Auto finance NBFCs have reported AUM growth in the range of 13-38 percent over the last 12 months, driven by strong auto demand and business diversification, even as they face challenges on the net interest margin front due to rising interest rates, as per Centrum Institutional Research.
Auto sector demand has remained resilient so far. In FY23, sales of commercial vehicles (CVs) climbed 34 percent on an annual basis, while passenger vehicle (PV) sales rose 27 percent.
However, according to industry estimates, volume growth is expected to slide to 10-12 percent for CVs and 7-8 percent for PVs in FY24 due to high base, waning pent up demand and increase in total cost of ownership.
Price hikes of 4-5 percent should support auto AUM growth of 15-18 percent for FY24E, it added.
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In order to reduce cyclicality and diversify their assets under management (AUM), auto finance NBFCs have entered the MSME financing space.
“As per CIBIL Transunion Report, demand for MSME loans has grown 1.7 times the demand seen two years ago (as on 2Q FY23). NBFCs saw credit demand crossing 2x for the same period. In our view, this is achieved due to improved underwriting from access to GST portals, alternate data sources and enriched credit scores along with digital lending,” as per a report by Centrum.
Notably, MSME loans for Cholamandalam Investment & Finance and Mahindra & Mahindra Financial Services jumped by 66 percent and 112 percent YoY in FY23, respectively.
Cost Challenges
The cost of funds for auto NBFCs has increased after a longer than expected cycle of repo rate hikes.
Repo rate has increased by 250 bps over the last one year to 6.5 percent. NBFCs increased lending rates by 25-200 bps in FY23, while the cost of funds increased by 30-100 bps.
Historically, growth has decelerated with rise in repo rates.
“Also, the interest rate hike is on fresh disbursements, while the old book is at a fixed rate suggesting near term NIMs (net interest margins) compression,” Centrum noted.
Despite these headwinds, auto NBFCs’ asset quality remains stable.
Auto NBFCs largely cater to mid and low range customers whose cash flows were impacted during Covid. Most NBFCs raised capital during this time to tide over the liquidity and asset quality issues.
Also, the books of NBFCs have been cleansed with high write-offs done in 4QFY22.
Meanwhile, NBFCs diversified their borrowings mix after the IL&FS crisis.
Funding from debt MFs declined from 19 percent in July’18 to 8.5 percent now. This was offset by an increase in bank exposure to the NBFC sector, which is up from 6.4 percent in Mar’18 to 9.7 percent in Feb’23.
“Post Covid, banks have increased funding towards NBFCs as their balance sheets strengthened with strong capital adequacy ratios and high provision coverage ratio. The asset quality outlook for FY24E remains comfortable too,” it added.
These factors have boosted the share performance of auto NBFCs.
Cholamandalam Investment & Finance has been the clear outperformer, with its stock advancing 21 percent over the past month, followed by M&M Financial Services (up 12 percent), Shriram Finance (4 percent) and Sundaram Finance (3.25 percent).
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