NBFCs Results Preview: Q1 will sparkle but look out for trouble

The April-June quarter of FY23 is the first normal three-month period without any effects of Covid-19 waves that marked the previous several quarters. This means that non-banking financial companies (NBFCs) are likely to report one of the best quarterly performances marked by strong loan growth and robust collection efficiency along with a reduction in stressed assets. At the same time, investors would have to parse the numbers carefully as a base effect will likely blow out a normalized performance.

It shouldn’t surprise that analysts expect NBFCs to show balance sheet growth and profitability similar to previous peak periods. “We find strong business momentum for NBFCs across segments, viz. housing finance—prime as well as affordable housing, vehicles finance (mostly CVs and PVs) and consumer loans including durables. Yoy (year-on-year) growth rates will be high due to a depressed Covid base,” analysts at Kotak Institutional Equities wrote in their preview note.

Housing finance companies in particular are expected to report balance sheet growth in high double digits for the quarter. Kotak points out that those focused on affordable housing such as Aptus Value Housing Finance India Ltd, Aavas Financiers Ltd and Home First Finance Company India Ltd may report loan growth of more than 25-30 percent. The segment’s leader, HDFC Ltd may report a loan growth of 15-16 percent, which is its pre-pandemic trend.

Vehicle financiers such as Shriram Transport Finance Corporation Ltd, Cholamandalam Investment and Finance Company Ltd and Mahindra & Mahindra Financial Services Ltd may report strong growth in assets under management given the revival in the automobile industry. A seasonally weak period may, however, weigh on growth somewhat. “Even in the case of vehicle financiers, for which Q1 is a seasonally weak quarter, we expect Q1FY23 to be better for the business than Q1s in the prior years,” analysts at Emkay Global Financial Services Ltd wrote in their preview note.

In an early update for Q1FY23, Mahindra Finance reported that its loan book grew by 3 percent sequentially and assets grew by 6 percent. Since the company has a high exposure to the rural economy, the uncertainties surrounding farm output may weigh on sentiment here. India’s villages have not yet bounced back from the pandemic’s blow and the sharp increase in inflation has also dented earnings, leaving little room for discretionary expenses or even investment into farming and small businesses.

Another area where NBFCs may put up a strong show besides loan growth is collection efficiencies and asset quality. Indeed, Shriram Transport and Mahindra Finance reported collection efficiency of 98 percent in their respective early updates on Q1FY23. Asset quality was a major trouble area for NBFCs during the pandemic. The move to focus on collections instead of growth and proactive provisioning has meant that NBFCs have managed to avoid a surge in delinquencies.

That brings us to another area that may create fresh challenges for NBFCs. The policy rate hikes in response to inflation has jacked up the cost of borrowing for most NBFCs. However, the effect of this may not be fully visible in the margins for the first quarter. Analysts are divided over the impact of the rise in cost of borrowings on margins. Those at Kotak expect a compression of 10-100 basis points (bps) in margins on a sequential basis with the hit more pronounced for vehicle financiers. However, some analysts believe that the impact won’t be pronounced in the April-June quarter as the full pass-through of the policy rate hikes hasn’t happened. “The increase in the weighted average cost of borrowings is between 5bp and 20bp across NBFCs/HFCs,” analysts at Motilal Oswal Financial Services Ltd wrote in a note.

Investors would pay close attention to management commentary from NBFCs for the outlook on margins. On balance, the operating metrics of NBFCs may show a smart recovery for the quarter.