Espirito Santo's views on NBFC sector

Santosh Singh, Espirito Santo Securities is bullish on M&M Financial Services as a play in rural India. "I don't think in this particular time, where our economy is, – I don’t see a lot of players who can talk about 20-25 percent growth rate, 20 percent RoA and all," he told CNBC-TV18.

Below is an edited transcript of the interview on CNBC-TV18 Q: What is your sense about this non-banking financial company (NBFC) space?
A: Mahindra & Mahindra Financial Services Limited (MMFSL) has been our top pick for sometime. We have been saying that because simply on the demand side M&M is in rural. Rural as such has not seen that much trouble as urban has seen. So if you are looking at from demand side, it is doing pretty well.
Even on the ability to pass on the increased cost of funds, where it is one of the highest, there is very little competition in this space. They have already increased the rates on the incremental loans. If you are looking from the funding side, definitely there is a trouble because definitely Mahindra has 50 percent from banks, 50 percent from NCD and entire NBFC was borrowing from NCD market because there was some sort of discrepancy within the bank rates and the NCD rates. So, at least 70-80 bps lower than the bank rates. So all of a sudden after RBI tightening, NCD has moved up probably bank rates. So people were borrowing from NCDs and that rate has moved up significantly. So there is some sort of trouble over there.
Even if you think about that, there will be 25-30 bps overall increase in cost of funds and that will percolate down to their return on assets (RoA), we are still talking about decent 20 percent RoAs and around 20-25 percent growth rate in a market which is growing pretty well.
I don’t think in this particular time, where our economy is, – I don’t see a lot of players who can talk about 20-25 percent growth rate, 20 percent RoA and all. That has been our top pick for sometime now. Q: Rajiv Bajaj (MD of Bajaj Auto) earlier in an interview pointed out that rural has not done well so far. Do you think that you could be surprised to its NPLs in the likes of MMFSL or Shriram Transport Finance?
A: I think it is about Q1 because I was talking to many people and they were pointing out that Q1 monsoons are very good and when the monsoons are very good, people are trying to do what they do the best. They were very much interested in their sowing and all those things so they were not that much interested in going out and buying. What everyone’s point of view is that Q2 is going to be far more better than Q1 and even if you look at MMFSL case, their gross NPLs were a tad higher in Q1. What we are expecting in Q2 is that it will come down sharply that has never been the case with MMFSL in the past but that is expected to come down sharply in Q2. Q: Manappuram is up 51 percent in a month and it is down some 40-50 percent in a year. How would you look at Manappuram?
A: About all the gold lending stocks, I am a pretty cautious person because over last one to one and a half years, they have made themselves a leveled play on gold prices. If you look at Manappuram stock price also, it has fluctuated with gold prices. When gold prices were moving down, the stock prices were moving down. When gold prices start to move up, the stock price starts to move up.
The clear reason is when the gold prices move up, there are two-three positives which come in. first and foremost is your NPL start to come down that is your recovery rates start to move up. Second is the amount which you can disclose on a similar quantum of gold that starts to move up then finally when the demand moves up because people can get more money by placing similar amount of gold. So overall gold prices moving up is positive and that is what the market is trying to price in.
Second part is that when it moved down to Rs 10, it was trading at 0.3 times its book. Now at 0.3 times its book, it is pretty cheap. It was pricing in more than the micros and the macros, it was pricing in something around the communication gap also which they had somewhere around January-February.