-
Please refer to the important disclosures and analyst
certification on inside back cover of this document, or on our
website www.macquarie.com/disclosures.
INDIA
Inside
CV lending industry bottoming out 2 Two years of consecutive
downturn in M&H
CV sales 3 Early signs of bottoming out 4 Asset quality to be
under control for larger
players 8 Regulatory changes unlikely to have
material longer term impact 10 Rural/semi-urban growth story
intact 11 Valuations and key picks 13 India Retail NBFC - Fitch
Ratings 16 Shriram Transport Finance 19 M & M Financial
Services 27 Chola Invest & Fin 32 Sundaram Finance 41 Shriram
City Union Finance 49
Valuation table
P/E (x) P/BV (x) RoE
Company FY14E FY15E FY14E FY15E FY15E
SHTF IN 9.6 7.6 1.6 1.4 19.7 MMFS IN 15.1 12.6 3.0 2.5 21.5 SUF
IN* 14.2 12.4 2.7 2.3 20.1 CIFC IN* 9.6 7.6 1.6 1.3 18.9 SCUF IN*
11.8 9.5 2.2 1.8 20.2
Prices as of 9th January 2014,
Bloomberg consensus estimates Source: Macquarie Research,
January 2014
Analyst(s) Parag Jariwala, CFA +91 22 6720 4083
[email protected] Suresh Ganapathy, CFA +91 22 6720 4078
[email protected]
10 January 2014 Macquarie Capital Securities India (Pvt) Ltd
India Retail NBFCs CV lending industry bottoming out We met
NBFCs and Fitch Ratings for an update on their growth/asset
quality
outlook for CV lending. Though the current situation is grim and
there is excess
capacity, the industry looks to have bottomed out and we think
any recovery will be slow and gradual. Buy SHTF for a ~20%
upside.
M&H CV lending situation is grim currently GDP growth has
halved and related activities such as infrastructure,
manufacturing
and investment have seen a big pullback. We have seen two
consecutive years
of decline in M&H CV sales the first time this has happened
in a decade. If the current trend continues, annualised CV sales
for FY14 would be ~200K about half as much as in FY12. Utilization
levels for M&H CVs are at a multi-year low:
40% of fleet capacity is lying idle. Resale prices have dropped
significantly (~20% in the last 1 year).
We are nearing a bottom; any improvement/revival will be slow
and gradual Our conversations with Fitch and some operators/lenders
suggest that capacity
utilisation is close to a bottom and a further drop in
utilisation levels is unlikely.
An improvement in the economy next year, driven by exports and a
stronger
rural economy, lifting of the mining ban, and a better rabi
harvest should lead to
higher utilisation rates. We are seeing early signs of a bottom
for the CV lending
industry (page 4). With an improvement in utilisation levels,
asset quality can
bottom out well before we see a revival in loan growth.
Correlation of the CV
cycle with IIP and GDP growth is reasonably high and in the
event of a widely-anticipated revival, CV sales could improve,
albeit marginally.
Expertise/sensible lending norms have kept asset quality robust
for larger players Delinquencies have increased for all CV lenders
in the industry. However,
experienced players, through sensible lending, have kept their
delinquencies
well under control. A closer look at India Ratings-rated CV
pools (FY12/13),
reveals that delinquencies for loans originated with +80% LTV is
2x than on
pools originated with less than 70% LTV (4x of loans with 60%
LTV). We gather
collections/ recoveries are better for strong players like SHTF
IN and SUF IN 180 DPD (days past due) delinquencies are 1/10th to
1/7th of 90 DPD (Figs 3
and 4). SHTF in particular has been lending at lower LTVs and we
dont see a material hit to its asset quality.
Regulatory changes unlikely to have material long-term impact on
normalised returns Most NBFCs (non-bank finance companies) are well
above the proposed tier 1
capital requirement of 10%. In our view, the companies are
unlikely to change
their business model even if NPL recognition norms are changed.
Accounting
will change, but cash flows will remain intact. They may take a
one-time hit on
profitability by providing more (at 2Q14 coverage level,
additional provision is equal to ~12% of FY15/16 profits) or may
bring down their coverage ratio.
What to do with the stocks? For SHTF, margins and RoE have
bottomed out, in our view, and the stock has
very high correlation with CV sales. We expect stock to do well
if the CV cycle
recovers. The stock is currently trading at a P/BV of 1.4x on
FY15E (near -1SD
of past 10 years average) at a 50% discount to MMFS, and this is
a good entry point from 1-2 years perspective. We retain our
Underperform rating on MMFS, as we think the stock is expensive at
its current P/BV of ~2.8x on FY15E.
-
Macquarie Research India Retail NBFCs
10 January 2014 2
CV lending industry bottoming out M&H CV lending the
situation is grim
M&H CV sales declined 23% in FY13 and were down ~27% in the
first 8 months of FY14
(Apr-Nov 2013). Utilization levels for M&H CVs are at a
multi-year low: 40% of the fleet
capacity is lying idle. Resale prices have dropped significantly
(~20% in the last one year).
Fuel prices are rising every month and passing this cost through
is difficult, due to idle
capacity. The M&H CV market is now a buyers market. Although
freight rates have gone up,
vehicle utilisation (trips per vehicle/month) has dropped
meaningfully versus a year ago.
Early signs of bottoming out
1. Exit of inexperienced/new players. In addition, unorganised
(informal) players have
curtailed their operations significantly in the last 1-1.5
years.
2. Strong players like Shriram Transport and Sundaram Finance
are gaining market share.
3. Withdrawal of attractive promotional schemes by NBFCs (mainly
owned by CV
manufacturers) and return of rational pricing in the market.
4. Pressure on pricing easing and NBFCs LTVs falling (LTV
reduction of 3-5% by all most
all players in the last six months)
5. Early signs of improvement in collection efficiencies
collections were good in Oct-Dec
2013 for large CV lenders.
6. Utilisation levels are at a record low and a further drop is
unlikely. Asset quality is directly
linked with utilisation levels. Asset quality can bottom out
well before the recovery in loan
growth (as utilisation levels start improving).
7. Resumption of mining activities (lifting of Karnataka mining
ban) / improvement in the
political situation in Andhra Pradesh to benefit.
Valuation and picks
SHTF is attractively valued relative to its peers and we would
play the recovery in CV cycle
through SHTF.
Fig 1 Valuations and recommendation table
P/E (x) P/BV (x) RoE Reco CMP TP Upside/ FY14E FY15E FY14E FY15E
FY15E (Rs) (Rs) Downside
SHTF IN 9.6 7.6 1.6 1.4 19.7 OP 610 730 19.6% MMFS IN 15.1 12.6
3.0 2.5 21.5 UP 284 215 -24.3% SUF IN 14.2 12.4 2.7 2.3 20.1 Not
Rated 589 NA NA CIFC IN 9.6 7.6 1.6 1.3 18.9 Not Rated 249 NA NA
SCUF IN 11.8 9.5 2.2 1.8 20.2 Not Rated 1,065 NA NA
Note: * Valuations for SUF, CIFC and SCUF are based on Bloomberg
consensus estimates. Prices as of 9
th January 2014
Source: Bloomberg, Macquarie Research, January 2014
SHTFs stock performance is highly correlated to CV cycle. The
stock has shown high
correlation with CV sales (0.83x) from Apr04 to Nov13. As such,
we expect the stock to
do well if the CV cycle recovers.
Earnings growth to improve from FY15E. Margins are at their
lowest since 2QFY10 and
we expect them to improve gradually over FY15/16. Asset quality
is likely to bottom out in
FY14, in our view, with gross NPA unlikely to increase by more
than 510bps from current
levels.
We are ahead of consensus by ~10% for FY15E. We expect margins
and asset quality
(lower credit cost) to improve in FY15. We expect EPS growth of
27% in FY15 and our
EPS estimate for FY15 is ~10% higher than the Bloomberg
consensus.
SHTF is trading at discount to its peers/historical average: We
expect the company to
report ~18% RoE in FY14 despite the weak CV cycle. It is
currently trading at a P/BV of
1.4x (lower end of trading band at -1SD of its historical
averages) at a 50% discount to
MMFS, and this is a good entry point from 1-2 years
perspective.
The industry looks to have bottomed out and we expect any
recovery to be gradual. We would
prefer to play the sector through
SHTF.
-
Macquarie Research India Retail NBFCs
10 January 2014 3
Two years of consecutive downturn in M&H CV sales In FY10
and FY11, M&H CV volumes (domestic) grew at a healthy rate of
~32%. Even in
FY12, M&H CV grew ~10% on the higher base of FY11. This
created a lot of latent
capacity in the hope of a better investment climate and higher
GDP growth / manufacturing
activity.
For M&H CVs, we have seen two consecutive years of declines,
(FY13 and Apr-Nov 2013)
and if the current trend continues, annualised CV sales for FY14
would be ~200K (level
last seen in FY09).
M&H CV sales declined 23% in FY13 and YTD FY14 (till
November 2013) it has registered
a decline of ~27%. Nov 2013 M&H CV sales are ~40% of those
in Nov 2011 sales. For the
first time since FY01, we have seen two consecutive years of
such a sharp decline in M&H
CV volumes.
LCV volumes (domestic) grew at a better rate in FY12/13,
primarily led by consumption
demand and a buoyant rural economy. However, given a slowdown in
the overall
economy, LCV volumes dropped 12.5% in the first eight months of
FY14 (Apr-Nov 2013).
Fig 2 LCV sales have dropped in FY14
Fig 3 M&H CV sales down sharply in FY13/YTD FY14
Source: SIAM, Macquarie Research, January 2014 Source: SIAM,
Macquarie Research, January 2014
Volumes are down significantly and utilisation levels are at
multi-year lows: GDP
growth has halved compared to five years ago and related
activities like infrastructure,
manufacturing and investment have seen a big pullback. Mining is
the largest contributor
for M&H CV usage. In certain states, it (including related
mining activities) accounts for 20-
25% total capacity utilisation. Ban on mining in various states
(Karnataka, Goa, Orissa)
has adversely affected utilisation levels. Utilization levels
for M&H CV are at a multi-year
low; 40% of the capacity is lying idle. Fuel prices are rising
every month and passing these
costs is difficult due to idle capacity.
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For the first time
since FY01, we have
seen two
consecutive years
of such a sharp
decline in M&H CV
volumes
M&H CV sales in
Nov 2013 were ~40%
as much as in Nov
2011.
-
Macquarie Research India Retail NBFCs
10 January 2014 4
Early signs of bottoming out Further drop in utilisation
levels/CV sales unlikely
M&H CV sales were down ~27% YoY for the period Apr-Nov 2013.
As per SIAMs sales data
(company sales to dealers), November 2013 volumes were 40% of
those in November 2011.
Inventories at dealers levels have also gone up and some of them
are holding two months
inventories. These inventories are included in sales data
(though final sell-down to truck
owners is pending). If we exclude this, retail sales are further
lower than what was reported
by SIAM. Our conversations with Fitch ratings and some
operators/lenders suggest that
capacity utilisation is nearing a bottom and a further drop in
the utilisation level is unlikely. An
improvement in GDP growth in the next year, lifting of the
mining ban, and a better rabi
harvest should lead to a higher utilisation rate. We are seeing
early signs of a bottom for the
CV lending industry.
Signs of bottoming out
The typical leading indicators of an improvement in the CV
lending industrys fortunes are as
follows:
1. Exit of inexperienced/new players: Many players (late
entrants/new players/companies
that have ventured into new product categories) have either
completely exited the CV loan
market or they have curtailed their loan portfolios
significantly. For example, banks like
Kotak and HDFC are going slow in new CV disbursements (mainly
for SRTOs), and have
taken a one-time hit on asset quality/credit cost for their CV
portfolios. Incrementally, they
are lending only to fleet operators that have a good repayment
history with them. NBFCs
like MMFS (which entered one and half years ago) are no longer
doing any CV lending and
have completely exited the market.
Unorganised players have curtailed their disbursements: The last
two years were
difficult for unorganised players. Higher delinquencies have
impacted their return ratios.
They have curtailed their operations significantly.
2. Strong players gaining market share: Traditional strong
players like Shriram Transport
Finance and Sundaram Finance have gained market share in
FY13/1HFY14. SHTF said
that in many regions/segments (mainly in more than 5-8 year old
CVs) they are the only
lender and other players have either exited or curtailed their
operations significantly.
3. Withdrawal of enticing schemes: Many NBFCs (particularly
owned by CV manufacturers
like Tata Motors Finance) were offering special schemes to lure
customers, like 100% LTV,
EMI starting after 1 year of possession, higher repayment period
of 5-7 years, etc. This has
led to higher defaults. For example as per the structured
finance report published by Fitch
Ratings, Tata Motors Finance Ltds three pools originated in
Jan/Feb 2013 recorded a
sharp increase in 90+ DPD delinquencies to ~5%. Fitch also
highlighted that 90 DPD
delinquencies for pools originated with LTV of +80% are ~2x the
pools originated with LTV
of less than 70%. 90 DPD delinquencies for less than 60% LTV are
1/4th to 1/6th those of
the +80% LTV.
Even good players bore the brunt due to unrealistic pricing by
some players: Resale
values for vehicles have dropped considerably (~20%) in the past
year as many
unqualified/inexperience borrowers (largely under 100% LTV
schemes, and higher
repayment schedules) are defaulting. In addition, they have also
applied aggressive pricing
for transportation in order to save their vehicles. This has
resulted in an unrealistic
correction in the freight rate. Even genuine CV operators and/or
CV lenders are suffering
as freight rates are lower due to unrealistic pricing and a drop
in resale value.
Return of rational pricing: Industry players have stated that
such schemes are now being
withdrawn. Removal of such schemes should benefit the industry
(mainly beneficial for
traditional and strong players) as rational pricing should
return slowly to the market. This
should keep delinquencies under control.
-
Macquarie Research India Retail NBFCs
10 January 2014 5
4. Easing pressure on pricing / reduction in LTVs by NBFCs:
Players like SHTF, Chola,
and Sundaram Finance have reduced their LTVs by 3-5% in the last
six months to one
year. This is likely to support their asset quality. Most of the
SHTF securitized pools
originated in the last year have less than 70% LTV and 180 DPD
and are well under
control at 0.5%. Competition has eased significantly and there
is no pricing pressure in
most of the market segments. NBFCs hiked their lending rates by
25-50bps in 2Q14.
5. Early signs of improvement in collection efficiencies: The
first visible sign of easing in
asset quality pains is improvement in collection efficiencies.
The largest player, SHTF,
indicated that visibility is improving and collections were good
in Oct/December 2013
(Nov13 is seasonally weak due to festivals). January 2014 could
be a bottom for asset
quality pains.
6. Asset quality to bottom out well before the recovery in
growth: Asset quality is directly
linked with utilisation levels in the industry. Asset quality
can bottom out well before the
recovery in loan growth as utilisation levels start improving.
However, improvement in CV
sales will take some time due to excess capacity; though the
change in sentiment can kick
start investment activities a bit earlier. Normalcy is a few
quarters away.
7. Resumption of mining activities / improvement in the
political situation in Andhra
Pradesh to benefit: Mining is the largest contributor to M&H
CV usage. In certain states
(including mining related activities) it accounts for 20-25% of
total capacity utilisation. The
ban on mining in various states (Karnataka, Goa, Orissa) has
impacted utilisation levels
and growth/asset quality of CV lenders.
Mining ban in Karnataka has been lifted by the Supreme Court.
Players are indicating
that their exposure to the Karnataka belt is not significant but
the lifting of the mining ban in
Karnataka is definitely a positive sign. The demand-supply
imbalance may improve as
demand for vehicles in the industry should go up. NBFCs have
stated that ~10k M&H CVs
will benefit from this decision. Similar action in Orissa and
other mining regions would
benefit the industry.
Political situation in Andhra is impacting volumes and recovery.
Political disturbance
in Andhra is hurting all businesses in the state. Some
businesses/shops are operational
only 2/3 days in a week. Recovery and further lending have
become difficult. Any
improvement in this situation would benefit the industry.
We expect CV volumes to recover in FY15
Our India economist, Tanvee Gupta Jain, expects GDP growth to
decelerate sharply to a
near-decade-low of 4.8%YoY in FY14. However, Indias GDP growth
is likely to pick up to
5.4%YoY in FY15 and further to 6.1%YoY in FY16. (Link - Macro
Mantra - India: 2014
outlook changing gears).
CV sales and their utilization levels have a high correlation
with the GDP growth and it
follows economic cycles. M&H CV sales have a high
correlation with IIP growth also.
Fig 4 Strong correlation between IIP growth and M&HCV
growth
Source: RBI, SIAM, Macquarie Research, January 2014
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-
Macquarie Research India Retail NBFCs
10 January 2014 6
Fig 5 Long term trend for CV sales and GDP growth
Source: RBI, SIAM, Macquarie Research, January 2014
Our India auto analyst, Amit Mishra, expects domestic CV volumes
to recover in FY15. We
are projecting LCV and M&H CV volumes to grow by 10% and 8%
respectively in FY15.
Fig 6 LCV volumes to recover in FY15
Fig 7 M&H CV volumes to register 8% growth after two years
of consecutive declines
Source: SIAM data, Macquarie Research, January 2014 Source: SIAM
data, Macquarie Research, January 2014
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-
Macquarie Research India Retail NBFCs
10 January 2014 7
Fig 8 What Fitch Ratings / CV lenders are saying?
Company Key takeaways
Sundaram Finance Poor economic conditions are unlikely to
improve before January 2015
The company is not growing aggressively. 1HFY14 disbursement
growth was below 10% and this
trend is expected to continue
Utilization levels are at multi-year lows. Around 35-40% of
vehicle capacities are laying idle
(Utilisation rate is ~60%).
Asset quality could bottom out well before the pickup in loan
growth (due to the improvement in
utilisation levels).
Chola Finance The M&H CV market is behaving like a buyers
market. Although freight rates have gone up the
number of trips per vehicle/month has come off meaningfully.
Resale prices have dropped significantly (15-20% in the last
year)
Experienced players (mainly NBFCs) have been very sensible in
pricing their loans and therefore
asset quality pains are likely to be lower for them
Shriram Transport Finance In the last six months, SHTF reduced
its LTV by 2-3%, which is expected to control delinquencies
and lower the losses on repossessed vehicles
Visibility is improving and collections were good in
Oct/December 2013 (Nov13 is seasonally weak
due to festivals). January 2014 could be a bottom for asset
quality pains and gross NPA is unlikely to
increase by more than 5-10bps from current levels
Investment activities are unlikely to pick up until elections
are concluded. CV sales are unlikely to
improve materially before 1Q15
Fitch Ratings For 2013, within the first eight months, average
90+dpd delinquency reached 3.2% as compared to
2.6% and 1.9% in 2012 and 2011, respectively
Tata Motors Finance Ltds three pools originated in Jan/Feb 2013
recorded a sharp increase in 90+
DPD delinquencies
Recovery closely linked to IIP and agricultural performance
Limited impact of securitization/priority sector guidelines on
business volumes
Source: Company, Fitch Ratings, Macquarie Research, January
2014
-
Macquarie Research India Retail NBFCs
10 January 2014 8
Asset quality to be under control for larger players
Delinquencies have increased for all CV lenders in the industry.
However, experienced
players have kept their delinquencies well under control as a
result of sensible lending norms.
A closer look at India Ratings rated CV pools (FY12/13) reveals
that delinquencies for loans
originated with +80% LTV are 2x those of pools originated with
less than 70% LTV (4x those
of loans with 60% LTV). For example as per the structured
finance report published by Fitch
Ratings, Tata Motors Finance Ltds three pools originated in
Jan/Feb 2013 with ~90% LTV
recorded a sharp increase in 90+ DPD delinquencies to ~5%. 180+
DPD has also jumped
significantly to ~1%. Players with 60-65% LTV had 180+ DPD well
under control at 0.3-0.5%.
Fig 9 Performance of securitized CV pools rated by India Ratings
(Fitch)
90+ DPD 180+ DPD Originator Transaction name Month LTV 3Q13 2Q13
3Q12 3Q13 2Q13 3Q12
SHTF STFCL CV Trust Nov 12 -II Nov 12 62.70 4.20 2.47 NA 0.25
0.04 NA SHTF Small Operators Trust 2013 Dec 12 65.40 5.88 2.69 NA
0.47 0.22 NA SHTF STFCL CV Trust Dec 12 -I Dec 12 68.90 5.09 2.69
NA 0.21 0.17 NA SHTF Small Operators Trust II 2013 Jan 13 64.40
3.28 1.94 NA 0.21 0.11 NA SHTF STFCL CV Trust Feb 2013 Feb 13 65.50
2.49 1.37 NA 0.02 0.09 NA SHTF Sansar Trust March 2013-I March 13
61.40 1.16 0.22 NA 0.04 - NA SHTF Sansar Trust March 2013 III March
13 63.90 1.95 0.37 NA 0.10 0.01 NA SHTF Sansar CV Trust Mar 2013 IV
March 13 64.10 2.23 0.44 NA 0.21 - NA SHTF STFCL CV Trust Aug
2013-I Aug 13 70.00 - - NA NA NA NA Chola Platinum Trust 2013 Jan
13 83.30 1.42 0.86 NA 0.24 0.07 NA Chola Platinum Trust - Feb 2013
-
Tranche 2 Feb 13 86.40 2.15 0.73 NA 0.13 - NA
Chola Platinum Trust March 2013 March 13 86.40 0.90 0.16 NA 0.07
- NA Tata Motors Fin Indian Receivable Trust
January 2013 B Jan 13 91.00 4.33 1.25 NA 0.88 0.02 NA
Tata Motors Fin Indian Receivable Trust January 2013 A
Jan 13 89.10 5.08 1.80 NA 1.04 0.09 NA
Tata Motors Fin Indian Receivable Trust February 2013 A
Feb 13 89.60 5.63 1.77 NA 1.09 - NA
Source: India Ratings, Macquarie Research, January 2014
Fig 10 State- and LTV-wise 90+ dpd
Source: Ind-Ra (Fitch Ratings), January 2014
Fitch Ratings: CV
delinquencies vary
widely among
players
-
Macquarie Research India Retail NBFCs
10 January 2014 9
Collections/ recoveries are better for strong players like
SHTF/SUF - 180 DPD delinquencies
are 1/7th to 1/10th of 90 DPD (Figs 9 and 11). Players like
SHTF, Chola, and Sundaram
Finance have reduced their LTVs by 3-5% in the last six months
to one year. This is likely to
support their asset quality.
Fig 11 STFCL CV Trust Feb 2013 difference between 90+ DPD and
180+ DPD
Source: Ind-Ra (Fitch Ratings), January 2014
-
Macquarie Research India Retail NBFCs
10 January 2014 10
Regulatory changes unlikely to have material longer term impact
Tier 1 requirement of 10%
As per RBIs draft guidelines, retail NBFCs are required to
maintain 10% tier 1 capital (total
CAR at 15%). As per the draft, NBFCs will be given three years
to comply with the
requirement.
Most NBFCs are well above the proposed tier 1 capital
requirement of 10%. Therefore the
higher capital requirement is unlikely to impact them.
Fig 12 Except Chola, Other NBFCs are well above the proposed 10%
tier 1 capital requirement
Source: Company data, Macquarie Research, January 2014
NPL recognition norms
At present, the period for classifying loans into NPAs in the
case of retail NBFCs is higher
at 180 days compared to 90 days for banks. Draft guidelines have
proposed that the asset
classification and provisioning norms (including standard asset
provisioning norms) should,
in a phased manner, be made similar to those of banks for all
registered NBFCs.
As per the draft guidelines, NBFCs are required to comply with
120 DPD norms by FY15
and 90 DPD norms by FY16.
The companies are unlikely to change their business models even
if the NPA recognition
norms are changed. Accounting would change but cash flows would
remain intact. They
may take a one-time hit on profitability by providing more (at
the 2Q14 coverage level,
additional provisions would be equal to ~12% of FY15/16E
profits) and/or may lower their
coverage ratios.
Fig 13 Impact of 90 DPD recognition norms on NBFCs
Gross NPAs
Gross NPA - %
Gross NPA with
90 DPD % NPA
coverage Impact FY15 -
PBT
% of FY15 PBT
MMFS 12,223 4.1% 18,185 6.1% 54.7% 3,261 19,200 17.0% SHTF
12,543 3.3% 25,085 6.5% 79.0% 9,909 27,539 36.0% SHTF - Cov ratio
at 55% 12,543 3.3% 25,085 6.5% 55.0% 6,898 27,539 25.0% SCUF 3,198
2.5% 4,811 3.7% 73.0% 1,177 8,600 13.7% Chola 2,900 1.5% 4,833 2.5%
72.4% 1,400 6,500 21.5% Note: FY15E bloom estimates for SCUF and
Chola
Source: Company data, Macquarie Research, January 2014
16.10% 15.70%
18.34%
10.77%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
MMFS SHTF SCUF Chola
Tier 1 Capital as of 2Q14 As per draft guidelines
Changes in the NPL
recognition norms
to have ~15%
impact on PBT
-
Macquarie Research India Retail NBFCs
10 January 2014 11
Rural/semi-urban growth story intact Long term growth story is
intact
NBFCs operating in rural/semi-urban regions (MMFS, SCUF and
Chola) believe that
lending opportunities are strong due to structural changes
(increase in the income of
households, increase in affordability and higher passenger
vehicle penetration) happening
in the rural economy.
Penetration levels for loan products are expected to increase in
rural areas due to a
moderation in interest rates and alleviation of credit risk.
Rural/semi-urban regions are not overcrowded markets and demand
remains robust.
Banks need to change their lending models (in terms of appraisal
process, collection and
decentralization of decision making etc) if they want to serve
these categories of
customers - which is not a near term possibility in our
view.
Fig 14 Higher minimum support prices helping rural India
Fig 15 Much of the financial needs to MSME sector still untapped
(mainly in rural and semi-urban regions) annual report of MSME
industry FY12
Source: SCUF presentation, Macquarie Research, January 2014
Source: SCUF presentation, Macquarie Research, January 2014
Fig 16 Vehicle penetration expected to increase: Lenders to
benefit
Source: MMFS presentation, Macquarie Research, January 2014
5.7
3.1 4.0
14.6
12.0 11.2
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Arhar Wheat Common paddy
CAGR - FY99-06 CAGR - FY06-12
(%) Institutional sources
5% Non-institutional
sources
2%
Self finance/no finance
93%
11 2670
125
184
251280
380
461499
602
0
100
200
300
400
500
600
700
Ind
ia
Ch
ina
Th
ailand
Bra
zil
Mexic
o
Russia
S K
ore
a
US
A
Jap
an
UK
Italy
(PV per thousand people)
We expect these
NBFCs to register
healthy loan/AUM
growth of 20%+ and
RoE of 19-20% over
the next 5 years
-
Macquarie Research India Retail NBFCs
10 January 2014 12
Cyclical pressures to impact near term growth/asset quality
NBFCs have cut their loan growth guidance as GDP growth has
halved. Rural/semi-urban
centric NBFCs are likely to grow their disbursements by 15-20%
in FY14E/1HFY15 as
compared to ~30%+ growth registered in FY13.
Credit costs and gross NPA levels are likely to go up. However,
loss rates (loss given
defaults) are unlikely to disturb their long term projected
return ratios.
We expect these NBFCs to register healthy loan/AUM growth of
20%+ and RoE of 19-20%
over the next 3-5 years.
-
Macquarie Research India Retail NBFCs
10 January 2014 13
Valuations and key picks Valuations
We expect CV lenders EPS growth to come off significantly in
FY14E. For SHTF, we are
projecting EPS growth of ~6% in FY14 (on the lower base of 8%
EPS growth in FY13).
Bloomberg consensus estimates suggest that Sundaram Finance (SUF
IN) and Chola
Finance (CIFC IN; ~50% of loan book is CV lending) will report
lower EPS growth in
FY14E as compared to FY13 (see Fig 17 below).
We expect modest recovery in earnings in FY15E for CV lenders
due to recovery in loan
growth and margins.
Fig 17 Earnings growth to slow in FY14E
Companies EPS (Rs) EPS growth (%) RoE (%) FY13 FY14E FY15E FY13
FY14E FY15E FY13 FY14E FY15E
SHTF IN 60.0 63.4 80.5 8.0 5.5 27.1 20.6 18.4 19.7 MMFS IN 16.5
18.9 22.5 31.4 14.5 19.4 24.4 21.3 21.5 SUF IN* 36.9 41.6 47.5 15.4
12.7 14.2 19.5 19.2 20.1 CIFC IN* 22.9 25.9 32.9 59.0 13.1 27.0
19.4 17.5 18.9 SCUF IN* 81.1 90.2 112.0 12.4 11.2 24.2 19.9 20.5
20.2
Note: * Bloomberg consensus estimates.
Source: Bloomberg, Company data, Macquarie Research, January
2014
Fig 18 Valuation and recommendation table
P/E (x) P/BV (x) CMP TP Upside/ FY14E FY15E FY14E FY15E Reco
(Rs) (Rs) Downside
SHTF IN 9.6 7.6 1.6 1.4 OP 610 730 19.6% MMFS IN 15.1 12.6 3.0
2.5 UP 284 215 -24.3% SUF IN 14.2 12.4 2.7 2.3 Not Rated 589 NA NA
CIFC IN 9.6 7.6 1.6 1.3 Not Rated 249 NA NA SCUF IN 11.8 9.5 2.2
1.8 Not Rated 1,065 NA NA
Note: * Bloomberg consensus estimates. Prices as of 9
th January 2014
Source: Bloomberg, Macquarie Research, January 2014
Key pick: Play the recovery in CV cycle through SHTF
SHTFs stock performance is highly correlated to CV cycle. The
stock has a high
correlation with CV sales (0.83x). We expect the stock to do
well if the CV cycle recovers.
Fig 19 SHTFs stock performance is highly correlated to the CV
cycle
Source: Bloomberg, Macquarie Research, January 2014
-
100
200
300
400
500
600
700
800
900
1,000
-
10
20
30
40
50
60
70
80
90
100
Ap
r-04
Sep
-04
Feb-0
5
Jul-
05
Dec-0
5
May-0
6
Oct-
06
Mar-
07
Aug
-07
Jan
-08
Jun
-08
No
v-0
8
Ap
r-09
Sep
-09
Feb-1
0
Jul-
10
Dec-1
0
May-1
1
Oct-
11
Mar-
12
Aug
-12
Jan
-13
Jun
-13
No
v-1
3
Total domestic CV sales SHTF's stock price - RHS
('000) (Rs)
Correlation = 83%
SHTF trades at 1.4x
PBV (lower end of
trading band at -1SD
of its historical
averages) 50%
discount to MMFS,
which is a good
entry point from 1-
2yr perspective
-
Macquarie Research India Retail NBFCs
10 January 2014 14
Margins/Return ratios are at bottom: We expect margins to slowly
improve to the 7%+
level in the next year. SHTF hiked their lending rates by 50bps
on 15th August 2013 and
the full impact will be felt in 3Q14. Management stated that
margins are lower by 20-25bps
due to high cash levels (Rs95bn 36% of total borrowings). Cash
on the balance sheet will
start reducing from 1Q15 which would aid margins further. AUM
mix will change with
improvement in the economy/CV volumes which will benefit margins
further in FY15/16E.
Asset quality likely to peak out in FY14: As per the company,
visibility is improving and
collections were good in Oct/December 2013 (Nov13 is seasonally
weak due to festivals).
January 2014 could be a bottom for asset quality pains and gross
NPA is unlikely to
increase by more than 5-10bps from current levels.
We are ahead of consensus by ~10% for FY15E. We expect margins
and asset quality
(lower credit cost) to improve in FY15. We expect EPS growth of
27% in FY15 and our
EPS estimate for FY15 is ~10% higher than the consensus
SHTF is trading at a discount to its peers/historical average:
We expect the company
to report ~18% RoE in FY14 despite a weak CV cycle. Currently,
it trades at 1.4x PBV
(lower end of trading band at -1SD of its historical averages)
at a 50% discount to
MMFS, which we think is a good entry point from a 1-2 year
perspective.
Fig 20 SHTF one year forward PBV trading at -1SD
Source: Company data, Bloomberg, Macquarie Research, January
2014
Fig 21 One year forward PBV SHTF is trading at significant
discount to MMFS
Source: Company data, Bloomberg, Macquarie Research, January
2014
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jun
-04
Sep
-04
Dec-0
4
Mar-
05
Jun
-05
Sep
-05
Dec-0
5
Mar-
06
Jun
-06
Sep
-06
Dec-0
6
Mar-
07
Jun
-07
Sep
-07
Dec-0
7
Mar-
08
Jun
-08
Sep
-08
Dec-0
8
Mar-
09
Jun
-09
Sep
-09
Dec-0
9
Mar-
10
Jun
-10
Sep
-10
Dec-1
0
Mar-
11
Jun
-11
Sep
-11
Dec-1
1
Mar-
12
Jun
-12
Sep
-12
Dec-1
2
Mar-
13
Jun
-13
Sep
-13
Dec-1
3
(x)
PBV Avg +1std -1std
-51.6%
Average 14.4%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
Mar-
06
Jun
-06
Sep
-06
Dec-0
6
Mar-
07
Jun
-07
Sep
-07
Dec-0
7
Mar-
08
Jun
-08
Sep
-08
Dec-0
8
Mar-
09
Jun
-09
Sep
-09
Dec-0
9
Mar-
10
Jun
-10
Sep
-10
Dec-1
0
Mar-
11
Jun
-11
Sep
-11
Dec-1
1
Mar-
12
Jun
-12
Sep
-12
Dec-1
2
Mar-
13
Jun
-13
Sep
-13
Dec-1
3
SHTF - premium/ discount over MMFS Average
-
Macquarie Research India Retail NBFCs
10 January 2014 15
Mahindra Finance Retain Underperform
Volume growth to slow down going ahead: In line with the
industry trend, overall
disbursement growth is expected to slow down in FY14/ 1HFY15.
The company is
targeting 10-15% disbursement growth in FY14 and overall AUM is
likely to grow at 22%+
as compared to 30% YoY growth as of Sept13.
Credit cost is expected to increase: Delinquencies have gone up
across various
segments. If slowdown continues then overall credit cost could
increase to 2%+ levels.
Losses on repossessed vehicles have also gone up by 15% in the
last year.
Maintain Underperform: MMFS is trading at 2.5x FY15E (+1SD of
its historical average).
Incremental trends are not encouraging in terms of loan growth
and asset quality outlook.
Though the long term story is intact, we expect the stock to
remain under pressure for the
next year.
-
Macquarie Research India Retail NBFCs
10 January 2014 16
INDIA
CV delinquencies are increasing for FY13 vintage pool
Source: India Ratings, Macquarie Research, January 2014
Tata motors Fin CV pools sharp increase in delinquencies
90+ DPD
LTVs 3Q13 2Q13
Jan 13 91.00 4.33 1.25 Jan 13 89.10 5.08 1.80 Feb 13 89.60 5.63
1.77
Source: India Ratings, Macquarie Research, January 2014
Analyst(s) Parag Jariwala, CFA +91 22 6720 4083
[email protected] Suresh Ganapathy, CFA +91 22 6720 4078
[email protected]
10 January 2014 Macquarie Capital Securities India (Pvt) Ltd
India Retail NBFC Fitch Ratings: CV delinquencies vary widely
among players Event
We met up with Mr. Jatin Nanaware Director, Structured Finance
at India
Ratings & Research (Fitch Group). As per their structured
finance
performance report 3Q13, weighted average 90+ days past due
(DPD)
delinquencies increased to 3% - up 23% from 2Q13.
Impact
CV loan delinquencies are increasing: Stress in the economy is
reflected in
the transactions originated in 2013, for which loans were
defaulting faster than
the earlier vintages. For 2013, within the first eight months,
average 90+dpd
delinquency reached 3.2% as compared to 2.6% and 1.9% in 2012
and 2011.
The Early Delinquency Index (EDI) has also showed a QOQ rise of
165bps to
8.2% in 3Q13 (~200bps YoY increase), indicating that the asset
quality
deterioration into the 90+dpd delinquency bucket has not yet
bottomed out.
However there is a significant variation among players / LTVs: A
closer
look at the vintage pools of FY13 reveals that there is a
significant variation in
EDI and 90+ DPD delinquencies among various players. For
examples, Tata
Motors Finance Ltds three pools originated in Jan/Feb 2013
recorded a sharp
increase in 90+ DPD delinquencies (Fig 1). Data also suggest
that significant
recovery is happening between the 90 days and 180 days bracket.
For the
2012 and 2013 vintage pools, 180 DPD delinquencies are 1/7th to
1/10
th of the
90 DPD. Fitch also highlighted that 90 DPD for pools originated
with LTV of
+80% is ~2x that of pools originated with LTV of less than 70%.
Most of the
SHTF securitized pools originated in the last year have LTVs of
less than 70%
and 180 DPD well under control at 0.5%. Fitch highlighted that
originator
expertise in the regions/particular asset class plays a big role
in performance
of the underlying pool.
Recovery closely linked to IIP and agricultural performance: The
rating
agency highlighted that performance of the CV industry is
directly linked to
manufacturing and the agricultural industry. Better IIP numbers
or a good
agricultural harvest can improve the performance of CV
loans.
Limited impact of securitization/priority sector guidelines on
business
volumes: The total amount of underlying loans which can qualify
for sell
down have reduced due to seasoning requirements and 8% cap on
spread
(from the banks base rate). However, NBFCs sell down only 20-30%
of their
disbursements and therefore volumes are not affected. Gross
spreads have
remained unchanged and there is a slight compression in tier 1.
Tax treatment
for investors is broadly clear and gets reflected in the
interest shown by banks
in buying PTC paper for their priority sector requirements.
Outlook
SHTF to benefit from the recovery in CV cycle: For SHTF, we
believe that
margins and RoE are at bottom and the stock has a high
correlation with CV
sales (0.83x). We expect the stock to do well if the CV cycle
recovers.
Currently, it trades at1.5x PBV at a 50% discount to MMFS, which
is a good
entry point from a 1-2 year perspective in our view.
-
Macquarie Research India Retail NBFCs
10 January 2014 17
Fig 1 CV Vintage Weighted average 90+dpd as % of Original
POS
Source: Ind-Ra (Fitch Ratings), January 2014
Fig 2 CV loans Early Delinquency Indicator (EDI)
Source: Ind-Ra (Fitch Ratings), January 2014
Fig 3 Performance of securitized CV pools
90+ DPD 180+ DPD Originator Transaction name Month LTV 3Q13 2Q13
3Q12 3Q13 2Q13 3Q12
SHTF STFCL CV Trust Nov 12 -II Nov 12 62.70 4.20 2.47 NA 0.25
0.04 NA SHTF Small Operators Trust 2013 Dec 12 65.40 5.88 2.69 NA
0.47 0.22 NA SHTF STFCL CV Trust Dec 12 -I Dec 12 68.90 5.09 2.69
NA 0.21 0.17 NA SHTF Small Operators Trust II 2013 Jan 13 64.40
3.28 1.94 NA 0.21 0.11 NA SHTF STFCL CV Trust Feb 2013 Feb 13 65.50
2.49 1.37 NA 0.02 0.09 NA SHTF Sansar Trust March 2013-I March 13
61.40 1.16 0.22 NA 0.04 - NA SHTF Sansar Trust March 2013 III March
13 63.90 1.95 0.37 NA 0.10 0.01 NA SHTF Sansar CV Trust Mar 2013 IV
March 13 64.10 2.23 0.44 NA 0.21 - NA SHTF STFCL CV Trust Aug
2013-I Aug 13 70.00 - - NA NA NA NA Chola Platinum Trust 2013 Jan
13 83.30 1.42 0.86 NA 0.24 0.07 NA Chola Platinum Trust - Feb 2013
-
Tranche 2 Feb 13 86.40 2.15 0.73 NA 0.13 - NA
Chola Platinum Trust March 2013 March 13 86.40 0.90 0.16 NA 0.07
- NA Tata Motors Fin Indian Receivable Trust
January 2013 B Jan 13 91.00 4.33 1.25 NA 0.88 0.02 NA
Tata Motors Fin Indian Receivable Trust January 2013 A
Jan 13 89.10 5.08 1.80 NA 1.04 0.09 NA
Tata Motors Fin Indian Receivable Trust February 2013 A
Feb 13 89.60 5.63 1.77 NA 1.09 - NA
Source: Ind-Ra (Fitch Ratings), Macquarie Research, January
2014
-
Macquarie Research India Retail NBFCs
10 January 2014 18
Fig 4 State and LTV wise 90+ dpd
Source: Ind-Ra (Fitch Ratings), January 2014
Fig 5 STFCL CV Trust Feb 2013 difference between 90+ DPD and
180+ DPD
Source: Ind-Ra (Fitch Ratings), January 2014
-
Macquarie Research India Retail NBFCs
10 January 2014 19
INDIA
SHTF IN Outperform
Price (at 10:30, 09 Jan 2014 GMT) Rs610.30
Valuation Rs 730.00 - Gordon Growth 12-month target Rs
730.00
Upside/Downside % +19.6
12-month TSR % +21.2
Volatility Index Medium
GICS sector Diversified Financials
Market cap Rsm 142,869
Market cap US$m 2,298
Free float % 58
30-day avg turnover US$m 3.2
Number shares on issue m 234.1
Investment fundamentals Year end 31 Mar 2013A 2014E 2015E
2016E
Net interest Inc m 35,264 39,377 46,168 53,871 Non interest Inc
m 1,669 1,168 1,635 1,831
PBT m 20,162 20,545 27,273 32,050 PBT growth % 7.2 1.9 32.7 17.5
Reported profit m 13,606 14,382 18,273 21,473 EPS rep Rs 59.97
63.39 80.54 94.64 EPS rep growth % 7.9 5.7 27.1 17.5 PER rep x 10.2
9.6 7.6 6.4 Total DPS Rs 7.01 7.92 10.07 11.83 Total div yield %
1.1 1.3 1.6 1.9 ROA % 3.4 3.0 3.3 3.4 ROE % 20.6 18.4 19.7 19.5
Equity to assets % 16.0 16.8 17.6 17.9
P/BV x 1.9 1.6 1.4 1.2
SHTF IN rel BSE Sensex performance, & rec history
Note: Recommendation timeline - if not a continuous line, then
there was no Macquarie coverage at the time or there was an embargo
period.
Source: FactSet, Macquarie Research, January 2014
(all figures in INR unless noted)
Analyst(s) Suresh Ganapathy, CFA +91 22 6720 4078
[email protected] Parag Jariwala, CFA +91 22 6720 4083
[email protected]
10 January 2014 Macquarie Capital Securities India (Pvt) Ltd
Shriram Transport Finance Incremental trends getting better
Event We met up with the management of SHTF and key takeaways are
presented
below. Incremental trends are getting better for asset quality.
Margins/RoEs
are at bottom. Reiterate Outperform with a TP of Rs730.
Impact Margins/Return ratios are at bottom: NIM has consistently
declined by 100
bps from 7.7% reported in 2Q13 to 6.7% in 2Q14 (lowest in the
last three
years). We expect margins to slowly improve to the 7%+ level in
the next
year. SHTF hiked their lending rate by 50bps on 15th August 2013
and the full
impact will be felt in 3Q14. Management stated that margins are
lower by 20-
25bps due to high cash levels (Rs95bn 36% of total borrowings).
Cash on the balance sheet would start reducing from 1Q15 which
would aid margins
further. AUM mix will change with improvement in the economy/CV
volumes
which would benefit margins further in FY15/16.
Asset quality likely to peak out in FY14: Credit cost (on AUM)
has gone up
by ~30bps since FY12. This is despite the fact the business mix
has changed
in favour of LCVs and less than 5 year old CVs, which have lower
margins
and consequently lower credit costs. Therefore, there is no
under-reporting of
NPLs/credit costs and this has increased in line with industry
trends. In the
last six months, SHTF reduced its LTV by 2-3%, which is likely
to control
delinquencies and lower the losses on repossessed vehicles.
Management
stated that visibility is improving and collections were good in
Oct/December
2013 (Nov13 is seasonally weak due to festivals). January 2014
could be a bottom for asset quality pains and gross NPA is unlikely
to increase by more
than 5-10bps from current levels.
Not losing market share; business model remains intact: The CV
industry
has undergone a change in the last 2-3 years. LCV volumes have
increased
despite a weak economy. For the first time in the last 10 years,
M&H CV
volumes have declined consistently for two years (FY13 -23% YoY
growth,
YTD FY14 -27% YoY growth). This created the less than 5 year old
CV
segment as new CV owners were selling down due to the weak
economy.
Structural changes in the rural economy increased the
opportunity for
financiers to lend towards LCVs/mini LCVs. We believe that SHTFs
core strength in financing towards used vehicles is intact. In
fact, in the last six
months to one year, many players have reduced their exposure to
CV lending
or exited completely from the riskier segments.
Growth will take some time to pick up: Investment activities are
unlikely to
pick up until elections are concluded. CV sales are unlikely to
improve
materially before 1Q15. SHTF may see overall AUM growth of ~18%
in FY14.
Earnings and target price revision We cut our estimates by ~10%
for FY14 due to lower margins and slower
AUM growth. FY15/16 estimates are fine tuned. No change in
TP.
Price catalyst 12-month price target: Rs730.00 based on a Gordon
growth methodology.
Catalyst: Improvement in loan growth/margins and lower asset
quality pains
Action and recommendation Good play on CV cycle/economic
recovery: We maintain Outperform with
a TP of Rs730.
-
Macquarie Research India Retail NBFCs
10 January 2014 20
Margins/Return ratios are at bottom
NIM has consistently declined by 100 bps from 7.7% reported in
2Q13 to 6.7% in 2Q14 (lowest in
the last three years). Accordingly, return ratios have also come
off sharply in the last year. RoE
has declined from 20%+ to 17% in 2Q14.
Fig 1 NIMs have declined consistently in the last year
Source: Company data, Macquarie Research, January 2014
Fig 2 Return ratios have come off meaningfully in the last
year
Source: Company data, Macquarie Research, January 2014
7.6%
8.2%
7.4%
7.2%
7.4%
7.7%
7.5%
7.2%
7.0%
6.7%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
1Q FY12 2Q FY12 3Q FY12 4Q FY12 1Q FY13 2Q FY13 3Q FY13 4Q FY13
1QFY14 2QFY14
NIM on AUM
4.3%
3.6% 3.6% 3.5%
3.7%3.9%
3.6%
3.3%
3.0%
2.8%
27.4%
22.2%21.4%
20.9% 20.9% 20.8%20.4% 20.1%
18.5%
17.0%
15.0%
17.0%
19.0%
21.0%
23.0%
25.0%
27.0%
29.0%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1Q FY12 2Q FY12 3Q FY12 4Q FY12 1Q FY13 2Q FY13 3Q FY13 4Q FY13
1QFY14 2QFY14
ROA ROE (RHS)
-
Macquarie Research India Retail NBFCs
10 January 2014 21
Changes in the AUM mix have impacted margins: Management stated
that the LCV proportion
has gone up in the last 1-2 years as LCV volume growth was
robust. The less than 5 year old CV
proportion has also gone up over the years. This segment now
constitutes 12-13% of overall
AUMs. Therefore changes in AUM mix have impacted margins, albeit
the impact is not very
significant as less than 5 year old CV disbursements were done
at a cost of new vehicles. Yield in
less than 5 year old CVs is 50-100bps higher than for new CVs.
There could be slight
compression due to a higher LCV proportion and lower +5 year old
M&H CVs.
Fig 3 Changes in AUM mix since FY11
Source: Company data, Macquarie Research, January 2014
AUM mix will change with improvement in economy/CV volumes: We
believe that current
AUM mix is mainly due to industry trends. LCV volumes have been
higher due to the strong rural
economy and better than expected consumption demand in tier 2
and tier 3 cities. The less than 5
year old CV segment was created due to slowdown in investment
related/manufacturing activities
in the last two years. M&H CV volumes are likely to improve
with improvement in the economy/
investment and manufacturing activities.
SHTF is focusing on small-vehicle finance (LCVs and mini LCVs)
in rural markets (yield of +18%).
Currently, this segment is less than 5% of the total loan book.
SHTF expects that the share of rural
loans will go up and this is likely to benefit margins.
SHTF hiked their lending rate by 50bps on 15th August 2013 and
the full impact will be felt from
3Q14. The lending rate hike is applicable only to new loans and
therefore the full impact will take
some time to reflect in the financials. As per the company, this
is likely to help margins by ~15bps
in the coming quarters.
Management stated that margins are lower by 20-25bps due to high
cash levels (Rs95bn 36% of
total borrowings). This is mainly due to quarter end
securitization done in 2Q14.
The company highlighted that cash levels are expected to remain
high in the next 1-2 quarters as
selldown activities are higher in the second half of any
financial year. The company is targeting
securitized assets of Rs20bn in the next two quarters.
Cash on the balance sheet (cash and bank balance + current
investments) should start reducing
from 1Q15 which would aid margins further.
Management stated that there is no pricing pressure in any of
its segments and in fact competition
has eased in the last six months. We expect margins to slowly
improve to the 7%+ level in the
next year.
We expect return ratios to improve with the improvement in
margins. We are forecasting ~18%
RoE in FY14/15E.
76% 76%77% 77%
78%79% 79%
81%
83%
84%
24%24%
23% 23%22% 21% 20%
19%
17%
16%15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
70%
72%
74%
76%
78%
80%
82%
84%
86%
1Q FY12 2Q FY12 3Q FY12 4Q FY12 1Q FY13 2Q FY13 3Q FY13 4Q FY13
1QFY14 2QFY14
Used CVs New CVs
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Macquarie Research India Retail NBFCs
10 January 2014 22
Asset quality likely to peak out in FY14
Credit cost (on AUM) has gone up by ~30bps since FY12. This is
despite the fact that the
business mix has changed in favour of less than 5 year old CVs
and LCVs. These two segments
have lower margins and consequently lower credit cost.
Therefore, there is no under-reporting of
NPLs/credit cost and this has increased in line with industry
trends.
However, the company has maintained its NPA coverage and net NPA
levels, which is
encouraging in our view. NPA coverage is at ~80% with net NPA of
0.7% as of 2QFY14.
Fig 4 Credit costs have gone up; coverage remains adequate at
~80%
Source: Company data, Macquarie Research, January 2014
Fig 5 NPAs are well under control and within guided range
Source: Company data, Macquarie Research, January 2014
2.3%
3.0%
2.3%
2.1%2.2% 2.2% 2.2% 2.2%
2.4% 2.4%81.9%
85.0%
86.1%85.9%
79.7% 79.5%78.9% 78.9% 78.7% 79.0%
74.0%
76.0%
78.0%
80.0%
82.0%
84.0%
86.0%
88.0%
1.5%
1.7%
1.9%
2.1%
2.3%
2.5%
2.7%
2.9%
3.1%
1Q FY12 2Q FY12 3Q FY12 4Q FY12 1Q FY13 2Q FY13 3Q FY13 4Q FY13
1QFY14 2QFY14
Credit cost on AUM (%) NPA coverage (%) - RHS
2.7% 2.7%2.8%
3.1% 3.0%2.9% 2.9%
3.2%3.1%
3.3%
0.5%0.4%
0.4%0.4%
0.6% 0.6%0.6%
0.8%
0.7%0.7%
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1Q FY12 2Q FY12 3Q FY12 4Q FY12 1Q FY13 2Q FY13 3Q FY13 4Q FY13
1QFY14 2QFY14
Gross NPA (%) Net NPA (%) - RHS
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Macquarie Research India Retail NBFCs
10 January 2014 23
SHTF took a hit on its profits in 1Q/2Q12 due to their mining
related exposure. Currently, only 1-
1.5% of its loan book is exposed to mining related activities
(all operational currently).
In the last six months, SHTF reduced its LTV by 2-3%, which is
expected to control delinquencies
and lower the losses on repossessed vehicles.
Management stated that visibility is improving and collections
were good in Oct/December 2013
(Nov13 is seasonally weak due to festivals). January 2014 could
be a bottom for asset quality
pains and gross NPA is unlikely to increase by more than 5-10bps
from current levels.
We have analysed the rated securitized pool (by India Ratings)
of SHTF. For 2012 and 2013
vintage pools of all NBFCs, 180 DPD delinquencies are 1/7th to
1/10
th those of 90 DPD (better
recovery). Most of the SHTF securitized pools originated in the
last year have LTV of less than
70% and 180 DPD well under control at 0.2-0.5%. Fitch
highlighted that originator expertise in the
regions/particular asset class plays a big role in performance
of the underlying pool.
Fig 6 Performance of securitized CV pools
90+ DPD 180+ DPD
Originator Transaction name Month LTV 3Q13 2Q13 3Q12 3Q13 2Q13
3Q12
SHTF STFCL CV Trust Nov 12 -II Nov 12 62.70 4.20 2.47 NA 0.25
0.04 NA SHTF Small Operators Trust 2013 Dec 12 65.40 5.88 2.69 NA
0.47 0.22 NA SHTF STFCL CV Trust Dec 12 -I Dec 12 68.90 5.09 2.69
NA 0.21 0.17 NA SHTF Small Operators Trust II 2013 Jan 13 64.40
3.28 1.94 NA 0.21 0.11 NA SHTF STFCL CV Trust Feb 2013 Feb 13 65.50
2.49 1.37 NA 0.02 0.09 NA SHTF Sansar Trust March 2013-I March 13
61.40 1.16 0.22 NA 0.04 - NA SHTF Sansar Trust March 2013 III March
13 63.90 1.95 0.37 NA 0.10 0.01 NA SHTF Sansar CV Trust Mar 2013 IV
March 13 64.10 2.23 0.44 NA 0.21 - NA SHTF STFCL CV Trust Aug
2013-I Aug 13 70.00 - - NA NA NA NA Chola Platinum Trust 2013 Jan
13 83.30 1.42 0.86 NA 0.24 0.07 NA Chola Platinum Trust - Feb 2013
-
Tranche 2 Feb 13 86.40 2.15 0.73 NA 0.13 - NA
Chola Platinum Trust March 2013 March 13 86.40 0.90 0.16 NA 0.07
- NA Tata Motors Fin Indian Receivable Trust
January 2013 B Jan 13 91.00 4.33 1.25 NA 0.88 0.02 NA
Tata Motors Fin Indian Receivable Trust January 2013 A
Jan 13 89.10 5.08 1.80 NA 1.04 0.09 NA
Tata Motors Fin Indian Receivable Trust February 2013 A
Feb 13 89.60 5.63 1.77 NA 1.09 - NA
Source: India Ratings, Macquarie Research, January 2014
Not losing market share; core strength/business model remains
intact
We believe the CV industry has undergone a change in the last
2-3 years. LCV volumes have
increased despite the weak economy. For the first time in the
last 10 years, M&H CV volumes
have declined consistently for two years (FY13 -23% YoY growth,
YTD FY14 -27% YoY growth).
This created the less than 5 year old CV segment as new CV
owners were selling down due to the
weak economy. Structural changes in the rural economy increased
the opportunity for the
financiers to lend towards LCVs/mini LCVs.
We believe that SHTFs core strength in financing of used
vehicles is intact. In fact, in the last six
months to one year, many players have reduced their exposure to
CV lending (HDFC Bank, Kotak
Bank) or exited completely from the segment (MMFS).
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Macquarie Research India Retail NBFCs
10 January 2014 24
We are ahead of consensus by ~10% for FY15E
We expect margins and asset quality (lower credit cost) to
improve in FY15. We expect EPS
growth of 27% in FY15 and our EPS estimate for FY15 is ~10%
higher than the consensus.
Valuations
We value SHTF using a two stage Gordon growth model. P/BV = RoE
* {(p(1+g) * (1- (1+g)n/(1+r)n))
+ (pn(1+g)n(1+gn))/((r-gn)(1+r)n)} where g=growth rate for the
first n (high-growth period) years,
p=payout ratio in the first n years, gn=perpetual growth rate,
pn=perpetual payout ratio.
Fig 7 SHTF: Two-stage Gordon growth model
RoE 20.2% g (initial growth) 15% r (CoE) 16% gn (perpetual
growth rate) 4% n (initial growth period, yrs) 10 K1 2.36 K2 6.08
P/BV 1.71x FY15E ABV 427 TP (Rounded off) 730
Source: Macquarie Research, January 2014
Fig 8 1 year forward PBV
Source: Company data, Bloomberg, Macquarie Research, January
2014
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jun
-04
Sep
-04
Dec-0
4
Mar-
05
Jun
-05
Sep
-05
Dec-0
5
Mar-
06
Jun
-06
Sep
-06
Dec-0
6
Mar-
07
Jun
-07
Sep
-07
Dec-0
7
Mar-
08
Jun
-08
Sep
-08
Dec-0
8
Mar-
09
Jun
-09
Sep
-09
Dec-0
9
Mar-
10
Jun
-10
Sep
-10
Dec-1
0
Mar-
11
Jun
-11
Sep
-11
Dec-1
1
Mar-
12
Jun
-12
Sep
-12
Dec-1
2
Mar-
13
Jun
-13
Sep
-13
Dec-1
3
(x)
PBV Avg +1std -1std
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Macquarie Research India Retail NBFCs
10 January 2014 25
Fig 9 SHTF Balance sheet and Profit and loss account (Rs mn)
BALANCE SHEET FY11 FY12 FY13 FY14E FY15E FY16E
Share Capital 2,262 2,262 2,269 2,269 2,269 2,269 Reserves and
surplus 46,782 57,660 69,679 82,262 98,251 117,041 Loan Funds
198,817 231,219 231,999 269,616 307,140 349,942 Non-convertible
Debentures 47,529 52,282 104,589 123,095 141,559 162,793 Term Loans
102,188 126,609 85,501 98,326 110,159 123,418 Subordinated Debts
32,982 23,303 31,284 35,977 41,373 47,579 Public Deposits 11,295
11,860 6,822 7,846 9,022 10,376 Short-term debt and others 4,823
5,306 3,803 4,373 5,026 5,776 Current Liabilities and Provisions
68,223 66,051 144,386 158,033 174,133 208,653 Total liabilities
& stockholders' equity 316,084 357,192 448,332 512,180 581,793
677,905 Investments 36,507 39,646 35,689 37,327 39,046 40,852
Current Assets, Loans and Advances 78,631 95,104 94,766 107,652
123,090 141,589 Cash and Bank balances 36,251 53,809 63,193 75,832
90,998 109,198 Loans and advances 41,800 39,673 29,099 29,099
29,099 29,099 Other Current assets 579 1,622 2,473 2,720 2,993
3,292 Fixed Assets, net 384 397 601 661 727 799 Commercial Vehicle
Loans 198,656 219,878 314,438 363,419 415,496 490,887 Other Assets
1,906 2,167 2,838 3,122 3,434 3,778 Total assets 316,084 357,192
448,332 512,180 581,793 677,905
PROFIT & LOSS ACCOUNT FY11 FY12 FY13 FY14E FY15E FY16E
Interest earned 37,122 36,990 45,244 53,042 61,729 71,831
Interest expended 23,020 24,895 28,703 31,981 36,289 41,396 Net
interest income 14,103 12,095 16,541 21,062 25,440 30,435 Income on
securitization 15,348 20,935 18,723 18,315 20,728 23,436 Other
income 948 1,014 1,669 1,168 1,635 1,831 Fees 270 289 476 333 466
522 Profit on sale of Investment 642 686 1,129 791 1,107 1,240
Others 36 38 63 44 62 69 Operating expenses 6,362 7,552 8,262 9,861
11,075 13,030 Payments to / Provisions for employees 3,582 3,701
3,848 4,540 4,863 5,777 Depreciation 108 135 183 202 222 244 Others
2,671 3,717 4,231 5,120 5,990 7,009 Pre-provisioning profit 24,037
26,492 28,670 30,684 36,728 42,673 Loan and investment loss
provisions 5,548 7,683 8,508 10,139 9,455 10,623 Profit before tax
18,489 18,809 20,162 20,545 27,273 32,050 Extraordinary items - - -
- - - Income taxes 6,190 6,235 6,556 6,164 9,000 10,576 Net profit
12,299 12,574 13,606 14,382 18,273 21,473
Source: Company data, Macquarie Research, January 2014
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Macquarie Research India Retail NBFCs
10 January 2014 26
Fig 10 SHTF Ratios and other data (%)
RATIOS FY11 FY12 FY13 FY14E FY15E FY16E
Per share data (Rs) Period end shares outstanding (mn) 226.2
226.2 226.9 226.9 226.9 226.9 Basic EPS 54.4 55.6 60.0 63.4 80.5
94.6 Diluted EPS 54.4 55.6 60.0 63.3 80.5 94.6 Book value per share
216.8 264.9 317.1 372.6 443.0 525.9 Adjusted book value per share
213.5 260.6 306.5 356.7 426.6 505.4 Operating ratios (%) Operating
cost to income 20.93 22.18 22.37 24.32 23.17 23.39 Operating
expenses/ Avg. assets 2.70 2.80 2.78 3.00 2.91 2.97 Employee cost/
Total income 11.78 10.87 10.42 11.20 10.17 10.37 Core Cost Income
Ratio 21.38 22.79 23.24 24.32 23.17 23.39 Revenue measures (%)
Interest income/ total avg. assets 17.91 17.21 15.88 14.86 15.07
15.13 Net interest income/ total income 96.88 97.02 95.48 97.12
96.58 96.71 Non-interest income/ total income 3.12 2.98 4.52 2.88
3.42 3.29 Profitability ratios (%) Yield on average assets 17.22
15.09 14.97 14.24 14.53 14.65 Average cost of funds 12.01 11.58
12.39 12.60 12.55 12.50 Spread 5.22 3.52 2.58 1.64 1.98 2.15 Net
interest margin 6.54 4.94 5.47 5.65 5.99 6.21 Effective tax rate
33.48 33.15 32.52 30.00 33.00 33.00 Return on avg. assets 4.20 3.74
3.38 2.99 3.34 3.41 Return on avg net worth 28.12 23.08 20.64 18.38
19.75 19.54 Asset quality and capital (%) Credit Loan funds ratio
99.92 95.10 135.53 134.79 135.28 140.28 Gross NPA 2.60 3.07 3.18
3.57 3.59 3.65 Net NPA 0.37 0.44 0.77 0.99 0.90 0.95 Loan loss
coverage ratio 85.91 85.92 76.43 73.03 75.60 74.73 Tier I CAR 16.62
15.16 13.60 13.83 14.38 14.45 Tier II CAR 8.18 7.10 7.00 6.97 7.01
6.82 Total CAR 24.80 22.26 20.60 20.79 21.39 21.27
Source: Company data, Macquarie Research, January 2014
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Macquarie Research India Retail NBFCs
10 January 2014 27
INDIA
MMFS IN Underperform
Price (at 10:30, 09 Jan 2014 GMT) Rs283.90
Valuation Rs 215.00 - Gordon Growth 12-month target Rs
215.00
Upside/Downside % -24.3
12-month TSR % -22.5
Volatility Index Medium
GICS sector Diversified Financials
Market cap Rsm 161,472
Market cap US$m 2,597
Free float % 48
30-day avg turnover US$m 4.1
Number shares on issue m 568.8
Investment fundamentals Year end 31 Mar 2013A 2014E 2015E
2016E
Net interest Inc m 22,238 27,580 33,126 39,442 Non interest Inc
m 2,209 2,651 3,181 3,817
PBT m 13,244 16,123 19,233 23,121 PBT growth % 51.3 21.7 19.3
20.2 Reported profit m 9,007 10,651 12,705 15,273 Adjusted profit m
9,007 10,651 12,705 15,273 EPS rep Rs 16.00 18.92 22.57 27.13 EPS
rep growth % 40.0 18.2 19.3 20.2 PER rep x 17.7 15.0 12.6 10.5
Total DPS Rs 1.46 4.33 5.17 6.21 Total div yield % 0.5 1.5 1.8 2.2
ROA % 3.9 3.6 3.7 3.7 ROE % 23.7 21.4 21.6 22.0
Equity to assets % 16.9 17.1 16.9 17.1 P/BV x 3.5 3.0 2.5
2.1
MMFS IN rel BSE Sensex performance, & rec history
Note: Recommendation timeline - if not a continuous line, then
there was no Macquarie coverage at the time or there was an embargo
period.
Source: FactSet, Macquarie Research, January 2014
(all figures in INR unless noted)
Analyst(s) Suresh Ganapathy, CFA +91 22 6720 4078
[email protected] Parag Jariwala, CFA +91 22 6720 4083
[email protected]
10 January 2014 Macquarie Capital Securities India (Pvt) Ltd
M & M Financial Services Growth/asset quality under
pressure; retain UP Event
We met the management of MMFS and present our takeaways
below.
Impact
Volume growth to slow down: In line with the industry trend,
overall
disbursement growth is likely to slow down in FY14/ 1HFY15. The
company is
targeting 10-15% disbursement growth in FY14 and overall AUM is
likely to
grow at 22%+ as compared to 30% YoY growth as of Sept13 (for
segment
breakdown of management target please see fig 1 below). A strong
rural
economy, a presence across multiple products, market share gain
from
unorganised players and PSU banks and a lower base in certain
segments
would support above-industry growth. Management is confident of
~25%
CAGR in loan book over the next 3-5 years.
Exited M&H CV vehicle financing: The company is not doing
any
incremental disbursement to this segment as slowdown has badly
affected the
M&H CV market. Gross NPAs are running at 5%+. LCV volumes
have also
started declining and the company is very selective in their
disbursements.
Asset quality to remain in the guided range; however, credit
cost is
likely to increase: Delinquencies have gone up across various
segments.
Credit cost as a percentage of AUM stood at 1.8% for 1HFY14
(annualised)
as against 1.6% in 1HFY13 and 1.4% in 1HFY12. The company stated
that if
slowdown continues then overall credit cost could increase to
the 2%+ level.
Losses on repossessed vehicles have also gone up by 15% in the
past year.
However, loss rates and delinquencies are well within their
internal estimates
and are unlikely to disturb long term average return ratios (RoA
of ~3% and
RoE ~20%). Gross NPA may go up by 60% (200bps) if NPA
recognition norms
are changed to 90 DPD (days past due) as compared to 180 DPD
currently.
NIM to remain protected at 9.5-10% levels: Correction in
wholesale cost of
funds (CP rates) is unlikely to benefit much as short term
borrowings
constitute 7-8% of overall borrowings. Cost of funds is unlikely
to come off
meaningfully as banks have not cut their base rates. Overall
margins would
remain protected at between 9.5-10%.
Other key takeaways: 1) New priority sector/securitization
guidelines have
reduced qualifying assets for selldown. Overall gross spread has
not declined
as banks can invest in PTC instruments at below base rate.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs215.00 based on a Gordon Growth
model
methodology.
Catalyst: Slower than expected loan growth and asset quality
pressure
Action and recommendation
Maintain Underperform: We find the valuation expensive at 2.5x
FY15E
P/BV. Maintain Underperform and our target price of Rs215.
-
Macquarie Research India Retail NBFCs
10 January 2014 28
Fig 1 Management guidance on loan growth
Segments Proportion in overall AUM
Projected disbursement
growth Comments
Tractors 19% 15-20% 1. M&M tractor portfolio growth is
better than expected initially at the beginning of the year.
Industry is likely to grow at 15%+ as compared to their earlier
estimate of 6-10% growth.
2. MMFS is likely to gain market share in M&M tractor
portfolio by 2-3% in FY14E
3. 2-3% growth will be supported by increase in prices
4. Started financing non-M&M portfolio. Market share
gain/growth is good so far.
Auto / Utility vehicle (M&M) 28% 8-10% 1. Parent company
M&M commands 50%+ market share
2. UV sales are expected to grow at ~10% in FY14
3. MMFS is likely to maintain market share and growth rate
Cars and others (non M&M) 33% 15-17% 1. Rural car sales are
likely to remain better than overall industry growth rates.
2. Focusing on players which are increasing rural market
penetration like Hyundai, Tata motors and Toyota
3. Financing ~1200 cars per month for Hyundai motors.
Commercial Vehicles and construction equipment
12% Flat to decline 1. The company has completely exited heavy
commercial vehicles due to slowdown.
2. LCV/ CE volumes are also slowing down considerably.
3. Doing very selective business in this segment
Used Vehicles 7% 35%+ 1. Base is very small.
2. Used vehicle market is growing rapidly in rural areas.
3. Portfolio break-up Cars 35%; UVs (majority M&M) 30-32%;
Tractors 20% and LCVs 13%
Source: Company data, Macquarie Research, January 2014
Valuations
We value the stock using a two stage Gordon growth model. Here
the P/BV = RoE * {(p(1+g) * (1-
(1+g)n/(1+r)n)) + (pn(1+g)n(1+gn))/((r-gn)(1+r)n)} where
g=growth rate for the first n (high-growth
period) years, p=payout ratio in the first n years, gn=perpetual
growth rate, pn=perpetual payout
ratio.
Our TP values the core business at 2.02x FY15E adjusted BVPS for
a 19.2% sustainable ROE.
Fig 2 2 stage GGM
RoE 19.2% g (initial growth) 14% r (CoE) 14.5% gn (perpetual
growth rate) 4% n (initial growth period, yrs) 10 payout1 25%
payoutn 75% K1 2.49 K2 8.03 P/BV 2.02x FY15E adjusted BVPS (Rs) 107
TP (Rs) ) (rounded-off) 215
Source: Macquarie Research, January 2014
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Macquarie Research India Retail NBFCs
10 January 2014 29
Fig 3 1 year fwd P/BV
Source: Bloomberg, Company data, Macquarie Research, January
2014
0.5
1.0
1.5
2.0
2.5
3.0A
pr-
06
Aug
-06
Dec-0
6
Ap
r-07
Aug
-07
Dec-0
7
Ap
r-08
Aug
-08
Dec-0
8
Ap
r-09
Aug
-09
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Ap
r-10
Aug
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Ap
r-11
Aug
-11
Dec-1
1
Ap
r-12
Aug
-12
Dec-1
2
Ap
r-13
Aug
-13
Dec-1
3
(x)
PBV Avg +1std -1std
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Macquarie Research India Retail NBFCs
10 January 2014 30
Fig 4 MMFSL profit and loss account and Balance sheet (Rs
mn)
BALANCE SHEET FY11 FY12 FY13 FY14E FY15E FY16E
Share Capital 1,045 1,027 1,126 1,126 1,126 1,126 Reserves and
surplus 24,404 29,284 44,670 52,832 62,568 74,273 Loan Funds 97,846
146,464 201,525 243,093 291,073 348,639 Other liabilities and
provisions 47 77 237 260 286 315 Current Liabilities and Provisions
16,053 17,350 23,151 18,125 21,802 17,033 Total liabilities &
stockholders' equity 139,396 194,202 270,708 315,437 376,856
441,386 Investments 6,252 4,366 4,575 4,330 4,327 4,369 Current
Assets, Loans and Advances 130,128 186,775 262,575 307,437 368,735
433,088 Fixed Assets, net 840 1,028 1,137 1,249 1,373 1,509 Other
Assets 2,176 2,033 2,421 2,421 2,421 2,421 Total assets 139,396
194,202 270,708 315,437 376,856 441,386
PROFIT & LOSS ACCOUNT FY11 FY12 FY13 FY14E FY15E FY16E
Interest earned 20,661 27,112 38,944 48,699 58,231 69,029
Interest/Discount on Advance/Bills 19,529 25,969 36,491 46,701
56,092 66,353 Income on securitization 906 925 2,145 1,689 1,789
2,283 Interest expended 6,662 11,399 16,706 21,119 25,105 29,587
Net interest income 13,999 15,713 22,238 27,580 33,126 39,442 Other
income 83 1,991 2,209 2,651 3,181 3,817 Profit / (Loss) on sale of
investment 5 73 23 28 33 40 Profit on sale of assets 1 3 - - - -
Others - - - - - - Operating expenses 5,024 6,492 8,321 10,205
12,110 14,250 Payments to / Provisions for employees 2,240 3,128
3,793 4,795 5,644 6,643 Depreciation 161 203 237 260 286 315
Operating & other expenses 2,622 3,161 4,291 5,150 6,180 7,292
Pre-provisioning profit 9,058 11,212 16,126 20,026 24,197 29,010
Loan and investment loss provisions 1,581 1,600 2,882 3,903 4,964
5,889 Profit before tax 7,477 9,613 13,244 16,123 19,233 23,121
Income taxes 2,540 3,168 4,238 5,472 6,528 7,848 Net profit 4,938
6,445 9,007 10,651 12,705 15,273
Source: Company data, Macquarie Research, January 2014
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Macquarie Research India Retail NBFCs
10 January 2014 31
Fig 5 MMFSL Ratios and other data (%)
RATIOS FY11 FY12 FY13 FY14E FY15E FY16E
Per share data (Rs) Period end shares outstanding (mn) 512.3
513.4 563.0 563.0 563.0 563.0 Basic EPS (on weighted avg. shares)
9.6 12.5 16.5 18.8 22.5 27.0 Diluted EPS (on weighted avg. shares)
9.8 12.4 17.1 18.7 22.3 26.7 Book value per share 49.7 59.0 81.3
95.8 113.1 133.9 Adjusted book value per share 48.2 56.7 76.7 90.6
107.3 127.3 Growth (%) Loan Funds 50.0 49.7 37.6 20.6 19.7 19.8
Loans and advances 49.3 45.1 39.7 17.1 20.0 17.5 Net interest
income 36.4 12.9 35.9 28.9 21.0 18.6 Operating expenses 51.8 29.2
28.2 22.6 18.7 17.7 Fee income 14.4 2296.6 9.8 20.0 20.0 20.0 Net
profit 38.5 30.6 44.1 14.3 19.3 20.2 EPS 29.7 30.3 31.4 14.3 19.3
20.2 Valuation ratios (x) P/E 28.3 21.7 16.5 14.4 12.1 10.1 P/ABV
5.6 4.8 3.5 3.0 2.5 2.1 Dividend yield (%) 0.7 1.0 1.3 1.6 1.9 2.3
Key ratios (%) Operating cost to income 35.67 36.67 34.07 33.79
33.38 32.97 Net interest margin 11.89 9.28 8.91 9.08 9.28 9.29
Gross NPA ratio 4.18 2.95 2.91 2.98 2.98 3.04 Loan loss coverage
ratio 86.44 78.01 65.92 67.73 69.99 71.73 Tier I CAR 17.00 15.10
17.00 17.10 16.82 16.94 Total CAR 20.30 18.00 19.70 19.63 19.14
19.12
Source: Company data, Macquarie Research, January 2014
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Macquarie Research India Retail NBFCs
10 January 2014 32
INDIA
CIFC IN Not rated
Stock price as of 09/01/2014 INR m 249
GICS sector Financials
Market cap US$m 565
Avg Value Traded (3m) US$m 0.1
12m high/low INR m 202/310
PE FY13 x 10.7
P/BV FY 13 x 1.8
Historical financials
YE Mar (INR m) FY11A FY12A FY13A
Revenue 6336 8000 11447 % growth 45.8% 26.3% 43.1% EBITDA 2996
3632 5751 % growth 86.0% 21.2% 58.3% EPS 5.7 14.4 22.9 % growth
217% 153% 59% EBIT Margin 8.8 7.4 7.6
Source: Company data,January 2014
Historical business risk/reward* HIGH
Reward
x
LOW Risk
*Relative to the market. Source: Macquarie Research, December
2013
Share Price Driver
Thematic
Growth
Value
Event
Source: Macquarie Research, January 2014
Price chart
Source: Bloomberg
Analyst(s) Parag Jariwala, CFA +91 22 6720 4083
[email protected] Suresh Ganapathy, CFA +91 22 6720 4078
[email protected]
10 January 2014 Macquarie Capital Securities India (Pvt) Ltd
MacVisit: Chola Invest & Fin Vehicle portfolio to remain
under pressure AUM growth robust; likely to grow at moderate rate
going forward: AUM
has grown 34% YoY in 2Q FY14. The growth was higher mainly
because in
many segments such as tractors, MUV and cars, Chola has small
market
share according to management. In addition, home equity business
and
business lending (MSME) are also growing at a faster rate. The
company
believes these segments will support better than industry growth
going
forward. However, lower GDP and slowdown in economic activities
may
impact the growth going forward. Overall disbursements were up
only 6% YoY
in 2Q FY14 (vehicle disbursements were flat). Overall AUM growth
will be
lower than what was seen in the past.
Asset quality pains likely to be lower than that of industry: CV
is not a
homogenous market and it has various segments which cater to
different
classes of customers. CIFC is primarily into LCV and mini-LCVs.
This
segment is more dependent on consumption rather than M&H CV
segment
which has linkage to mfg/investment related activities.
Therefore asset quality
pains are likely to be lower than the industry. However, the
company expects
delinquencies to increase (Gross NPAs have gone up from 1% in
FY13 to
1.4% 1H FY14) but it should remain well within their comfort
zone.
View on CV cycle
M&H CV - situation is very grim: M&H CV market is
behaving like a buyers
market. Operators/business units are dictating terms and
pricing. Around 40%
of capacity is lying idle. Fuel price hikes are happening every
month and pass
through is difficult due to idle capacity. Although freight
rates have gone up,
number of trips per vehicle/month has come off meaningfully.
November 2013
volumes were ~40% of November 2011 volumes (retail sales are
much lower
if we include ~2 months of dealers inventories). Resale prices
have dropped
significantly (15-20% in the last one year).
Even good players are bearing the brunt: Resale value for
vehicles has
dropped considerably in the last six months as many
unqualified/inexperienced borrowers (largely under 100% LTV
schemes) are
defaulting. In addition, they are also going for aggressive
pricing for
transportation in order to save their vehicles. This has
resulted in lower than
market rate for freight. Experienced players (mainly NBFCs) have
been very
sensible in pricing their loans and therefore asset quality
pains are likely to be
lower for them. Many experienced players have reduced LTVs for
incremental
loans. CIFC has reduced their LTVs by 4-5% across the segments.
Provisions
might go up but the company expects losses will be
manageable.
Difficult to say that asset quality is at bottom for M&H CV;
however
recovery is a few quarters away: Utilization levels and growth
rates are at a
record low. A few NBFCs who were offering attractive schemes
have
withdrawn their offering and sensible pricing has returned to
the market. A few
well established traditional players have gained market share
and the
company thinks it is very encouraging. Lifting of mining ban in
Karnataka can
improve demand-supply imbalance.
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CIFC IN Nifty - RHS
(INR) (INR)
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Macquarie Research India Retail NBFCs
10 January 2014 33
Ownership History and corporate governance
Promoters own 57.8% in the company through Tube
Investments 50.5%, Ambadi Enterprises 5.0% and
Others -2.3%.
FII holding 31.6%
Domestic Institu