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Feb 19, 2013, 11.04 PM IST | Source: CNBC-TV18

NBFCs growth to moderate; bet on Shriram Transport: Kotak

Nischint Chawathe, Kotak Institutional Equities, says that in the last two-three years, some NBFCs have registered a growth of around 30-40 percent, however he expects some growth moderations going forward. In the NBFCs space growth is likely to slowdown to around 20 percent next year.

Nischint Chawathe, Kotak Institutional Equities, says that in the last two-three years, some NBFCs have registered a growth of around 30-40 percent. However, he expects some growth moderations going forward. In the NBFCs space, growth is likely to slowdown to around 20 percent next year, he notes.

He is bullish on Shriram Transport, as he feels that the company's business is largely focused on used CVs. It is a countercyclical segment when the new CV business slows down the used CV segment picks up.

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Below is the edited transcript of his interview to CNBC-TV18.

Q: What is the view about the NBFCs and should an investor approach this space? It has been growing at a rapid trajectory for the past so many quarters, but now we have seen some signs of slowdown?

A: Some NBFCs grew very rapidly at around 30-40 percent over the last two-to-three years. Every year, we wondered that if they can maintain the pace of growth but they always surprised us on an upside and maintained the pace of growth. Finally, we expect to see some moderations from a very high base on some of these companies. 

So companies which are growing at 30-40 percent, will possibly grow at a pace of 20 percent in the next financial year. Auto sales are slowing down and there cannot bve a situation where auto sales slow down consistently and auto finance companies are unaffected. So, it will reflect in the numbers for auto finance companies as well.

Q: If you only stick to the auto vehicle financing set of companies Bajaj Auto, Mahindra and Mahindra which stock would you pick of the pack, because while volumes will fall they will be differentiated in terms of asset quality and margins?

A: Correct. In this space our pick is Shriram Transport, FY12 was a bad year for the company. On the back of a bad year and very low base they are able to report moderate growth this year. We may not see high growth rate but from a 12-13 percent growth rate in last year, we are looking at a 20 percent growth this year and possibly another 17-18 percent growth next year. So from all operating parameters, be it asset quality performance, growth or margins we do not really expect a disappointment.

The general street expectation for this stock is not high because FY12 was a big shock for this company. Compared to other companies, which are already showing signs of moderations and are trading at higher valuation multiples, Shriram could land up being an outperformer.
 
Q: Many auto analysts have told us about the fact that because the Commercial Vehicle (CV) space has had such a bad year it cannot follow it up with another bad year, something that we have never seen in the past, two bad years back to back. Is that really simplistic in terms of an assumption? What if there is another bad year that the CV space or the auto industry may have then how does your argument hold?

A: What is the definition of a bad year? Whether, you are referring to negative growth or moderate growth. Shriram Transport business is largely focused on used CVs. 

Used CVs segment typically tends to be a countercyclical segment, when the new CV business slows down the used CV segment picks up and the reason is logical that equated monthly installments (EMI) for used vehicles are much lower than new vehicle.

Suppose4, if you are a CV operator and the economy is going through difficult times then you may buy a used vehicle which has a lower EMI compared to a new vehicle which has higher EMI. This is actually helping the company to clock higher growth. If you study the breakup of growth that the company is delivering over the last two or three quarters then it is very clear that new vehicle business is slowing down and third quarter was little flattish.

There was a sharp decline in the second quarter, but used vehicles business is picking up very rapidly at around 20 percent, so the company is able to report high growth rate in FY13. So somewhere there is a countercyclical buffer also built in the entire business model and one should take a note of this.

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