NBFC cos may react positively to RBI announcement: Kotak

According to him, housing finance companies will not be impacted by NBFC norms.

He likes Bajaj Finance, Bajaj Finserv and Shriram Transport.

Below is the transcript of Nischint Chawathe's interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

Latha: These are on expected lines. The final rules are exactly as Usha Thorat's panel had put them out. What is your immediate approach to Shriram or an Mahindra & Mahindra Financial Services Limited (MMFSL) or L&T Finance?

A: Two things here, one is from a stock point of view and business point of view. From a stock point of view clearly the timeframe of 3.5 years to move to 90 days is something which is better than expected. So, from a pure newsflow point of view it is better than what we would have expected for last couple of months.

From a business point of view very frankly, I do not know whether we have really understood the implications of these guidelines. 3.5 years is a fairly long period. Managements have been guiding that we can change our business processes, try to improve our short term collections, etc and try to reduce our gross Non-Performing Loans (NPL) ratio even on a 90 days basis.. Very roughly you can say that between 90-180 days your gross NPL ratios would kind of double. So they would make these efforts to bring down these ratios.

The second option that they have is to play with the provisioning coverage ratios. Someone like Shriram who operates at 80 percent provisioning coverage ratio, they can drop down the provisioning coverage ratio and thus manage 6 or 7 percent gross NPL without really having much of an impact on earnings.

These are the variables which will play out. Markets will slowly and steadily understand the implications of these but from a stock point of view because the news was a little positive and expected things would be fine for stocks. We would look at two things, one is the valuations of the stock, the underlying business momentum and these regulations. So if I look at let’s say, somewhere like Shriram Transport everybody is looking forward to a recovery in commercial vehicles (CVs) and this business doing well. Given the fact that the regulations are not bad I would say even if purely on a standalone basis the impact of the regulations is fairly high for this business. From a stock point of view it might tend to outperform or it might tend to do well over the next couple of months.

As far as Mahindra is concerned it has already run up a lot. It trades at 2.6 times price to book and it is not all that easy for the management to kind of make the business process changes etc and which is the reason I would say that the stock kind of tends to underperform, or remain sideways at these levels.

Sonia: What about the smaller ones, the likes of SREI Infra, some of these gold loan companies, how would you approach them?

A: As far as gold loan companies are concerned, first of all their gross NPL ratios are not that high. It depends a lot on the timing of the auction per se which is the reason gross NPL ratios tend to be more volatile. So for them it won’t be very difficult to kind of change the business process and conduct auctions not six months out but three months out. So I don’t think there is much of an implication on these guys.

From a capital point of view the capitalisation levels for these guys are higher than other Non-Banking Financial Banking Companies (NBFCs). The good part is somewhere in the regulation Reserve Bank of India (RBI) has mentioned that they would look at harmonising the capital requirements for gold loan NBFCs with the rest of the sector. In all possibility, it would mean that capital requirements for gold loan NBFCs might come down over a period of time. The very fact that the regulator has a positive stance or continues to have a positive stance on this segment is something which I would see positively.

Latha: So you expect that capital levels may be brought down from, say, 15 to 12 or something?

A: They may come down to 10 at some point of time, maybe not now, but the fact that the approach is positive or the approach is as compared to the past when RBI had imposed a series of regulation on these guys that is something encouraging.

Latha: It is 12 for them, it is only for systematically important ones that it is 15, is it?

A: So 12 might go down to 10.

Sonia: What are the stocks that you would recommend now? I heard you say that Shriram Transport is good for the longer term, but if there is a dip in these names, what are the stocks that you advise buying?

A: From a pure stock point of view some of the stocks which are not affected by the regulations at all, the housing finance companies, stocks like Bajaj Finance where there is very little difference between a 90 and 180 day basis are the at the best positions. Among the stocks under coverage which we like the most, we like Bajaj Finserv, we like IDFC, LIC Housing Finance and Shriram Transport.

Latha: Bajaj Finance doesn’t have loans that are six months due at all?

A: The difference between a six months and three months past due basis NBF for Bajaj Finance is not very significant. So in that sense it is just a 50 basis points increase and they are already making enough provisions for that.

Latha: You don't cover SREI and IVRCL, that kind of stocks?

A: No, we don’t cover them.

Latha: But are they impacted?

A: I have not examined that.

Sonia: Just a word on HDFC because a report said that the deposit acceptance for asset finance companies has been reduced to one and half times from four times earlier. Would this impact HDFC?

A: The regulations are not directly affecting HDFC. Having said that yes, for HDFC as on September the ratio of deposits to net worth was around two times. So in that sense if at all National Housing Bank (NHB) decides to follow these regulations then yes, HDFC might have to reduce the deposit ratios. My sense is that public deposits at the end of the day are one of the ways in which NBFCs or housing finance companies are able to diversify their funding sources. So I am not really sure whether NHB would want to really kind of come out and just follow RBI as far as this particular thing is concerned.

Latha: But they normally do, don’t they. There are hardly ever any differences between NHB rules and RBI rules. So if they were to come there is a problem for HDFC to raise money?

A: If they were to come, yes. That I would agree but somewhere RBI’s intention is that they want NBFCs to depend less on public deposits but if you have a large institution like HDFC where there is fair amount of public confidence then I don’t think that would be much of a worry and especially from HDFC's point of view it is important for them to have access to multiple or diversified public funding sources.

Latha: But you don't make rules only for HDFC, along with it will be an Indiabulls Housing Finance, Dewan Housing Finance. As the bucket grows if NHB were to do so, it is amazing but HDFC can actually have a crunch from one of its sources. What does it do, it raises funds from banks. What is the option for HDFC?

A: Yes, it raises fund from banks and debt market in that case. Principally you need to understand that from an NBFC point of view RBI does not want very high public participation in NBFCs because NBFCs tend to be volatile but at the same time the regulator wants diversified funding sources for NBFC, they want some of the good NBFCs to be relatively more stable and have lesser dependence on one single funding source. So, that is a conflict that the regulator has to think and take a call on, but somewhere I feel there is a merit on the other side as well.