Sector UpdateUpdate | Technology
Sector | 26 November 2024
Financials - NBFCs
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Turbulence in the near term but fundamentals still robust
Regulatory scrutiny more intense than before; froth in valuations comes off
Vehicle Finance: AUM growth YoY
Power Finance: GNPA (%)
The past 12 months have been highly eventful for the NBFC sector. Over the
past year, we (in India as well as globally) have repeatedly moved our goalpost
for interest rate cuts, which are naturally expected to benefit the NBFC/HFC
sector. While repo rate cuts are yet to happen in India, what kept the NBFC
sector in the thick of the action (for better or worse) was the intense and
sustained regulatory scrutiny (occasionally even culminating in a ban on
business activity; Exhibit 2) and the weakness (over the last six months) in retail
asset quality, particularly unsecured. Add to this the narrative of a slowdown in
consumption, evident in the last quarter, which has prompted us to revisit our
outlook on loan growth for financial lenders.
This was followed by a correction in stock prices of NBFCs (alongside a decline in
the broader NIFTY and the Financial Services Index). The price corrections in
certain NBFCs were accentuated by the high ownership of FIIs (who have
recently been net sellers in Indian equities) despite strong earnings consistently
delivered by these companies over the past year (Exhibit 6).
NSEBank Index was up ~2% in the last three months and NSE Financial Services
Index was up 3% compared to NIFTY, which declined 3% over the last three
months. Within Financial Services, the brunt of the stock price performance was
higher for NBFCs due to the reasons we outlined earlier. Exhibit 5 shows the
price performance for the NBFC universe under our coverage. Among large caps,
we have seen a decline of 9% and 4% in CIFC and SHFL, respectively, over the
last three months. Exhibit 3, displays the earning cuts observed in our NBFC
coverage universe post 1HFY25 results.
Views on the NBFC sector and our recommendation at this juncture
Gold Finance: AUM growth YoY
We expect this turbulence in the NBFC sector to sustain in the near term given
the heightened anxiety that we sense among investors regarding the 1)
regulatory undertones and supervisory audits, 2) weakening of retail asset
quality, (particularly unsecured), and to a lesser extent, 3) moderation in the
outlook on loan growth in vehicle finance.
At this juncture and in the near term, it is important to identify hiding spaces
(safe zones) where one can park their investments rather than making
aggressive bets in the NBFC sector. One positive outcome from the recent
correction in the NBFC sector is that the froth that had built up in some NBFC
stocks has now come off and will soon start providing much more valuation
comfort instead of unsubstantiated expansion in P/BV multiples that we had
observed until recently.
Abhijit Tibrewal - Research Analyst
(Abhijit.Tibrewal@MotilalOswal.com)
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com) |
Raghav Khemani
(Raghav.Khemani@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
MFI: Credit Costs
We delve deeper into the nuances and present our views on different niches
(sub-sectors) in the latter part of this report. However, before doing so, we want
to highlight that
we see Power Finance, Affordable Housing Finance, and (in
the near term) Gold Finance as sub-sectors where, structurally, we see a lower
risk of moderation in loan growth and challenges on asset quality or credit
costs.
Historically, the NBFC sector has demonstrated a strong ability to quickly turn
around the narrative. Until then, we would advise preserving capital (in the near
term) by investing in stocks within the sector that are likely to exhibit relative
outperformance.
Our top picks in the current environment are PFC/REC, SHFL,
PNBHF, and HomeFirst.
Exhibit 1:
Valuation matrix for NBFCs in the coverage along with our revised TPs
Val
summary
MSME
Five-Star
Housing Finance
LIC HF
PNB HF
Aavas
HomeFirst
CanFin
Repco
Vehicle Finance
Cholamandalam
MMFS
Shriram Finance
Indostar
Gold Finance
Muthoot
Manappuram
Diversified
BAF
Poonawalla
ABCL
LTFH
PIEL
MAS Financial
IIFL Finance
Microfinance
CreditAccess
Fusion Micro
Spandana Sphoorty
Power Financiers
PFC
REC
Rating
FY27E
Buy
Buy
Buy
Neutral
Buy
Neutral
Neutral
Buy
Buy
Buy
Buy
Neutral
Neutral
Neutral
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
CMP TP
EPS (INR)
BV (INR)
RoA (%)
RoE (%)
P/E (x)
P/BV (x)
(INR) (INR) FY25E FY26E FY25E FY26E FY25E FY26E FY25E FY26E FY25E FY26E FY25E FY26E
640
622
859
1,656
1,110
821
464
1,265
271
3,046
252
850
760
1,160
1,800
1,320
900
500
36.9
93.1
72.3
73.1
42.7
65.1
70.4
43.0
93.4
88.8
90.2
52.8
72.6
70.3
215
645
649
550
278
385
530
257
718
726
640
326
451
597
8.3
1.7
2.4
3.2
3.5
2.2
3.1
2.5
2.0
3.2
1.1
5.3
4.5
3.9
0.5
-
2.5
1.0
3.0
1.5
3.6
-3.3
-0.5
3.1
2.7
7.7
1.6
2.5
3.3
3.4
2.2
2.8
2.7
2.2
3.2
1.5
5.3
4.3
4.0
3.0
-
2.6
1.3
3.1
3.4
4.9
4.0
3.7
3.0
2.6
18.8
15.3
11.8
14.2
16.5
18.3
14.2
20.4
12.1
16.2
4.4
19.5
17.4
18.9
1.8
12.9
11.4
3.3
14.9
6.0
15.0
-13.8
-1.6
19.6
21.3
18.3
13.7
12.9
15.2
17.5
17.4
12.5
21.7
14.0
16.8
6.7
19.8
16.3
19.9
12.9
13.4
12.8
4.7
15.0
16.1
19.7
17.1
12.8
18.8
20.9
23.3
6.7
11.9
22.6
26.0
12.6
6.6
24.0
13.8
13.6
23.5
15.3
6.1
24.8
191.2
13.5
12.5
30.6
16.0
25.1
14.8
-
-
9.6
8.6
19.4
6.7
9.7
18.4
21.0
11.3
6.6
18.0
10.9
11.5
15.4
12.9
5.6
19.3
24.9
11.6
10.1
20.9
12.6
8.1
9.5
4.0
5.3
8.7
7.5
4.0
1.0
1.3
3.0
4.0
2.1
0.9
4.5
1.6
2.1
1.0
2.8
1.0
4.2
3.4
1.7
1.4
1.0
2.0
1.4
2.1
0.7
0.7
1.8
1.7
3.3
0.9
1.2
2.6
3.4
1.8
0.8
3.4
1.5
1.8
1.0
2.4
0.8
3.5
3.0
1.5
1.2
1.0
1.8
1.2
1.7
0.6
0.6
1.5
1.5
1,500 52.6 70.2
283
369
320 19.6 24.8
169
186
3,700 223.3 264.7 1,471 1,680
300 10.7 16.4
248
260
706
159
826
183
1,951 1,815 127.9 151.6
155 160 25.7 27.9
6,619
364
191
141
1,197
279
412
7,320 266.7 343.8 1,582 1,881
420
1.9
14.6
106
119
250 14.2 16.5
116
130
180 11.2 13.9
103
114
1,090 39.2 57.4 1,211 1,253
340 17.4 22.2
138
158
520 16.4 50.7
292
338
468
246
503
275
306
571
293
572
314
357
977 1,140 65.8 102.5
183 190 -36.7 46.2
369 430 -8.4 69.0
484
520
590
630
50.5
60.5
55.4
69.3
Source: MOFSL, Company
26 November 2024
2
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Exhibit 2:
Stringent actions undertaken by RBI on NBFCs in the recent past
Name of the company
Period
What was the action taken?
Asirvad Micro Finance,
Arohan Financial, DMI
Finance, and Navi Finserv
Oct’24
IIFL Finance
Mar’24
Bajaj Finance
Nov'23
ECL Finance and Edelweiss
ARC
May'24
JM Financial
Mar'24
Reason for taking the action
Major supervisory concerns about its pricing practices,
particularly the weighted average lending rate and the
interest spread over its cost of funds, which were deemed
excessively high.
Violated regulatory guidelines on the assessment of
Ban on sanctioning and
household income and the evaluation of existing or proposed
disbursing loans
monthly repayment obligations for their microfinance loans.
Found non-compliant with IRAC norms, leading to loan ever
greening, mismanagement of gold loan portfolios, failure to
disclose required interest rates and fees, and improper
outsourcing of core financial services.
Material supervisory concerns observed in the gold loan
portfolio, including serious deviations in assaying and
certifying the purity and net weight of the gold and breaches
Ban on sanctioning or
in the loan-to-value ratio.
disbursing gold loans or
assigning/securitizing/selling
Significant disbursal and collection of loan amount in cash far
in excess of the statutory limit.
any of its gold loans
Non-adherence to the standard auction process and a lack of
transparency in charges being levied to customer accounts.
Central Bank's digital lending guidelines required a lender to
Restrictions on the issuance
disclose all fees and charges to borrowers upfront as well as
of new loans and EMI cards
detail its recovery practices in the event of a default.
under the Insta EMI program
RBI required this to be provided in the KFS document, which,
and its e-commerce platform,
according to RBI, was not issued by Bajaj Finance for the two
eCOM
products.
Conduct of the group entities acting in concert, by entering
into a series of structured transactions for ever-greening
ECL Finance: Restriction from
stressed exposures of ECL, using the platform of EARCL and
undertaking any structured
connected AIFs, thereby circumventing applicable regulations.
transactions with respect to
its wholesale exposures.
Incorrect valuation of SRs was also observed in both ECL and
EARCL.
In ECL, supervisory observations included submission of
incorrect details of its eligible book debts to its lenders for
Edelweiss ARC: To cease
computation of drawing power, non-compliance with LTV
norms for lending against shares, incorrect reporting to CRILC
and non-adherence to KYC guidelines.
and desist from the
ECL, by taking over loans from non-lender entities of the
acquisition of financial assets,
group for ultimate sale to the group ARC, allowed itself to be
including Security Receipts
used as a conduit to circumvent regulations, which permit
(SRs), and reorganizing
ARCs to acquire financial assets only from banks and financial
existing SRs into senior and
institutions.
subordinate tranches.
The company repeatedly helped a group of its customers bid
on various IPO and NCD offerings by using loaned funds. The
credit underwriting was found to be perfunctory, and
financing was done against meagre margins.
Ban on financing against
The application for subscription, demat accounts, and bank
shares and debentures,
accounts were all operated by the company using a Power of
including the sanction and
Attorney (POA) and a Master Agreement obtained from these
disbursal of loans against IPO
customers without their involvement in the subsequent
of shares as well as against
operations. Consequently, the company was able to
subscription to debentures.
effectively act as both the lender and borrower.
The company was also found to be involved in arranging
Bank account openings as well as in operating the said bank
accounts using the POA.
Source: RBI
26 November 2024
3
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Exhibit 3:
Change in EPS estimates for our NBFC coverage after 1HFY25 results
Name of the company
AAVAS
BAF
CANF
CIFC
CREDAG
Five Star Business
FUSION
HomeFirst
IIFL Finance
LTFH
LICHF
MMFSL
MASFIN
Muthoot
MGFL
PNBHF
PFL
PFC
REPCO
REC
SHFL
SPANDANA
Old Estimates (INR)
FY25
FY26
FY27
74.4
90.4
113.6
273.2
363.5
475.4
63.5
72.8
83.7
53.4
73.1
96.9
81.2
97.9
127.6
36.7
44.3
53.9
-1.7
54.0
69.7
42.4
52.6
65.8
26.5
48.3
63.3
11.4
14.2
18.4
89.2
93.3
99.7
20.7
28.3
32.1
16.9
21.7
27.2
126.7
145.3
165.6
27.4
33.4
39.9
70.3
88.9
108.8
16.8
21.3
29.2
49.9
55.0
62.1
68.9
74.3
82.5
60.5
69.3
80.1
224.9
272.7
331.2
12.7
73.0
101.1
New Estimates (INR)
FY25
FY26
FY27
73.1
90.2
112.7
266.7
343.8
441.2
65.1
72.6
83.2
52.6
70.2
92.1
65.8
102.5
128.7
36.9
43.0
51.2
-36.7
46.2
65.8
42.7
52.8
66.1
16.4
50.7
64.4
11.2
13.9
18.5
93.1
93.4
102.1
19.6
24.8
31.1
17.4
22.2
27.2
127.9
151.6
169.0
25.7
27.9
35.2
72.3
88.8
108.4
1.9
14.6
23.3
50.5
55.4
62.2
70.4
70.3
78.5
60.5
69.3
80.1
223.3
264.7
321.6
-8.4
69.0
101.5
FY25
-1.7
-2.4
2.6
-1.4
-18.9
0.4
-
0.6
-38.0
-1.5
4.4
-5.1
3.1
0.9
-6.2
2.8
-88.7
1.3
2.2
0.1
-0.7
-
Change (%)
FY26
-0.2
-5.4
-0.3
-3.9
4.7
-2.8
-14.6
0.4
4.9
-2.2
0.1
-12.3
1.9
4.3
-16.4
-0.2
-31.7
0.7
-5.4
-0.0
-2.9
-5.5
FY27
-0.7
-7.2
-0.6
-5.0
0.9
-5.0
-5.7
0.4
1.7
0.7
2.4
-3.2
0.2
2.0
-11.7
-0.4
-20.5
0.1
-4.8
-0.0
-2.9
0.5
Source: MOFSL, Company
Exhibit 4:
Change in BVPS for our NBFC coverage after 1HFY25 results
Name of the company
AAVAS
BAF
CANF
CIFC
CREDAG
Five Star Business
FUSION
HomeFirst
IIFL Finance
LTFH
LICHF
MMFSL
MASFIN
Muthoot
MGFL
PNBHF
PFL
PFC
REPCO
REC
SHFL
SPANDANA
Old Estimates (INR)
FY25
FY26
FY27
551
642
755
1,546
1,862
2,275
384
450
528
284
372
465
483
581
709
214
258
310
281
335
405
278
326
387
302
346
404
103
114
129
641
715
795
169
190
213
138
157
182
705
820
953
160
189
225
647
724
818
121
139
164
275
313
357
528
599
678
306
357
417
1,472
1,690
1,971
524
597
698
New Estimates (INR)
FY25
FY26
FY27
550
640
753
1,582
1,881
2,267
385
451
528
283
369
457
468
571
699
215
257
306
246
293
358
278
326
388
292
338
397
103
114
129
645
718
800
169
186
209
138
158
183
705
820
961
159
183
214
649
726
819
106
119
141
275
314
358
530
597
671
306
357
417
1,471
1,680
1,952
503
572
673
FY25
-0.2
2.3
0.4
-0.3
-3.2
0.1
-12.4
0.1
-3.3
-0.2
0.5
-0.4
0.3
-
-0.9
0.3
-12.4
0.2
0.3
0.0
-0.1
-4.0
Change (%)
FY26
-0.2
1.0
0.2
-1.0
-1.9
-0.4
-12.8
0.1
-2.2
-0.4
0.4
-1.7
0.5
-
-3.3
0.2
-14.2
0.2
-0.4
0.0
-0.6
-4.2
FY27
-0.3
-0.4
-0.0
-1.8
-1.4
-1.2
-11.6
0.2
-1.6
-0.2
0.7
-1.9
0.5
0.9
-4.6
0.1
-14.4
0.2
-0.9
0.0
-1.0
-3.5
Source: MOFSL, Company
26 November 2024
4
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Exhibit 5:
Price Performance for the Indices and NBFCs under over coverage
Name
SENSEX INDEX
NIFTY INDEX
NSEbank Index
NSEFIN Index
BANKEX INDEX
FIVESTAR IN EQUITY
LICHF IN EQUITY
PNBHOUSI IN EQUITY
AAVAS IN EQUITY
HOMEFIRS IN EQUITY
CANF IN EQUITY
REPCO IN EQUITY
CIFC IN EQUITY
MMFS IN EQUITY
SHFL IN EQUITY
INDOSTAR IN EQUITY
MUTH IN EQUITY
MGFL IN EQUITY
BAF IN EQUITY
POONAWAL IN EQUITY
ABCAP IN EQUITY
LTF IN EQUITY
PIEL IN EQUITY
MASFIN IN EQUITY
IIFL IN EQUITY
CREDAG IN EQUITY
FUSION IN EQUITY
SPANDANA IN EQUITY
POWF IN EQUITY
RECL IN EQUITY
CMP
26-Nov-24
80,004
24,195
52,192
24,047
59,432
640
622
860
1658
1109
821
465
1265
270
3046
252
1952
156
6618
364
191
141
1198
283
411
973
183
369
484
520
1M
1
0
3
1
3
-26
4
-9
-1
1
-3
-6
-8
1
-1
-5
1
7
-4
22
-6
0
14
0
4
-1
-4
-19
11
2
3M
-2
-3
2
3
2
-13
-7
-2
-2
1
-4
-8
-9
-14
-4
-10
1
-28
-2
-11
-14
-17
13
1
-11
-20
-41
-41
-6
-12
6M
6
5
7
10
6
-9
-4
8
2
38
11
-8
0
0
27
11
15
-14
-3
-21
-16
-11
46
-3
5
-30
-60
-52
-1
-6
Price Performance (%)
9M
1Yr
10
21
9
22
12
19
17
22
12
20
-11
-19
-6
37
19
10
13
12
19
25
3
9
2
20
14
16
-7
2
23
56
20
50
49
47
-15
5
0
-6
-23
2
1
13
-18
1
32
34
-13
0
-30
-30
-34
-42
-67
-69
-62
-62
18
54
13
54
FYTD
9
8
11
15
11
-11
2
36
26
24
9
16
9
-3
29
33
32
-10
-9
-22
9
-11
41
-1
25
-32
-61
-56
24
15
CYTD
11
11
8
12
9
-13
16
10
8
19
6
18
0
-2
48
50
32
-10
-10
-16
15
-15
29
-2
-29
-39
-68
-67
27
26
Source: MOFSL, Company
Note: FYTD – Financial year to date and CYTD – Calendar year to date
26 November 2024
5
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Exhibit 6:
Shareholding pattern of MOFSL NBFC coverage as of Sep’24
Company
AAVAS Financiers
Aditya Birla Cap
Bajaj Fin.
Can Fin Homes
Cholaman.Inv.&Fn
CreditAccess
Five-Star Business
Fusion Finance
Home First Fin.
IIFL Finance
IndoStar Capital
LIC Housing Fin.
L&T Finance
Manappuram Fin.
MAS Financial
M & M Fin. Serv.
Muthoot Finance
Piramal Enterp.
PNB Housing
Poonawalla Fincorp
PFC
REC
Repco Home Fin
Shriram Finance
Spandana Sphoorty
Promoters (%)
26.5
68.9
54.7
30.0
50.2
66.5
21.6
57.7
23.4
24.9
73.6
45.2
66.3
35.3
66.6
52.2
73.4
46.3
28.1
61.9
56.0
52.6
37.1
25.4
55.8
FII (%)
35.5
11.1
20.9
11.7
27.2
10.8
56.7
3.2
25.6
29.6
2.3
22.0
6.7
30.4
2.7
10.3
9.8
15.3
20.4
8.4
17.7
21.2
12.9
53.3
22.6
DII (%)
25.6
8.5
15.1
27.5
16.6
14.9
9.0
19.2
12.4
6.3
1.8
20.5
12.3
11.0
20.2
31.6
13.3
15.0
22.2
10.6
17.5
14.3
19.9
16.2
7.3
Other (%)
12.5
11.6
9.4
30.8
6.0
7.8
12.7
19.9
38.6
39.2
22.3
12.3
14.7
23.4
10.4
6.0
3.5
23.4
29.3
19.1
8.8
11.8
30.1
5.1
14.2
Source: MOFSL, Company
26 November 2024
6
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Housing Finance
Transitory NIM contraction expected but better placed on asset quality
Disbursement yields have
been under pressure due
to high competitive
intensity.
Asset quality risks remain
minimal as customers
prioritize secured loan
repayments over their
unsecured loans.
Large HFCs have demonstrated weaker loan growth compared to their
Affordable HFC (AHFC) peers. Despite adjusting for their respective balance
sheet sizes, AHFCs are better placed to deliver stronger loan growth of 20-25%
over the medium term.
Disbursement yields have been under pressure due to high competitive
intensity. A stronger focus on customer retention has also impacted the
portfolio yields of HFCs. While NIMs have stabilized now, a transitory NIM
contraction (driven by faster repricing of the assets relative to liabilities) is
expected to happen when repo rate cuts occur in India. This will be slightly more
pronounced for large HFCs compared to AHFCs.
A declining interest rate environment, coupled with the operationalization of
CLSS under PMAY-U, will be an enabler for stronger growth. Asset quality risks
remain minimal as customers prioritize secured loan repayments over their
unsecured loans.
We prefer PNBHF and HomeFirst in our HFC coverage.
Exhibit 8:
PNB Housing - One-year forward P/E
Max (x)
-1SD
P/E (x)
32
24
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 7:
PNB Housing - One-year forward P/B
4
3
2
1
0
P/B (x)
Min (x)
Avg (x)
+1SD
3.2
2.0
1.2
0.3
0.5
23.8
16.6
11.1
5.7
2.5
1.2
16
8
0
10.4
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 9:
LIC housing - One-year forward P/B
3.6
2.7
1.8
0.9
0.0
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 10:
LIC housing - One-year forward P/E
21.0
16.0
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
2.7
2.0
1.4
0.7
0.6
13.2
9.6
6.0
3.8
17.8
0.9
11.0
6.0
1.0
6.5
Source: MOFSL, Company
Source: MOFSL, Company
26 November 2024
7
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Exhibit 11:
Aavas - One-year forward P/B
8
6.5
5
3.5
2
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 12:
Aavas - One-year forward P/E
7.3
70
55
40
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
56.5
47.8
6.0
4.5
2.4
3.1
2.7
25
10
35.8
23.9
17.7
19.3
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 13:
Can Fin Homes - One-year forward P/B
6.0
4.5
3.0
1.5
0.0
P/B (x)
Min (x)
Avg (x)
+1SD
5.5
3.2
Max (x)
-1SD
Exhibit 14:
Can Fin Homes - One-year forward P/E
32.0
24.0
P/E (x)
Min (x)
Avg (x)
+1SD
29.7
17.9
Max (x)
-1SD
1.6
1.4
2.4
1.9
16.0
8.0
0.0
9.5
13.7
8.0
11.7
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 15:
Home first - One-year forward P/B
5
4
3
2
1
P/B (x)
Min (x)
Avg (x)
+1SD
3.4
3.0
2.5
4.4
3.8
Max (x)
-1SD
Exhibit 16:
Home first - One-year forward P/E
36
31
26
21
16
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
33.0
27.9
24.4
18.4
20.9
3.5
21.7
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 17:
Repco - One-year forward P/B
6.0
4.5
3.0
1.5
0.0
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 18:
Repco - One-year forward P/E
32.0
24.0
16.0
P/E (x)
Min (x)
Avg (x)
+1SD
4.6
3.2
1.8
0.3
0.4
29.7
Max (x)
-1SD
20.7
12.3
3.9
2.1
0.8
8.0
0.0
6.1
Source: MOFSL, Company
Source: MOFSL, Company
26 November 2024
8
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Story in charts - Affordable HFCs
Exhibit 19:
Home First has consistently exhibited its ability to deliver stronger AUM growth compared to its peers
AUM growth YoY (%)
80
Aavas
Canfin
Homefirst
46
31
17
13
48
21
7
FY21
20 21
30
25
34
18
22
11
FY24
35
21
14
33
22
15
29
21
27
16
14
FY19
FY20
FY22
FY23
FY25E
FY26E
FY27E
Source: MOFSL, Company
Exhibit 20:
High competitive intensity and greater focus on customer retention have kept yields/NIM under pressure for Aavas
NIMs (%)
Aavas
7.7
6.7
3.7
7.6
8.1
6.7
3.6
6.8
8.0
6.4
3.4
3.6
7.7
Canfin
6.7
7.3
Homefirst
6.5
3.8
7.0
3.9
7.0
5.8
3.8
6.9
6.6
3.8
6.2
5.8
3.6
5.8
3.4
1QFY23
2QFY23
3QFY23
4QFY23
1QFY24
2QFY24
3QFY24
4QFY24
1QFY25
2QFY25
Source: MOFSL, Company
Exhibit 21:
Notwithstanding the seasonally weaker 1H of the fiscal, asset quality has been broadly stable for HFCs and credit
costs continue to remain benign
GNPA (%)
Aavas
1.84
1.04
0.76
0.91
0.62
FY19
0.46
FY20
FY21
0.64
FY22
0.99
Canfin
2.33
1.61
0.92
1.70
0.94
0.82
FY24
1.72
1.1
0.88
1HFY25
Source: MOFSL, Company
Homefirst
0.79
0.47
0.98
0.55
FY23
26 November 2024
9
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Story in charts - Large HFCs
Exhibit 22:
PNBHF is well-placed among large HFCs to deliver a loan CAGR of ~18% over FY24-27E
Loan growth YoY (%)
30
14
PNBHF
LICHF
16
6
7
19
8
19
10
8
10
10
2
11
10
-10
-5
FY21
-8
FY22
FY23
FY24
FY25E
FY26E
FY27E
FY19
FY20
Source: MOFSL, Company
Exhibit 23:
PNBHF has been able to maintain a steady NIM over the last few quarters despite high competitive intensity
NIMs (%)
4.7
4.1
3.7
2.9
2.4
1.8
PNBHF
3.9
3.2
4.0
3.0
LICHF
3.7
3.0
3.2
3.7
2.8
3.7
2.7
3.5
2.4 2.5
1QFY23
2QFY23
3QFY23
4QFY23
1QFY24
2QFY24
3QFY24
4QFY24
1QFY25
2QFY25
Source: MOFSL, Company
Exhibit 24:
Asset quality in the housing segment continues to improve across all large HFCs
GNPA (%)
PNBHF
8.12
4.74
2.75
1.58
0.48
FY19
2.83
FY20
FY21
FY22
FY23
4.12
LICHF
4.65
4.40
3.83
3.33
1.51
FY24
3.06
1.24
1HFY25
Source: MOFSL, Company
26 November 2024
10
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Vehicle Finance
Outlook on loan growth weakened; asset quality to become an important
monitorable
The new PV cycle has
weakened already and
will continue to weaken
in the year ahead
SHFL, with its dominance
in used CVs, will be
better placed even if new
auto sales were to slow
down, we prefer SHFL
over CIFC.
In our view, the new PV cycle has weakened already and will continue to
weaken in the year ahead. While we are still grappling to understand where the
new CV cycle is headed, we estimate a decline of 4-5% and a growth of 7-8% in
total new CV volume growth in FY25 and FY26, respectively. Over FY24-27, we
estimate a new CV volume CAGR of ~4%. This has led us to build a 9%/0%/17%
YoY growth in FY25 vehicle finance disbursements and moderate our FY25
vehicle finance AUM growth estimates to 18%/16%/19% for CIFC/MMFS/SHFL,
respectively.
Asset quality deterioration in 1H was attributed to seasonal weakness, floods
and extended/uneven monsoons, and some slowdown in consumption, which
impacted last-mile delivery LCV/SCV operators. Asset quality remains a key
monitorable for us, given that any slowdown in loan growth can also impact the
asset quality going forward.
While we expect 2HFY25 to be healthy for MMFS, driven by lower credit costs
(aided by ECL provision releases), its loan growth could suffer if PVs were to
slow down even further. In the context of current valuations and given that
SHFL, with its dominance in used CVs, will be better placed even if new auto
sales were to slow down, we prefer SHFL over CIFC.
Max (x)
-1SD
Exhibit 25:
CIFC - One-year forward P/B
6.2
4.7
3.2
1.7
0.2
P/B (x)
Min (x)
Avg (x)
+1SD
Exhibit 26:
CIFC - One-year forward P/E
P/E (x)
Min (x)
Avg (x)
+1SD
4.9
3.2
4.0
2.4
29.0
26.2
Max (x)
-1SD
3.5
22.0
15.0
8.0
1.0
18.7
22.5
14.9
7.2
18.7
1.2
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 27:
Shriram Finance - One-year forward P/B
2.5
2.0
1.5
1.0
0.5
P/B (x)
Min (x)
Avg (x)
+1SD
2.4
1.8
1.4
Max (x)
-1SD
Exhibit 28:
Shriram Finance - One-year forward P/E
25.0
19.0
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
13.6
10.5
7.4
5.1
20.2
1.0
0.6
1.7
13.0
7.0
1.0
11.2
Source: MOFSL, Company
Source: MOFSL, Company
26 November 2024
11
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Exhibit 29:
M&M Financial - One-year forward P/B
P/B (x)
2.6
2.1
1.6
1.1
0.6
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 30:
M&M Financial - One-year forward P/E
72.0
54.0
36.0
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
2.1
1.7
1.5
1.2
56.6
1.4
24.1
17.1
10.2
9.4
0.7
18.0
0.0
11.1
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 31:
Indostar - One-year forward P/B
2
1.5
1
0.5
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 32:
Indostar - One-year forward P/E
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
1.6
1.3
0.7
0.4
0
27
1.0
1.0
Loss
16.5
12.9
21
15
9
3
20.0
21.7
9.3
17.7
Source: MOFSL, Company
Source: MOFSL, Company
26 November 2024
12
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Story in charts - Vehicle finance
Exhibit 33:
Loan growth outlook for vehicle financiers has moderated given the slowdown in PV and the mid-single digit
growth expectations in CV volumes
AUM growth YoY (%)
MMFS
27
12
5
16
6
1
15
CIFC
38
SHFL
37
24
27
21
15
19
13
24
17
13
23
16
22
26
6
8
10 8
FY19
FY20
-5
FY21
FY22
FY23
FY24
FY25E
FY26E
FY27E
Source: MOFSL, Company
Exhibit 34:
Asset quality in 1HFY25 weakened primarily due to macro factors, including floods and unseasonal rains
GNPA (%)
MMFS
8.49
6.45
8.44
8.26
8.96
7.66
6.92
6.91
4.37
3.01
FY22
FY23
6.21
4.49
5.45
3.40
2.48
FY24
5.32
3.83
2.83
1HFY25
Source: MOFSL, Company
Chola
SHFL
2.70
FY19
3.80
3.96
FY20
FY21
Exhibit 35:
Potential weakening of vehicle finance loan growth can impact asset quality and consequently result in higher
credit costs
Credit Costs (%)
5.6
MMFS
Chola
SHFL
3.1
2.5
1.1 0.7
FY19
1.7
3.7
2.7
2.8
2.2
1.3
FY21
FY22
3.1
2.4
1.4
0.9
2.0
1.1
FY24
2.2
1.6 1.3
FY25E
2.3
1.6
1.3
2.5
1.6
1.2
2.5
FY20
FY23
FY26E
FY27E
Source: MOFSL, Company
26 November 2024
13
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Gold Finance
Near-term visibility on loan growth; competitive intensity to increase again
if gold prices decline
We would need to closely
monitor the a)
competitive intensity in
gold loans after the RBI
ban on IIFL Finance was
revoked and b) trajectory
of gold prices
Over the last two quarters, the going was strong for gold lenders such as MUTH
and MGFL, driven by a) higher gold prices, b) lower competitive intensity from
banks and a ban on IIFL Finance in gold loans, and c) lower availability of
unsecured personal/business loans and MFI loans. Most importantly, they
delivered strong gold loan growth without the associated trade-offs of loan
growth with margins.
While the gold loan growth may remain healthy in the near term, for a healthy
outlook in the medium term, we would need to closely monitor the a)
competitive intensity in gold loans after the RBI ban on IIFL Finance was revoked
and b) trajectory of gold prices as the geo-political landscape continues to
remain volatile.
In our view, valuations for MUTH at 2.4x FY26E P/BV are full and largely factor in
the tailwinds we outlined earlier. MGFL, though may appear attractive at
current valuations, will have to work closely with the regulator to get the ban on
its MFI subsidiary, Asirvad, revoked quickly. While we are not overly positive on
this space, we believe that the downside risks are limited.
Exhibit 37:
Manappuram Finance - One-year forward P/E
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 36:
Manappuram Finance - One-year forward P/B
2.8
2.1
1.4
0.7
0.0
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
2.4
1.9
1.4
13.0
10.0
7.0
12.7
10.0
7.6
5.2
3.5
0.9
0.6
0.9
4.0
1.0
5.6
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 38:
Muthoot Finance - One-year forward P/B
3.6
2.8
2.0
1.2
0.4
P/B (x)
Min (x)
Avg (x)
+1SD
3.2
Max (x)
-1SD
Exhibit 39:
Muthoot Finance - One-year forward P/E
19.0
15.0
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
16.7
13.1
10.3
7.5
6.0
2.5
2.0
1.5
1.1
13.7
2.4
11.0
7.0
3.0
Source: MOFSL, Company
Source: MOFSL, Company
26 November 2024
14
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Story in charts - Gold finance
Exhibit 40:
Gold loan demand expected to remain healthy in the near term but competitive intensity and gold prices will
remain important monitorables
AUM growth YoY (%)
30
23
18
22
17
8
11
10
8
MGFL
27
19
20
Muthoot
27
18
7
18
12
14
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY27E
Source: MOFSL, Company
Exhibit 41:
MUTH/MGFL exhibited healthy gold loan growth in 1HFY25 without an associated trade-off with NIM
NIMs (%)
MGFL
14.7
10.9
11.2
14.7
12.2
13.9
14.8
12.7
12.0
Muthoot
15.0
11.2
15.3
11.2
15.0
11.9
14.5
11.8
14.8
11.8
13.1
1QFY23
2QFY23
3QFY23
4QFY23
1QFY24
2QFY24
3QFY24
4QFY24
1QFY25
2QFY25
Source: MOFSL, Company
Exhibit 42:
Asset quality deterioration in gold loans indicates the inability of customers to repay
GNPA (%)
MGFL
Muthoot
3.79
2.72
2.99
2.16
0.88
0.88
FY19
FY20
FY21
FY22
FY23
FY24
1HFY25
Source: MOFSL, Company
1.90
3.00
3.28
1.90
1.30
2.40
4.30
0.55
26 November 2024
15
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Power Finance
Structural opportunity given the energy transformation; healthy outlook on
asset quality
We believe that we are
now in a phase of power
upcycle, where stressed
asset resolutions will
continue, leading to
further asset quality
improvement.
In previous cycles, the power sector was plagued by high levels of NPAs, mainly
in thermal projects. However, the current power cycle is markedly different
since a majority of loans extended by PFC and REC are now directed toward
government entities or private renewable energy companies.
We believe that we are now in a phase of power upcycle, where stressed asset
resolutions will continue, leading to further asset quality improvement. We do
not see risks of incremental additions to the stress pool over the next 18-24
months. This should keep credit costs benign at <5bp over FY25-FY26E.
PFC and REC will be a beneficiary of the revival in the power sector capex. Both
PFC and REC can deliver a loan CAGR of 15-18% along with healthy earnings
growth, reflecting an RoE of 19-21% over FY25-27E.
Given the recent news flow on the Adani Group, where it has been indicted by
US prosecutors on bribery charges, it is important to understand the exposure
of PFC and REC to the Adani Group. PFC has a total exposure of ~INR135b, all in
generation (mostly renewable) power projects. Out of its total exposure, ~74%
is toward projects that are already operational. Meanwhile, REC has a total
exposure of ~INR180b in generation (mostly renewable) power projects and
transmission and a relatively smaller exposure to a road infrastructure project.
Out of its total exposure, ~56% is toward projects that are already operational.
Exhibit 43:
Details on the exposure of PFC and REC to the Adani Group
Exposure to the Adani Group
Total Exposure (INR b)
% of exposure to Adani Group in operational/
commissioned projects
Area of Exposure
PFC
135
74
REC
180
56
Exposure only to
generation (mostly
renewable)
projects
No exposure to
Adani-listed
entities; exposure
only in SPV
structure to
specific power
projects
Exposure to generation
(mostly renewable),
transmission, and one road
infrastructure project
Small exposure of ~INR5b to
one listed entity of the
Adani Group; rest of the
exposure to SPVs
Source: MOFSL, Company
26 November 2024
16
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Exhibit 44:
Power finance - One-year forward P/B
2.2
1.7
1.2
0.7
0.2
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 45:
Power finance - One-year forward P/E
13.0
10.0
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
1.9
1.0
0.6
0.3
10.7
5.8
3.8
1.8
1.8
1.6
0.3
7.0
4.0
1.0
8.9
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 46:
RECL - One-year forward P/B
P/B (x)
Avg (x)
Min (x)
+1SD
2.4
1.8
1.2
0.6
0.0
Max (x)
-1SD
Exhibit 47:
RECL - One-year forward P/E
13.0
10.0
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
2.0
1.0
0.7
0.3
10.2
5.6
3.7
1.5
1.5
0.3
7.0
4.0
1.0
7.6
1.7
Source: MOFSL, Company
Source: MOFSL, Company
26 November 2024
17
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Story in charts - Power finance
Exhibit 48:
Power lenders expected to deliver robust loan growth aided by a strong power demand and energy
transformation
AUM growth YoY (%)
17
13
10
15
17
PFC
13
7
2
FY23
FY24
FY25E
FY26E
FY27E
13
REC
14
17
13
18
16
18
15
19
1
FY19
FY20
FY21
FY22
Source: MOFSL, Company
Exhibit 49:
Asset quality continues to improve, aided by stressed asset resolutions
9.39
8.08
7.24
5.70
6.59
4.84
4.45
GNPA (%)
PFC
REC
5.61
3.91
3.42
3.34
2.71
FY24
2.71
2.53
1HFY25
Source: MOFSL, Company
FY19
FY20
FY21
FY22
FY23
Exhibit 50:
Credit costs for PFC and REC are expected to remain benign in the absence of any new stress formation
Credit Costs (%)
1.01
0.71
0.31
0.09
(0.08)
(0.31)
FY19
FY20
FY21
FY22
FY23
0.31
0.03
(0.04)
(0.29)
FY24
1HFY25
Source: MOFSL, Company
(0.03) (0.03)
PFC
REC
0.94
0.62
26 November 2024
18
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Micro Finance
Stress will continue to run its course over the next two quarters; recovery
still distant
We estimate credit costs
to remain elevated in 3Q
and continue to be far
from normal levels. We
expect a recovery only by
FY25 end or early FY26.
We continue to advise
underweight on the MFI
sector instead of getting
carried away with the
valuation argument
Asset quality significantly deteriorated across the microfinance sector, with all
NBFC-MFIs, SFBs, and even larger banks acknowledging the problem of
customer overleveraging in the MFI sector.
FUSION was the worst impacted, reporting a GNPA of ~9.4% as of Sep’24. This
also triggered its auditor note on the going concern premise in the face of
multiple covenant breaches by the company. We estimate credit costs to remain
elevated in 3Q and continue to be far from normal levels. We expect a recovery
only by FY25 end or early FY26.
The MFI sector will continue to go through a rough patch for the next two
quarters as the problem of customer overleveraging is broad-based (spread
across different states) and the stress will run its course before the situation
improves. As outlined in detail in our
MFI Sector update,
we would like to re-
emphasize that we view this as a credit cycle not only in microfinance but also
across all unsecured products, including credit cards, personal loans, and
unsecured business loans.
Recently, the MFIN published its revised guardrails on November 25, 2024 and
which will be effective from 1-Jan-2025. They advocate 1) Reduction of
maximum lenders to a single borrower to three from the previous limit of four,
2) Prohibition of lending to clients who are 60dpd+ (v/s 90dpd earlier) with an
outstanding of INR3000 or more, 3) Total indebtedness will now be at INR200K,
including both MFI loans and unsecured retail loans. Earlier the cap of INR200K
considered only the MFI loans, 4) Sector to set a target to link PAN to 50% of the
borrower accounts by Mar’25, even as the validated Voted ID will continue to
remain the primary KYC document and 5) Board to review interest rates to
ensure that the efficiency gains are passed on to the borrowers. In our view,
these revised MFIN guardrails are more stringent than the ones put out earlier
in Jul’24 and will result in further moderation in loan growth expectations and a
slight increase in credit costs as well.
While the downside risks might appear limited given the steep correction in
stock price of NBFC-MFIs, we believe that fundamentals in the sectors will take
some more time to improve. We continue to advise underweight on the MFI
sector instead of getting carried away with the valuation argument, given that
stock price of CREDAG/ SPANDANA/FUSION have corrected ~30%/60%/52%
over the last six months.
26 November 2024
19
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Exhibit 51:
Credit Access - One-year forward P/B
4.2
3.4
2.6
1.8
1
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 52:
Credit Access - One-year forward P/E
100
75
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
3.8
3.2
2.6
2.1
1.4
87.0
50
25
40.2
24.9
9.6
9.6
1.6
9.6
0
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 53:
Fusion - One-year forward P/B
2.8
2.2
1.6
1
0.4
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 54:
Fusion - One-year forward P/E
P/E (x)
Min (x)
36
28
Avg (x)
+1SD
Max (x)
-1SD
2.3
2.1
2.3
1.6
0.6
29.6
21.5
21.5
13.8
6.1
5.0
20
1.1
0.6
12
4
5.0
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 55:
Spandana Sphoorty - One-year forward P/B
3.5
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 56:
Spandana Sphoorty - One-year forward P/E
200
150
100
50
P/E (x)
Min (x)
Avg (x)
+1SD
2.9
2.0
1.4
0.9
0.7
190.3
Max (x)
-1SD
2.5
82.5
44.2
5.9
7.6
1.5
0.5
0.7
0
8.4
Source: MOFSL, Company
Source: MOFSL, Company
26 November 2024
20
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Story in charts - MFI
Exhibit 57:
Moderation in AUM growth for all MFIs due to industry-wide stress and implementation of MFIN guardrails
AUM growth YoY (%)
70
44
38
68
37
13
CREDAG
56
29
46
19
22
-19
27
FUSION
SPANDANA
37
29
41
27 23
7
-5
-3
23 21 23
24 25 22
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY27E
Source: MOFSL, Company
Exhibit 58:
Sharp rise in credit costs due to customer overleveraging and sustained forward flows
Credit Costs (%)
26.4
CREDAG
FUSION
SPANDANA
26.2
20.7
13.2
6.9
2.5
1.2
2.6 3.4 2.0
2QFY23
2.1 2.6 3.0
3QFY23
2.2
3.4
1.4
3.6
1.4
1.7
7.8
3.4 4.2
2.2
4.0 3.1
2.4
4.8 3.7
2.6
1QFY25
2QFY25
6.5
1QFY23
4QFY23
1QFY24
2QFY24
3QFY24
4QFY24
Source: MOFSL, Company
Exhibit 59:
Significant deterioration in asset quality across all NBFC MFIs; FUSION worst affected
GNPA (%)
CREDAG
FUSION
18.7
SPANDANA
7.8
1.5
FY19
9.4
5.5 5.6
1.1 0.4
1.5
FY20
4.5
FY21
3.7
FY22
5.7
1.2
FY23
3.5
2.9
1.2
FY24
4.9
1.5
2.4
1HFY25
Source: MOFSL, Company
0.6
2.2
26 November 2024
21
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Exhibit 60:
Between ~5-15% of the borrowers at respective MFIs had loans from 5 or more lenders, as on Aug/Sep’24
Lender Overlap
(basis number of borrowers)
Unique
Company + 1
Company + 2
Company + 3
Company + 4 and above
Total
Aug'24
26.3
25.2
19.9
13.2
15.3
100
Sep'24
Fusion
33.3
26
19
11.9
9.7
100
Sep'24
29
24.6
19.5
13.1
13.8
100
Oct'24
LTFH
41.2
27.4
18.4
8.0
4.9
100
CREDAG
Spandana
Sep'24
Muthoot
Microfin
32.9
25.8
18.8
11.9
10.6
100
Sep'24
Satin (At the time of
disbursements)
53.3
28.9
12.7
4.2
1.0
100
Source: MOFSL, Company; Note: Data above is basis the number of borrowers
Exhibit 61:
Between ~4-10% of the borrowers have total MFI indebtedness higher than INR200K at respective MFIs
Aug’24
Total MFI Indebtedness (INR)
<=50K
50K to <=100K
100K to <=150K
150K to <=200K
>=200K
Total
Total MFI Indebtedness (INR)
<40K
40-60K
60K-100K
>100K
Total
21.5
28.5
25.7
14.9
9.4
100.0
Sep’24
FUSION (%)
33.6
15.1
23.6
27.7
100.0
Sep’24
33.8
30.4
21.5
9.8
4.5
100.0
Sep’24
38.1
28.6
20
9.5
3.8
100.0
CREDAG (%) SPANDANA (%) Muthoot Microfin (%)
Sep’24
At the time of disbursements
SATIN (%)
81.1
10.4
8
0.4
0.04
100.0
Source: MOFSL, Company; Note: Fusion reported separate indebtedness buckets and hence shown separately
26 November 2024
22
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
MSME Finance
Near-term uncertainties on asset quality and AUM growth but huge runway
ahead
The cut in incremental
lending rates, which was
higher than the guided
cut in its lending rates
and the uncertainty on
its sustainable AUM
growth trajectory going
forward, came across as
a negative surprise
Despite a ~40-50%
overlap with MFI
customers and near-term
(transitory) risks to asset
quality because of stress
in the MFI sector, we find
Five Star better placed
due to the secured
nature of these MSME
loans.
P/B (x)
Min (x)
In its last MPC meeting, RBI expressed concerns over certain product segments
and outliers among NBFCs that were aggressively pursuing growth. The
regulator emphasized that it was not in favor of a ‘growth at any cost’ approach.
It also shared concerns over the usurious interest rates charged by some NBFC
players (including MFI and HFCs), which are often combined with unreasonably
high processing fees and excessive penalties. Though RBI had expressed
concerns over interest rates charged by MFIs earlier, this was the first time it
expressed displeasure with the rates charged by (few outliers) companies in the
mortgage space.
Cognizant of the views aired by the regulator on a public forum, Five Star’s
management cut its FY25 AUM growth guidance to ~25% (vs 30% earlier). It also
reduced its lending rates on incremental sanctions by ~200bp to pass on its
lower borrowing costs to customers. The cut in incremental lending rates, which
was higher than the guided cut in its lending rates and the uncertainty on its
sustainable AUM growth trajectory going forward, came across as a negative
surprise and impacted Five Star’s stock price, which has corrected by ~26% in
the past month.
Fundamentally, we continue to prefer Five Star given that the company
operates in the micro-LAP (backed by SORP) segment, where its business model
has been enhanced for over two decades to deliver a combination of healthy
loan growth and profitability. Despite a ~40-50% overlap with MFI customers
and near-term (transitory) risks to asset quality because of stress in the MFI
sector, we find Five Star better placed due to the secured nature of these MSME
loans.
Exhibit 63:
Five-star - One-year forward P/E
27
24
21
P/E (x)
Min (x)
Avg (x)
+1SD
Exhibit 62:
Five-star - One-year forward P/B
4.5
4
3.5
3
2.5
Avg (x)
+1SD
Max (x)
-1SD
Max (x)
-1SD
4.0
3.7
3.4
3.0
2.6
22.2
20.3
18.3
15.7
24.1
18
2.6
15
15.7
Source: MOFSL, Company
Source: MOFSL, Company
26 November 2024
23
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Diversified Lenders
Not completely out of the woods just yet!
Diversified lenders
reacted to the stress in
both these product
segments by calibrating
their growth in the PL/BL
and MFI portfolios.
Most of the diversified lenders in our coverage with multi-product offerings
have been plagued by stress in either their Personal Loans (PL)/unsecured
Business Loans (BL) portfolio or the perceived risks in their MFI portfolio.
Diversified lenders reacted to the stress in both these product segments by
calibrating their growth in the PL/BL and MFI portfolios. We believe this
calibration will continue for the next two quarters as the stress in these product
segments is provided for (or written off). We expect credit costs from these
segments to remain elevated in 2HFY25 as well.
Poonawalla Fincorp finally called out the stress in its short-term PL book (STPL)
and took a one-time credit cost of INR6.7b in the Sep’24 quarter. BAF guided for
credit costs to remain elevated in 2HFY25 as well but exhibit a declining
trajectory from hereon.
Exhibit 65:
Bajaj Finance - One-year forward P/E
Max (x)
-1SD
80.0
60.0
P/E (x)
Min (x)
Avg (x)
+1SD
Exhibit 64:
Bajaj Finance - One-year forward P/B
12.0
9.0
6.0
3.0
0.0
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
9.4
7.0
3.4
1.2
5.2
41.0
21.2
59.8
31.1
40.0
3.6
20.0
0.0
14.1
20.3
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 66:
L&T Finance - One-year forward P/B
3.7
2.9
2.1
1.3
0.5
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 67:
L&T Finance - One-year forward P/E
P/E (x)
Min (x)
Avg (x)
+1SD
30.0
24.0
18.0
Max (x)
-1SD
3.0
2.0
1.0
0.6
1.5
24.5
18.0
14.7
11.5
8.8
1.2
12.0
6.0
10.6
Source: MOFSL, Company
Source: MOFSL, Company
26 November 2024
24
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Exhibit 68:
Poonawalla Fincorp - One-year forward P/B
6
4.5
3
1.5
0
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 69:
Poonawalla Fincorp - One-year forward P/E
322
242
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
4.6
3.3
2.1
1.0
0.2
244.8
3.1
162
82
2
78.5
39.7
12.5
34.8
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 70:
MAS Financial - One-year forward P/B
5.8
4.6
3.4
2.2
1
P/B (x)
Min (x)
Avg (x)
+1SD
5.2
3.8
3.0
Max (x)
-1SD
Exhibit 71:
MAS Financial - One-year forward P/E
42
34
26
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
39.7
27.0
15.3
12.7
21.2
2.2
1.8
1.8
18
10
13.5
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 72:
Aditya Birla Cap - One-year forward P/B
6
4.5
3
1.5
0
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 73:
Aditya Birla Cap - One-year forward P/E
52
40
28
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
4.7
2.7
1.9
41.1
18.3
10.7
9.0
26.0
0.7
1.0
1.5
16
4
11.7
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 74:
Piramal Enterprises - One-year forward P/B
1.1
0.9
0.7
0.5
0.3
P/B (x)
Min (x)
Avg (x)
+1SD
1.1
Max (x)
-1SD
Exhibit 75:
Piramal Enterprises - One-year forward P/E
42
32
22
12
2
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
0.9
0.8
30.8
22.2
16.6
10.9
6.9
0.9
0.6
0.5
20.6
Source: MOFSL, Company
Source: MOFSL, Company
26 November 2024
25
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Story in charts - Diversified lenders
Exhibit 76:
Calibration in PL/BL/MFI portfolio by diversified lenders led to some moderation in AUM growth
BAF
41
16
27
4
-5 -1
-1
-7
4
-4
-20
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY27E
-6
29
18
0
-8
15
25
19
6
AUM growth YoY (%)
LTFH
IIFL
Poonawalla
55
37 34
27
28
32
2
27 26 26
37
26 27
35
17
21
Source: MOFSL, Company
Exhibit 77:
Minor deterioration in asset quality in 1H, primarily from higher delinquencies in unsecured retail credit
GNPA (%)
BAF
5.9
5.3
5.0
LTFH
IIFL
Poonawalla
4.7
3.2 3.3
1.8
-
FY20
FY21
FY22
FY23
FY24
1HFY25
Source: MOFSL, Company
2.1
1.6
1.8
0.9
1.4
0.9
3.2
2.3
1.2
1.1
3.2
2.4 2.1
4.3
4.2
1.5
1.7
-
FY19
1.6
2.3
Exhibit 78:
Credit costs rose due to stress in unsecured retail credit such as MFI, PL, and unsecured BL; Poonawalla took a
one-time credit cost of INR6.7b in 2QFY25 toward its STPL book
Credit Costs (%)
BAF
LTFH
13.4
IIFL
Poonawalla
13.1
1.6 1.7 1.1 1.9
3.8
3.1 2.5
1.7
4.1 4.1 3.8
2.8 3.6 2.7
0.7
1.5
3.2 2.4
1.6
-1.1
2.7 2.0
0.4
3.6
2.1 2.9
FY19
FY20
FY21
FY22
FY23
FY24
2QFY25
Source: MOFSL, Company
Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
26 November 2024
26
 Motilal Oswal Financial Services
Sector Update | Financial - NBFC
Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
< - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall be within following 30 days take
appropriate measures to make the recommendation consistent with the investment rating legend.
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