Talking about the expectations on the quarterly performance of non-bank financial companies (NBFCs), in an interview to CNBC-TV18 Nischint Chawathe of Kotak Institutional Equities says he is most positive on the housing finance companies and within that space more bullish on HDFC because of their potential to drop home loan rates and gain market share. However, he also expects the whole space to out perform other from the NBFC space. For IDFC, he thinks it could be another quarter of consolidation.He has a sell rating on M&M Financial. Fourth quarter usually the collections are strong for the company but this quarter could see some seasonal impact. Moreover, with the unseasonal rains impacting crops next year, it could affect recoveries, he adds. For L&T Finance Holdings the performance in the last two quarters has seen a marginal improvement and Chawathe expects this trend to continue going forward.For Shriram Transport he expects the numbers to be slightly better than previous quarters. However, going forward unseasonal rains and a question mark on the monsoon could impact the commercial vehicle segment, he adds. The house has a price target of Rs 1150 on the stock with add rating.
He also expects the superior performance of Bajaj Finance to continue in future too.
Below is the transcript of Nischint Chawathe’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18.Anuj: Let us start with Mahindra and Mahindra (M&M) Financial. What kind of earnings would you expect here and what is your call on the stock?A: We have a sell rating on the stock. For the quarter the consensus is anywhere between 5-15 percent decline and we are slightly on the higher end of the consensus. The point here is there are two things here - one is, what is the performance of the company in the quarter and what is the trend that you are looking out that will drive the call on the stock.
From a quarterly point of view, typically collections in the fourth quarter tend to be strong and there will be some seasonal impact out here. But with regards to next year trends, there was unseasonal rain in the last two months which will clearly have some impact on the crop season next year. There is also this whole talk about how monsoon is going to pan out next year. So, those are two key things which will drive the agri sector and which will in turn have a sensitivity on the recovery for Mahindra and Mahindra Financial Services (MMFS).Ekta: What is your expectation in terms of specifically the gross non-performing loans (NPL) for M&M Financial Services? Do you expect it to sustain at seven percent, maybe improve from that five year high or worsen this quarter?A: On a seasonal basis, NPLs do come down in the fourth quarter. So, that is something which would clearly play out. The extent of decline is something which is very difficult to forecast because it is a lot to do with how the internal numbers are really going to play out. But, I can just say that from a seasonal point of view things would be better. On a year-on-year (y-o-y) basis maybe things could be flattish or slightly worse.Anuj: What about the other one? Larsen and Toubro (L&T) Finance?A: If I look at the performance of L&T Finance, things have broadly been stabilising or improving marginally for this stock over the last couple of quarters. I would expect the trend to continue. This is a business that is involved in multiple segments. It has got too many moving parts. So, it is very difficult to put a number to that. But yes, the broad trends have been that of stabilisation, they have had pain in certain sectors which they have broadly bought under control and slowly and steadily we will see the performance improving in the year as well.Ekta: So which are these particular parameters that you would watch out for in L&T Finance holdings? Gross NPLS, retail loan growth, what would it be?A: I guess, the key line item that we would be looking out for is what is the trend in provisioning item because eventually that has the biggest delta on recovery. So, that is one thing that we are clearly looking at as far as this business is concerned.Ekta: We have Shriram Transport Finance coming out with earnings next week. What is your call in terms of the number that they could deliver? And I think SKS Micro as well soon, if you look at that stock?A: As far as Shriram is concerned, or as far as the commercial vehicle (CV) cycle is concerned, what we understand from the ground is that CV finance collections have been a little better this quarter. Some of it has to do with the seasonal impact, some of it has to do with the fact that diesel prices were down in the third quarter and that has had some impact on the way the entire sector has moved. Plus for last one and a half year or so, the under writing has been fairly stringent in the sector.In this back-drop we would expect numbers to be marginally better this quarter than what we have seen in the previous quarters.
Having said that, given the fact that there was unseasonal rains and you have some question mark on the monsoon next year which clearly has some impact on the CV cycle per se, we really do not know whether things are really going to turn around there soon or not. We have a Rs 1,150 price target on the stock with a add rating.Ekta: Bajaj Finance had reported some amount of fund-raising or looking at fund-raising sometime back. Did you look at that news and whether how you analysed that news, one? And two, what your expectations are in terms of the numbers for Bajaj Finance? That has traditionally always outperformed in terms of its quarterly figures. A: Bajaj Finance has been saying this for a while, that they will need to raise capital some time in FY16 - we really do not know the timing and the quarter in which they would raise capital. However, the pace at which this company is growing at around 37-40 percent on an annular basis, clearly they need to raise capital periodically.
From a business point of view, yes, business momentum continues to remain strong, we are still looking at around 35 percent plus loan growth and close to around 25 percent earnings growth for this name as well. I guess they have benefitted from the fact that there are multiple business lines, in which slowdown in one can off-set the other. Having said that they have managed all these business lines very well over the last couple of years and which is exactly the reason why you are able to see a superior performance in this name.
Anuj: What about HDFC, the big one? How do you rate that stock? It has seen a bit of buying off-lateA: In fact if I look at the entire housing finance sector we are in fact within the non-banking financial companies (NBFC) space we are the most positive on housing finance sector. One you have seen borrowing cost or bond borrowings cost coming down massively over the last couple of months which effectively means that the incremental spreads are way too higher.
Now as far as HDFC is concerned, HDFC has always managed spreads or margins within a particular range. So, what that effectively means is that they are very well positioned to drop their home loan rates and that effectively means they can gain market share. So, you have one tailwind as far as the margins are concerned. As far as loan growth is concerned, this company has gained market share by around 15-20 basis points over the last three quarters and given the fact that they have comfort on the margins side, they would continue to do that.
Moreover, as far as housing sector is concerned this is one of the only, or one of the few asset classes which can still grow by around 19-20 percent next year as compared to overall credit growth of around 11-12 percent. So, as an asset class also this will tend to outperform. So, looking at all these factors we are positive on the entire housing finance sector and clearly HDFC is one of the biggest beneficiaries over there.Ekta: And IDFC would be another quarter of consolidation? A: Yes. I guess what everybody is looking at IDFC is the way they have set up the bank. The way they put in the building blocks of the bank and so, from a quarterly point of view the numbers may not be very relevant for IDFC.Disclosure: Me or my relatives would not have any financial interest in any of the stocks that are discussed, but across Kotak Group there may be some relationships or some compensation that would be involved from some of the names that we have already discussed.
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