200
1,400
1,600
1,800
200
400
600
800
Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 CIF Sep-13 Mar-14
India NBFCs: Historical PBV Chart

Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 2.2x 2.8x 1.0x 1.6x
0.5x
1.0x
1.5x
2.0x
100
150
200
250
300
350
50 0
Mahindra Finance
Shriram Transport
1,000
1,200
1,400
200 0
400
600
800
MMFS
SHTF
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 1.0x 1.6x 2.2x 2.8x
1.7x
1.0x
2.5x
3.2x
12
100
120
140
160
180
200
1,000
1,500
2,000
2,500
20
500 0 Mar-08 Sep-08 Mar-09 Sep-09 BAF Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14
40
60
80
0 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 MAGMA Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 14x 11x 5x 8x
Bajaj Finance
Magma Fincorp

15x 12x 6x 9x
100 0 200 300 400 500 600
1,100
1,300
1,500
1,700
Chola Finance
100 SCUF
300
500
700
900
CIF
India NBFCs: Historical PE Chart

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 11x 14x 5x 8x
Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 6x
12x 9x
15x
100
150
200
250
300
350
400
50 0
Mahindra Finance
Shriram Transport
1,000
1,200
1,400
200 0
400
600
800
Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10
SHTF
Sep-10 MMFS Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14
Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14
11x
15x
10x
15x
20x
3x
7x
5x
13
Company section
14
Shriram Transport (Sell)

Structural issues; Downgrade to sell
Shriram Transport improved AUM growth to more than 20% AUM growth in 9MFY14. This was largely led by increasing rural penetration and the change in consumer preferences to used CVs (between 3- 5yr-old vehicles). However ,the higher growth however was offset by lower NIM, down 94bps yoy to 6.7%, on the higher cost of funds and lower securitization income. Shrirams productivity has been deteriorating with costto-income increasing by 400 bps yoy to 25% . Increasing rural penetration would further cap any productivity gains. Asset quality has deteriorated, with GNPA at 3.6% of advances, the highest in the last three years. A weak macro-economic environment is likely to keep credit costs (200bps on AUM) higher than in the past. At our Mar15 price target of `655, the stock would trade at 1.6x FY15e and 1.4x FY16e BV. We expect Shriram to continue facing structural challenges. Downgrade the stock to a Sell. Our target is based on the two-stage DDM (CoE: 15.7%; beta: 1.1; Rf: 8%). Risks: A higher-than-expected NIM could lead to higher income.
Income statement
Year end 31 March
FY12
FY13
FY14e
FY15e
FY16e
Net interest income NII growth (%) Non-interest inc Total income Total income growth (%) Op. expenses Operating profit Provisions PBT Tax PAT +(AssociatesMinorities) Consolidated PAT PAT growth (%) FDEPS (Rs/share) DPS (Rs/share)
33,312 12.6 1,015 34,327 9 7,835 26,492 10 7,683 18,809 6,235 12,574 12,574 2.2 55.6 6.5
34,588 3.8 1,885 36,473 6.3 7,860 28,613 8.0 8,451 20,162 6,556 13,606 13,606 8.2 60.0 9.0
37,546 8.6 2,227 39,773 9.0 9,815 29,958 4.7 11,280 18,677 5,603 13,074 13,074 (3.9) 57.6 11.0
42,303 12.7 2,672 44,975 13.1 11,029 33,946 13.3 11,563 22,383 7,386 14,997 14,997 14.7 66.1 13.0
48,882 15.6 3,207 52,089 15.8 12,377 39,712 17.0 11,821 27,891 9,483 18,408 18,408 22.7 81.1 14.0
Source: Company, Anand Rathi Research
Key Ratios
Year end 31 March
FY12
FY13
FY14e
FY15e
FY16e
NIM (%) Other inc / Total inc (%) Cost-Income (%) Provision coverage (%) Dividend Payout (%) Borrowings-loans (%) Gross NPA (%) Net NPA (%) BV (Rs) Adj BV (Rs) CAR (%) Tier 1 RoE (%) RoA (%) - Tier 1 (%) Dividend Yield (%)
7 3.0 23 86 14 105 3 0 265 260 24 17 23 3.7 17.3 0.9
7 5.2 22 76 17.6 98 3.2 1 317 306 20 17 21 3.4 17.0 1.3
6 5.6 25 70 22.3 99 3.8 1 362 343 19 15 17 2.7 15.0 1.6
6 5.9 25 70 23.0 98 4.1 1 413 389 18 14 17 2.7 14.2 1.9
6 6.2 24 67 20.2 98 4.2 1 478 445 19 13 18 2.8 13.4 2.0
15
Mahindra Finance (Buy)

Strong parentage, diversified product
Diversified loan mix and a diversified customer segment to help drive 23% loan growth over the next two years Customer profile changing; less dependent on agri-income A well-recognized brand in rural and semi-rural areas, along with strong support from the parent to help sustain its high NIM above 9.5% Productivity improvement to continue, with cost-assets to slip to 3.2% by FY15, from 3.4% at present Asset quality slips, with GNPA increasing to 4.8% of NPAs. However, Q4 FY14 is likely to result in greater recoveries on a seasonally good quarter when rural cash flows are highest. High capital adequacy of 18.6% (tier-1: 15.7 %) provides impetus against further delinquencies. We expect the companys niche rural presence, strong parentage and diversified product mix to support a 3.2%+ RoA over FY15/16.. At our price target of `291, it would trade at 2.8x FY15e and 2.4x FY16e PBV. Our valuation is based on the two-stage DDM (CoE: 15%; beta: 1.1; Rf: 8%) Risks. More than- expected credit growth and delinquencies.
Income statement
Year end 31 March
FY12
FY13
FY14e
FY15e
FY16e
Net interest income NII growth (%) Non-interest inc Total income Total income growth (%) Op. expenses Operating profit Operating profit growth (%) Provisions PBT Tax PAT PAT growth (%) FDEPS (Rs/share) DPS (Rs/share)
16,478 25.4 265 16,743 24 5,920 10,823 26 1,570 9,253 3,051 6,201 33.9 12.1 2.8
22,380 35.8 1,022 23,402 39.8 7,420 15,982 47.7 3,190 12,792 3,965 8,827 42.3 15.7 3.6
27,940 24.8 360 28,300 20.9 9,390 18,911 18.3 5,592 13,319 4,462 8,857 0.3 15.7 4.0
34,658 24.0 420 35,078 23.9 11,645 23,433 23.9 6,014 17,419 5,835 11,584 30.8 20.6 5.0
42,408 22.4 339 42,747 21.9 14,569 28,177 20.2 5,810 22,368 7,493 14,875 28.4 26.4 5.5
Key Ratios
Year end 31 March
FY12
FY13
FY14e
FY15e
FY16e
Interest spread (%) NIM (%) Other inc / Total inc (%) Cost-Income (%) Provision coverage (%) Dividend Payout (%) Borrowings-loans (%) Gross NPA (%) Net NPA (%) BV (Rs) Adj BV (Rs) CAR (%) - Tier 1 (%) RoE (%) ROA (%)
7 10.2 2 35 78 23 80 3 1 57 55 16 14 23.2 3.9
7 9.6 4 32 65.9 23 79 3 1 79 75 19 16 25.2 4.2
7 9.3 1 33 46.7 25 81 4 2 90 77 18 15 18.6 3.0
8 9.2 1 33 57.6 24 82 4 2 105 93 17 15 21.1 3.2
8 9.1 1 34 72.3 21 83 3 1 125 117 17 15 23.0 3.2
16
Bajaj Finance (Buy)

Rural foray, high NIM, stable asset quality
Likely RoE improvement, shored up by stable margins, improving share of fees and stable credit costs High capital adequacy of 17.4% (tier-1: 12.1%) provides impetus for more-than-past credit growth NIM protection in FY14, estimated at 3% over FY14-15, helped by CASA share sustained at over 40% Led by improving business growth across customer segments, we estimate fee-to-average-earning-assets to be higher 1.5% in FY14 and 1.6% in FY15, compared with ~1.4% over FY10-13 Adequate NPA coverage (75.4%); we expect stable credit costs,~64bps over FY14-15, to aid profitability. We expect the healthy loan growth, rising proportion of secured lending and high NPA coverage to drive a sustainable RoA of more than 3.3% over FY13-16. At our price target of `1,905 the stock would trade at 2x FY15e BV and 1.8x FY16e BV. Our target is based on the two-stage DDM (CoE: 15.5%; beta: 1.04; Rf: 8.5%) Key risks: Slowdown in the economy
Income statement
Year end 31 March
FY12
FY13
FY14e
FY15e
FY16e
Net interest income NII growth (%) Non-interest inc Total income Total inc growth (%) Op. expenses Operating profit Op profit growth (%) Provisions PBT Tax PAT PAT growth (%) FDEPS (Rs/share) DPS (Rs/share)
12,983 36.1 1,011 13,994 38.6 6,691 7,303 33.0 1,281 6,022 1,958 4,064 64.6 98.4 12.0
17,191 32.4 1,866 19,057 36.2 8,523 10,534 44.2 1,818 8,716 2,803 5,913 45.5 118.8 14.0
23,394 36.1 1,553 24,948 30.9 11,196 13,751 30.5 2,853 10,898 3,651 7,247 22.6 145.6 16.0
28,851 23.3 1,928 30,778 23.4 13,631 17,147 24.7 3,203 13,944 4,950 8,994 24.1 180.7 20.0
34,731 20.4 2,313 37,045 20.4 16,710 20,335 18.6 4,163 16,171 5,385 10,786 19.9 216.7 25.0
Key Ratios
Year end 31 March
FY12
FY13
FY14e
FY15e
FY16e
Interest spread (%) NIM (%) Other inc / Total inc (%) Cost-Income (%) Provision coverage (%) Dividend Payout (%) Borrowings-loans (%) Investment-Deposit (%) Gross NPA (%) Net NPA (%) BV (Rs) Adj BV (Rs) CAR (%) - Tier 1 (%) RoE (%) RoA (%) Dividend Yield (%)
12 13.0 7 48 89.4 12 83 1 0 492 488 17 17 24.0 3.8 0.8
9 11.6 10 45 82.6 12 78 1 0 676 670 22 19 21.9 3.8 0.9
10 11.9 6 45 83.5 11 80 1 0 806 796 19 17 19.6 3.6 1.0
10 11.6 6 44 84.0 11 82 2 0 967 952 17 15 20.4 3.5 1.3
10 11.0 6 45 84.3 12 84 2 0 1,158 1,137 18 15 20.4 3.3 1.6
17
Shriram City Union Finance (Buy)

Rurally entrenched, multi-product play
AUM growth set to pick up, with improved prospects of the gold-loan financing business. Other products such as SME finance, two-wheeler loans, etc., continue to augment growth. Additionally, SCUF is poised to benefit from customer-sourcing from Shriram Chits. This is likely to drive the 18% loan CAGR over the next two years NIM is likely to improve given the greater share of higheryielding assets such as SME finance and two-wheeler finance than gold loans Productivity has been stable despite the slowdown in AUM growth. Ahead, we expect expenses to grow in line with asset growth, with cost-to-AUM stable at 4.1% While asset quality has deteriorated, GNPA at 2.5% is lower than peers. Additionally, a 73% NPA coverage ratio is likely to provide a sound cushion against additional delinquencies At our price target of `1,184, the stock would trade at 2.1x FY15e and 1.9x FY16e BV. Our target is based on the twostage DDM (CoE: 16%; beta: 1.1; Rf: 8.5%). Risks. Belowexpected growth and higher NPA.
Income statement
Year end 31 March
FY12
FY13
FY14e
FY15e
FY16e
Net interest income NII growth (%) Non-interest inc Total income Total inc growth (%) Op. expenses Operating profit Op profit growth (%) Provisions PBT Tax PAT Extra-ordinary Consolidated PAT PAT growth (%) FDEPS (Rs/share) DPS (Rs/share)
11,033 43.9 229 11,261 46 4,236 7,025 47 1,783 5,242 1,816 3,425 3,425 42.4 65.4 6.5
16,289 47.6 397 16,686 48.2 6,189 10,497 49.4 3,840 6,656 2,160 4,496 4,496 31.3 81.1 8.5
18,784 15.3 476 19,261 15.4 7,549 11,712 11.6 3,914 7,798 2,597 5,201 5,201 15.7 87.7 10.0
21,516 14.5 596 22,112 14.8 8,807 13,304 13.6 3,832 9,472 3,154 6,318 6,318 21.5 106.5 12.0
25,340 17.8 715 26,055 17.8 10,319 15,736 18.3 4,442 11,294 3,761 7,533 7,533 19.2 127.0 13.0
Key Ratios
Year end 31 March
FY12
FY13
FY14e
FY15e
FY16e
Interest spread (%) NIM (%) Other inc / Total inc (%) Cost-Income (%) Provision coverage (%) Dividend Payout (%) Borrowings-loans (%) Investment-Deposit (%) Gross NPA (%) Net NPA (%) BV (Rs) Adj BV (Rs) CAR (%) - Tier 1 (%) RoE (%) RoA (%) Dividend Yield (%)
9 10.4 2 38 75 10 90 2 0 331 326 19 23.2 3.1 0.6
9 11.8 2 37 63.3 10 95 2 1 406 387 18 22.5 3.1 0.8
10 11.8 2 39 62.2 11 94 3 1 483 465 16 20.3 3.1 1.0
10 12.2 3 40 63.0 11 93 4 1 576 552 16 20.1 3.4 1.2
10 12.1 3 40 63.8 10 94 4 1 687 659 17 20.1 3.4 1.3
18
Chola Finance (Buy)

Multi product, high operating leverage
The NBFC has diversified its product profile over the last two years. Tractor and used CVs now form 36% of the vehicle portfolio, compared to 29% two years back Core earnings to be strong, driven by its multi-product strategy and strong branch-network expansion. The branch network has recorded more than a 40% CAGR over FY10-13 NIM likely to improve given the greater share of higheryielding assets such as tractors and used CVs. The NBFC also does not run any asset-liability mismatch Cost-to-assets has improved from 3.8% in FY11 to 3.3%, still higher than peers. The high operating leverage is likely to help drive improvement in RoAs to 2.3% by FY16 While asset quality has deteriorated, GNPA at 1.7 % is lower than peers. We build in higher than past credit costs to factor in a weak macro-economic environment. At our price target of `325, the stock would trade at 1.6x FY15e and 1.4x FY16e BV. Our target is based on the twostage DDM (CoE: 16%; beta: 1.1; Rf: 8.5%). Risks: Slowdown in the rural economy could lead to lower-than-expected growth and more-than-expected NPA.
Income statement
Year end 31 March
FY12
FY13
FY14e
FY15e
FY16e
Net interest income NII growth (%) Non-interest inc Total income Total income growth (%) Op. expenses Operating profit Operating profit growth (%) Provisions PBT Tax PAT +(AssociatesMinorities) Consolidated PAT PAT growth (%) FDEPS (Rs/share) DPS (Rs/share)
7,421 24.7 428 7,848 27 4,216 3,632 21 731 2,901 1,176 1,725 1,725 177.4 13.0 2.3
11,014 48.4 367 11,381 45.0 5,630 5,751 58.3 1,243 4,508 1,443 3,065 3,065 77.7 21.4 3.3
14,684 33.3 286 14,970 31.5 6,587 8,383 45.8 2,718 5,665 1,813 3,852 3,852 25.7 26.9 3.7
17,575 19.7 342 17,917 19.7 7,884 10,034 19.7 2,814 7,220 2,274 4,946 4,946 28.4 34.5 4.5
21,269 21.0 412 21,681 21.0 9,323 12,358 23.2 2,691 9,667 3,045 6,622 6,622 33.9 46.3 6.0
Key Ratios
Year end 31 March
FY12
FY13
FY14e
FY15e
FY16e
Interest spread (%) NIM (%) Other inc / Total inc (%) Cost-Income (%) Provision coverage (%) Dividend Payout (%) Debt / Equity (x) Borrowing-Loans (%) Investment-Deposit (%) Gross NPA (%) Net NPA (%) BV (Rs) Adj BV (Rs) CAR (%) - Tier 1 (%) RoE RoA Dividend Yield (%)
6 6.7 5 54 63 18 9 93 n.a 1 0 107 104 17 10.9 13.9 1.5 0.9
6 7.2 3 49 73.9 15 9 92.0 n.a 1 0 137 134 18 11.4 18.1 1.9 1.3
6 7.5 2 44 75.9 14 10 90.6 n.a 1 0 160 156 18 11.3 18.1 1.9 1.4
6 7.1 2 44 76.9 13 10 92.2 n.a 1 0 189 185 17 10.6 19.8 2.0 1.8
6 7.0 2 43 77.4 13 10 91.9 n.a 1 0 229 223 17 10.4 22.1 2.1 2.3
19
Magma Finance (Buy)

Diversifying product, inexpensive valuations
Magma has diversified its product profile over the last two years. Tractor and used CVs now form 36% of its vehicle portfolio compared to 29% two years ago The NBFC underwent a change in accounting norms, which led to RoAs dipping to 0.5% in FY13. Since then the RoA has improved to 1.3% in 9MFY14 .This would stabilize at 1.6% in FY16 NIM is likely to improve given the increasing share of higheryielding assets such as tractors and SCVs. The NBFC heavily depends on banks for financing and is more sensitive to favorable interest-rate movements While asset quality has deteriorated, GNPA at 1.7% is lower than peers. A more conservative NPA recognition policy is likely to keep credit costs higher than in the past At our price target of `89, the stock would trade at 1.0x FY15e and 0.8x FY16e BV. Our target is based on the twostage DDM. (CoE: 18.5%; beta: 1.2; Rf: 8.5%). Risks: Rural slowdown, leading to higher-than-expected credit cost and lower-than-expected growth.
Income statement
Year end 31 March
FY12
FY13
FY14e
FY15e
FY16e
Net interest income NII growth (%) Non-interest inc Total income Total income growth (%) Op. expenses Operating profit Operating profit growth (%) Provisions PBT Tax PAT +(AssociatesMinorities) Consolidated PAT
3,712 23.6 663 4,375 (16) 3,020 1,355 (38) 318 1,037 259 778 38 740
5,531 49.0 2,220 7,751 77.2 4,661 3,090 128.0 966 2,124 675 1,449 41 1,408
7,775 40.6 1,849 9,623 24.2 5,582 4,042 30.8 1,955 2,087 522 1,565 85 1,480
9,397 20.9 2,051 11,448 19.0 6,296 5,151 27.5 2,012 3,139 942 2,198 104 2,094
11,550 22.9 2,324 13,873 21.2 7,353 6,520 26.6 2,106 4,414 1,280 3,134 119 3,015
Key Ratios
Year end 31 March
FY12e
FY13e
FY14e
FY15e
FY16e
NIM (%) Other inc / Total inc (%) Cost-Income (%) Provision coverage (%) Dividend Payout (%) Debt / Equity (x) Borrowing-Loans (%) Investment-Deposit (%) Gross NPA (%) Net NPA (%) BV (Rs) Adj BV (Rs) CAR (%) RoE RoA Dividend Yield (%)
5.5 15 69 100 15 8 90 n.a 58 58 21 9.2 1.1 0.9
5.4 29 60 37.3 11 9 97.3 n.a 2 1 74 66 17 11.6 1.4 1.2
5.7 19 58 41.2 13 10 93.1 n.a 4 3 80 62 16 10.7 1.1 1.5
5.6 18 55 49.3 11 11 93.8 n.a 4 2 90 68 16 13.6 1.2 1.8
5.5 17 53 50.7 8 12 96.6 n.a 4 2 104 79 16 17.0 1.4 1.8
20
Financials
Valuation matrix
Bloomberg code Bank HDFC POWF RECL IDFC SHTF MMFS BAF SCUF CIFC Magma PFCIF Price M-cap Target Upside Rating FY13-15 EPS CAGR % Hold Buy Buy Buy Sell Buy Buy Buy Buy Buy Buy 14.9 12.9 15.7 16.1 5.0 14.6 23.3 14.6 29.6 21.9 31.2 P/ABV(x) Target P/ABV P/BV(x) Target P/BV P/E(x) RoE(%) Rs 871.7 185.4 217.8 112.2 701.7 252.4 1,657.0 1,044.0 256.8 67.1 13.7 Rs bn 1,348.0 244.7 215.0 169.9 159.2 142.1 83.0 57.9 36.8 12.7 7.7 Rs (Downside) 965 187 231 148 655 291 1,905 1,184 325 89 19 10.7 0.9 6.1 32.0 (6.7) 15.3 15.0 13.4 26.6 32.7 35.0 FY14e 2.8 0.9 1.1 1.1 2.0 3.3 2.1 2.2 1.6 1.1 0.6 FY15e 2.5 0.8 0.9 1.0 1.8 2.7 1.8 1.9 1.4 1.0 0.5 FY14e 3.1 0.9 1.2 1.5 1.9 3.8 2.4 2.5 2.1 1.4 0.8 FY15e 2.8 0.8 1.0 1.3 1.7 3.1 2.0 2.1 1.7 1.3 0.7 FY14e 2.7 0.9 1.0 1.1 1.9 2.8 2.1 2.2 1.6 0.8 0.6 FY15e 2.4 0.8 0.9 1.0 1.7 2.4 1.7 1.8 1.3 0.7 0.5 FY14e 3.0 0.9 1.1 1.5 1.8 3.2 2.4 2.5 2.0 1.1 0.8 FY15e 2.7 0.8 0.9 1.3 1.6 2.8 2.0 2.1 1.7 1.0 0.7 FY14e 24.6 4.6 4.9 8.0 12.2 16.0 11.5 11.9 9.5 8.6 3.9 FY15e 21.1 4.3 4.2 6.9 10.6 12.3 9.2 9.8 7.1 6.1 4.3 FY14e 21.0 20.4 22.9 14.7 17.0 18.6 19.6 20.3 18.1 10.1 15.3 FY15e 22.1 18.8 21.9 15.4 17.1 21.1 20.4 20.1 20.5 13.0 12.6
21
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21 - India Asset Financing NBFCs - Resilient Rural Model

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21 - India Asset Financing NBFCs - Resilient Rural Model

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India I Equities

India India Asset Asset financing financing NBFCs NBFCs

Anand Rathi Research

NIM stable, likely to improve

Asset quality slips, high capital adequacy provides buffer

Multi product NBFCs fare better

Anand Rathi Research

India Economy - Inflation likely to soften further

IIP growth yet to bottom out

Inflation coming off

Multi product NBFCs fare better

Anand Rathi Research

Vehicle sales - Structural slowdown

LCV sales tapering off

(`/9ton) 30,000 27,500 25,000

India diesel prices (RHS)

Multi product NBFCs fare better

Tractor, two wheelers save the day

Utility vehicles: High base effect playing out

Two-wheelers Continuing rural demand

Tractors - Structurally better

Multi product NBFCs fare better

AFCs: AUM growth better, yet

Indian NBFC: Disbursement growth slowing down

Bajaj Finance Magma Finance Shriram City Union Finance

Chola Finance Mahindra Finance Shriram Transport

Chola Finance Mahindra Finance Shriram Transport

Magma Finance Shriram City Union Finance

Multi product NBFCs fare better

AFCs diversifying into home, gold loans

0 Bajaj Finance Chola Finance Magma Finance Mahindra Finance

Shriram City Shriram Transport Union Finance

NiM stable,likely to improve

Anand Rathi Research

NIM stabilizes, further erosion unlikely

Share of credit to NBFCs by banks at all-time high

Bajaj Finance Magma Finance Shriram City Union Finance

Chola Finance Mahindra Finance Shriram Transport

Banks lending to NBFCs

% of overall credit (RHS)

NiM stable, likely to improve

Operating leverage playing out, to support RoAs

Cost-income improving trend for most

Bajaj Finance Magma Finance Shriram City Union Finance

Chola Finance Mahindra Finance Shriram Transport

Bajaj Finance Magma Finance Shriram City Union Finance

Chola Finance Mahindra Finance Shriram Transport

Anand Rathi Research

Higher stressed assets, comfort of high tier-I capital

Credit costs increase

Bajaj Finance Magma Finance Shriram City Union Finance

Chola Finance Mahindra Finance Shriram Transport

Bajaj Finance Magma Finance Shriram City Union Finance

Chola Finance Mahindra Finance Shriram Transport

Source: Companies, Anand Rathi Research

Source: Companies, Anand Rathi Research (*annualized)

To shore up NPA coverage

High capital adequacy for most is comforting

Bajaj Finance Magma Finance Shriram City Union Finance

Chola Finance Mahindra Finance Shriram Transport

Bajaj Finance Magma Finance Shriram City Union Finance

Chola Finance Mahindra Finance Shriram Transport

Source: Companies, Anand Rathi Research