Ve­hi­cle-fi­nance com­pa­nies in fast lane

Strong ve­hi­cle de­mand to sup­port earn­ings growth of top lenders

Business Standard - - THE SMART INVESTOR - SHREEPAD S AUTE

The share prices of ve­hi­cle­fi­nance com­pa­nies are up 717 per cent in the past one month. One rea­son be­ing that the com­pa­nies are ex­pected to post a strong set of num­bers for the Jan­uary-March 2018 quar­ter (Q4), mainly be­cause of hefty ve­hi­cle sales. No­tably, the trend is likely to con­tinue till FY19, and this should re­flect favourably on the share price re­turns, de­spite their out­per­for­mance in the past one year.

“Con­sid­er­ing the healthy de­mand for com­mer­cial and util­ity ve­hi­cles, we ex­pect Shri­ram Trans­port Fi­nance (STF) and Cho­la­man­dalam In­vest­ment and Fi­nance Com­pany (CIFC) to de­liver stronger set of num­bers. Mahin­dra and Mahin­dra Fi­nan­cial Ser­vices (MMFS) is ex­pected to reg­is­ter strong de­mand trends, sup­ported by higher trac­tor sales,” ob­serve an­a­lysts at Emkay Global in their re­cent re­port on Q4 re­sult ex­pec­ta­tions.

Dur­ing the March 2018 quar­ter, sales of com­mer­cial ve­hi­cles surged by over 29 per cent (YoY) and that of util­ity ve­hi­cles by 22 per cent. Even in the De­cem­ber 2017 quar­ter, ve­hi­cle sales wit­nessed a dou­ble-digit growth and trac­tor vol­umes were also healthy.

This buoy­ancy in the au­to­mo­bile sec­tor is likely to have trans­lated into a 15-20 per cent YoY growth in as­sets under man­age­ment (AUM re­flects size of the loan book) of the top ve­hi­cle-fi­nance com­pa­nies. This is be­cause the ve­hi­cle sec­tor, in­clud­ing trac­tors, ac­counts for around 70 per cent, 90 per cent and 100 per cent of CIFC, MMFS and STF’s AUM, re­spec­tively. In fact, for CIFC and MMFS, it would be the high­est AUM growth in the past sev­eral quar­ters.

The ex­pected rise in AUM and low cost of funds would help these firms clock around 19 to 26 per cent YoY growth in net in­ter­est in­come (in­ter­est earned mi­nus ex­pensed). An­a­lysts at Motilal Oswal Se­cu­ri­ties ex­pect the lower cost of funds to re­sult in a 30 to 40 ba­sis point ex­pan­sion (on a yearly ba­sis) in net in­ter­est mar­gin (NIM: NII as a per cent of AUM).

An up­swing in the ru­ral econ­omy, good mon­soon fore­cast and sea­son­ally bet­ter quar­ter (Q4) are also ex­pected to have au­gured well for these firms in terms of as­set qual­ity and credit cost, as re­cov­er­ies are likely to have im­proved.

An­a­lysts, how­ever, point to the im­pact of STF as it shifts to a 90-day NPA or bad loans recog­ni­tion norms (from 120 days ear­lier), which could weigh on its as­set qual­ity and earn­ings in Q4 to some ex­tent. “We an­tic­i­pate im­prove­ment in the un­der­ly­ing trend, tran­si­tion to 90 dpd (days past due, de­lay in re­pay­ment) recog­ni­tion norms will im­pact Q4 earn­ings (of STF),” an­a­lysts at Edel­weiss Se­cu­ri­ties said in a re­cent re­port. Nev­er­the­less, this would only be an ac­count­ing hic­cup.

An­a­lysts are bullish on these stocks, sug­gest­ing around 12-18 per cent up­side over a one-year pe­riod. They be­lieve a pick-up in eco­nomic growth and ru­ral de­mand will help sus­tain a healthy growth in earn­ings, while aid­ing as­set qual­ity in the cur­rent fis­cal. While earn­ings of CIFC is in­creas­ing by 1720 per cent, STF and MMFS’s are seen grow­ing by 30-35 per cent in FY19.

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