Post on 06-Mar-2018
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Non-Banking Finance CompaniesEmerging from the shadows
Non-Banking Finance CompaniesEmerging from the shadows
Kaitav Shah
+9122 6626 6545
kaitavshah@rathi.com
Mar2013
Anand Rathi Research
2
Anand Rathi Research
Financial Exclusion
■ Almost half of India is non-banked
■ Only 55% of the population have deposit accounts and 9% have credit accounts
with banks
■ India has the highest number of households (145 million) out of the banking
system
■ Only one bank branch per 14,000 people
■ Only a little less than 20% of the population has any kind of life insurance and
9.6% has non-life insurance coverage
■ Only 18% had debit cards and less than 2% had credit cards
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Anand Rathi Research
Role and Background
The NBFC sector has played an important role in
■ Enabling / facilitating
■ Product innovation
■ Improving service levels
■ Flexible timings
Low barriers to entry
■ Number of NBFCs registered with the RBI: ~12,500 at end-Mar’12
Growing size and stature of the sector
■ Equivalent to 15.4% of banking credit (11.2% in FY06)
■ Asset size has increased at a robust 24.2% CAGR over FY06-12
Wide disparity in NBFC sector in terms of business models, nature of operations, funding patterns and asset sizes, making regulations asymmetrical
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Anand Rathi Research
Sectoral Structure
Mutual Benefit Company (GOI)
(notified Nidhis)
Mutual Benefit Finance Company
(GOI)
Miscellaneous NBFC / Chit Fund Company
(GOI)
Non-Banking Financial Company
Micro Finance Company (RBI)
Housing Finance Company (NHB)
Investment Company
Infrastructure Fin. Company
Residuary NBFC
Asset FinanceCompany
Loan Company
Investment Company
Asset FinanceCompany
Loan Company
NBFCs-Non-deposit taking and systemic important
(RBI)
NBFCs-Deposit Taking (RBI)
CoreInvestment Companies
Note: Name in brackets indicates regulatory body
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Key Types of NBFCs - RBI
Infra Financing companies
Asset Financing companies
Investment companies
Loan, Gold finance, MFI, IDF, Factoring
Anand Rathi Research
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Anand Rathi Research
Niche expertise developed by NBFCs
Niche expertiseNiche expertise
Source: Company ,Anand Rathi Research
Core competencies
Nimble and Flexible
Skilled employees
Well-established network
In-depth knowledge of customers, better understanding of ground realities & the business model of customers, and aids regular checks and speedy recoveries.
NBFCs have developed key expertise and created own criteria for valuation, appraisal and collection due to the uniqueness of their business and products. Improves service quality and efficiency.
Well-spread branch network built over the years helps to tapgrowing demand in under-banked credit-starved rural / semi-urban areas.
Loyal customer base Several large NBFCs have become household names among borrowers. Loyal customers of several years standing not only act as referrals but also come back for refinance.
Identify a niche and create leadership position
STFC i s an organized player with a large 20-25% market share in used-CV financing. Bajaj Finance is the market leader in 2/3 wheelers. MMFS is the second-largest lender to Maruti vehicles, after SBI.
Advantages
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Niche expertise developed by NBFCs
Niche expertiseNiche expertise
Source: Company,Anand Rathi Research
- Rich experience in and better understanding of rural auto financing- Strong brand name of the parent helps in gaining customer confidence- more than 600 branches and 1 million loyal customers
+201991Mahindra Finance
- Specialised in used-CV financing, with 20-25% market share- Expertise developed over the years for loan generation, asset valuation and collection- more than 500 branches and 1 million loyal customers
+301979Shriram
Transport
- One of the few private players in infrastructure lending- Presence across the value chain- Diversified lending (unlike REC, PFC) to mitigate segmental risk - Well capitalised to tap huge lending potential
+151997IDFC
- Operating under the Ministry of Power; Navratna PSU- Enjoys strong relationship with state and Central government utilities (~90% of loan
book)- Nodal agency for UMPPs (huge lending potential) and R–APDRP
+251986PFC
- Operating under the Ministry of Power; Navratna PSU- Enjoys strong relationship with state and Central government- One of the few lenders to SEBs, thus strong pricing power - Nodal agency for RGGVY
+401969REC
PositioningExperience
(Years)Year of
IncorporationName
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Anand Rathi Research
Where are NBFCs placed compared to banks?
Source: Company and Anand Rathi Research
Superior pricing power
Source: Company and Anand Rathi Research
Higher capital
Source: Company and Anand Rathi Research
Better productivity
Source: Company and Anand Rathi Research
Robust return ratios (RoA)
Superior ModelSuperior Model
0
10
20
30
40
50
60
REC PF
C
IDFC
MM
FS STF
SBI
PNB
BOB
BOI
Can
ara
ICIC
I
HD
FC B
K
Axis
Cost-Income (FY12)
(%)
0
4
8
12
16
20
REC PF
C
IDFC
MM
FS STF
SBI
PNB
BOB
BOI
Can
ara
ICIC
I
HD
FC B
K
Axis
Tier 1 capital (FY12)
(%)
0
4
8
12
16
20
REC PF
C
IDFC
MM
FS STF
SBI
PNB
BOB
BOI
Can
ara
ICIC
I
HD
FC B
K
Axis
Yield on Earning Assets (FY12)
(%)
0
1
2
3
4
REC PF
C
IDFC
MM
FS STF
SBI
PNB
BOB
BOI
Can
ara
ICIC
I
HD
FC B
K
Axis
Return on Asset (FY12)
(%)
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Anand Rathi Research
Source: RBI
Lower diversification in liability mix
■ Highly dependent on banks for funding
■ Relatively lower leverage allowed due to higher product concentration
■ As a result despite higher RoAs, RoEs are comparable to banks
…….Hence, cost of funds is higher
Source: Company, Anand Rathi Research
High dependence on banks
As a result .. RoEs are comparable to banks
Source: Company, Anand Rathi Research
Lower leverage due to product concentration
Source: Company, Anand Rathi Research
FY12
Banks29%
others18%
CP5%
Financial institutions
2%Debentures
46%
0
3
6
9
12
REC PF
C
IDFC
MM
FS STF
SBI
PNB
BOB
BOI
Can
ara
ICIC
I
HD
FC B
K
Axis
Cost of Funds(FY12)
(%)
0
5
10
15
20
REC PF
C
IDFC
MM
FS STF
SBI
PNB
BOB
BOI
Can
ara
ICIC
I
HD
FC B
K
Axis
Leverage (FY12)
(x)
0
5
10
15
20
25
REC PF
C
IDFC
MM
FS STF
SBI
PNB
BOB
BOI
Can
ara
ICIC
I
HD
FC B
K
Axis
Return on Equity (FY12)
(%)
12
Anand Rathi ResearchIFC StatusIFC Status
IFC, AFC status positive for growth and margins
Positives
■ Higher exposure limits for single/group borrowers (5% for lending, 10% for lending and investing)
■ Banks can lend more (5% extra) to infrastructure NBFCs and asset-financing NBFCs
■ Higher ECB borrowings – (50% of net worth under automatic route) for IFCs
■ Tax-free infrastructure bonds for IFCs
■ 20% risk-weight for government-guaranteed loans given by IFCs, against 100% risk-weight for other NBFCs
Negatives
■ Higher CAR requirement; 10% Tier 1 for IFCs, against 7.5% for asset-financing NBFCs at present
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Anand Rathi Research
Opportunity unlimited – Infrastructure financing■ Huge investment in infrastructure –US$1trn in FYP XII (~10% of GDP)
■ Share of NBFCsexpected to increase
■ Private share + PPP in infra to increase (36% in FYP XI to 50% in FYP XII)
■ Private sector has high dependence on debt - ~70% of project cost
XII Plan: Investment outlay
Source: GoI
Reliance on debt for infrastructure projects (%)
Source: RBI
Opportunity unlimitedOpportunity unlimited
XII Plan: Sources of Funding
Source: GoI
Private participation rising
Source: RBI
24
52
70
State govts central govt Pvt sector
3.9 4.1 4.2 4.8 4.9 5 5.1 5
1.3 1.7 2.22.4 2.6 2.9 3.3
5
0
2
4
6
8
10
12
10th
Pla
n
FY07
FY08
FY09
FY10
FY11
FY12
BE
12th
Pla
nPr
ojec
ted
(% o
f GD
P)
Public Private
8,4736,5625,1834,1743,364Debt
7,4216,2935,4304,7004,146Non-debt
15,89312,85610,6138,8757,510Total projected investment
8,7536,4814,9053,7672,933Private
3,1392,8322,5562,3002,069States
4,0013,5433,1522,8072,508Centre
2016-172015-162014-152013-142012-13(`bn)
1,2341,072957922919Gap
8,4736,5625,1834,1743,364Estimated Requirement of Debt
7,2385,4904,2263,2522,445Likely Total Debt Resources
883755652560468ECBs
393339296257217Pension/Insurance funds
2,1431,5411,120810570NBFCs
3,8142,8552,1601,6271,191Domestic Bank Credit
2016-172015 -162014-152013-142012-13(`bn)
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Anand Rathi Research
Opportunity unlimited – Structural change in rural consumption
■ Increase in MSP driving structural change
■ Social spending by government increasing rural cashflows
■ Rural road connectivity improving
■ Rural household consumer expenditure increases faster
■ Dependence on rainfall decreases
Sharp rise in MSP brings structural change
Source: CMIE
Sharp rise in social spending
Source: GoI
Opportunity unlimited Opportunity unlimited
Roads awarded on an uptrend
Source: IMD
Rural Household consumer expenditure faster
Source: NSSO7.
7
7.9
7.1
6.9 7.
9
9.8
9.5 11
.1 12.5
11.9 12
.6
11.4 11
.9 12.8
0
2
4
6
8
10
12
14
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
BE
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
Total social spending (% of total expenditure)Total social spending (% of GDP) - RHS
0
400
800
1,200
1,600
FY01
FY07
FY13
Rice Wheat
Rice CAGR: 2.2%Wheat CAGR: 4.2%
Rice CAGR: 13.7%Wheat CAGR: 10.3%
(`/quintal)
R
0
500
1,000
1,500
2,000
2,500
61st round (Jun'05) 66th round (Jun'10) 68th round (Jun'12)
Rural Urban
Rural CAGR: 10.7%Urban CAGR: 11.2%
Rural CAGR: 17.5%Urban CAGR: 16.0%
(`)
0
2,000
4,000
6,000
8,000
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Awarded Completed
(km)
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Anand Rathi Research
Opportunity unlimited –Estimation of vehicle finance market
Source: Shriram City Union Finance, Crisil
Two-wheeler-market finance
Source: Shriram City Union Finance, Crisil
Light-commercial-vehicle Finance
Source: Shriram City Union Finance, Crisil
Utility-vehicle finance
Source: Shriram City Union Finance, Crisil
Medium-and-heavy-commercial-vehicle finance
Vehicle finance marketVehicle finance market
New TW Finance Market
0
40
80
120
160
200
FY10 FY11 FY12 FY13 FY17
CAGR:
(`bn)
CAGR: 21.6%
New UV Finance Market
0
90
180
270
360
450
FY10 FY11 FY12 FY13 FY17
CAGR: 18.7%
(`bn)
CAGR: 24.0%
New LCV Finance Market
0
70
140
210
280
350
FY10 FY11 FY12 FY13 FY17
CAGR: 20.9%
(`bn)
CAGR: 31.4%
New MHCV Finance Market
0
150
300
450
600
750
900
FY10 FY11 FY12 FY13 FY17
CAGR: 19.7%
(`bn)
CAGR: 25.0%
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Anand Rathi ResearchChallengesChallenges
Keys challenges to growth and earnings
■ Regulatory arbitrage: RBI tightening its grip on the sector
■ Securitization norms
■ Accelerated NPA recognition expected
■ Higher capital adequacy expected
■ Political risk
■ Microfinance industry
■ Discom restructuring / FSA
■ Emerging competition from banks
■ Will lead to lower LTV and reduction in pricing power
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Niche expertise■ Niche expertise, higher capital and lower
operating costs place them ahead of banks
■ IFC, AFC status positive for business growth and margins
■ Robust loan growth and higher RoA than banks
Anand Rathi ResearchSummarySummary
Dependence on banks ■ Funding mix less diversified than banks
■ Given the higher concentration of products, rating companies allow lower leverage than banks
Opportunities galore■ IFCs like PFC, REC, IDFC to benefit from
massive investment in infrastructure (estimated at $1trn in XII Five-year Plan)
■ Asset financing companies like MahindraFinance and Bajaj Finance are a play on a resilient consumption economy
Regulatory, Political threat ■ RBI sharpening its focus on NBFCs may
lead to lower earnings .
■ Political risk from state and Central governments impacts business model
■ Increasing competition from banks may impact pricing power negatively
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Anand Rathi Research
Current Issue: Should an NBFC convert into a Bank
Current IssuesCurrent Issues
Positives
■ Access to capital
■ Access to low-cost funds
■ Access to Repo market
■ Allow provisions as a taxable expense
■ SARFAESI Act
■ Highly experienced in understanding the rural market
Negatives
■ Negative carry of SLR and CRR
■ Operationally seamless transition difficult
■ Adherence to tighter KYC norms
■ Loss in flexibility
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Anand Rathi Research
How to value an NBFC…
ValuationValuation
■ There are several commonly used and accepted methods for valuation
■ Market multiples (P/E, P/B, P/S, P/CF)
■ DCF
■ DDM
■ Residual value
■ Valuation for Banks and NBFCs are different
■ Higher leverage
■ Predictable dividend payouts.
■ We use a multi-stage DDM, in which we assume the company grows at a high rate for a short time (high-growth stage); then gradually reverts to a long-run perpetual growth rate (stable stage). We use the Gordon growth model to estimate terminal value
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Anand Rathi Research
M&M Financial Services
Different legs of growth
Source: Company, Anand Rathi Research
Premium pricing of products
Source: Company, Anand Rathi Research
Key Financials
Source: Company, Anand Rathi Research
Robust loan growth
Source: Company, Anand Rathi Research
■ Well placed (600 branches, +1000 M&M dealers) to tap increasing rural demand
■ Strong brand name of the parent supports business growth and keeps cost of funds low
■ Premium pricing power helps sustain high NIM
■ A diversified product mix helps offset slowdown in an individual sector
■ Rural prosperity and better underwriting standards to keep credit cost under check
Investment IdeaInvestment Idea
1.0
0.8
4.2
21.5
5.4
26.0
60.1
7.2
3,444
10,290
FY10
0.7 0.6 NetNPA (%)1.2 1.1 Dividend yield (%)3.8 4.1 RoA (%)
22.8 22.0 RoE (%)3.4 4.0 PABV (x)
15.4 20.6 PE (x)33.6 26.0 Growth (%) 12.1 9.0 EPS (`)
6,201 4,631 Net profit (`m)16,474 13,137 Net interest income (`m)
FY12FY11Year end: March
0
30,000
60,000
90,000
120,000
150,000
180,000
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
0
12
24
36
48
60
72
Loan book Loan growth (RHS)
(`m)
5
10
15
20
25
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
YoA NIM
(%)
0
25
50
75
100
FY07
FY08
FY09
FY10
FY11
FY12
Dec
'12
UV Tractors Cars CV / CE Others
(%)
23
Anand Rathi Research
Bajaj Finance
Different legs of growth
Source: Company, Anand Rathi Research
Premium pricing of products
Source: Company, Anand Rathi Research
Key Financials
Source: Company, Anand Rathi Research
Robust loan growth
Source: Company, Anand Rathi Research
■ Niche in consumer durables and 2w finance
■ From a captive financier of two-wheelers, the company has successfully diversified its product mix to encompass consumer durables and LAP
■ Rising consumption of aspirational products in tier 1 and tier 2 cities has so far driven growth. Penetration in tier 2 and tier 3 cities are the next growth triggers
■ Premium pricing power helps sustain best in class NIMs
■ Rise of CIBIL and a benign retail credit cycle have kept credit costs in check
Investment IdeaInvestment Idea
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
-25
-5
15
35
55
75
95
Loans and Advances Growth (RHS)
(`m) (%)
5
10
15
20
25
30
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Yield on Advances Cost of Funds
(%)
0%
25%
50%
75%
100%
FY09
FY10
FY11
FY12
2/3 wheeler CD Mortgage Vendor FinOther Infra CE SME
0.11.13.6Net NPA (%)0.90.80.5Dividend yield (%)
3.83.82.4RoA (%)
24.019.78.0RoE (%)2.63.74.6PABV (x)
13.018.952.2PE (x)45.9176.0163.6Growth (%)
98.467.424.4EPS (`)4,064 2,470 894 Net profit (`m)
12,983 9,537 7,084 Net interest income (`m)FY12FY11FY10Year end 31 Mar
25
Anand Rathi Research
Appendix Analyst CertificationThe views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
Other DisclosuresThis report has been issued by Anand Rathi Financial Services Limited (ARFSL), which is regulated by SEBI. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). ARFSL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARFSL, its affiliates, directors, officers, and employees may have a long or short position in any securities of this issuer(s) or in related investments. ARFSL or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report.
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© 2013 Anand Rathi Financial Services Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Anand Rathi Financial Services Limited.
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