Cash-dependent finance firms may stay stressed

Bharat Financial, M&M Financial, Shriram Transport, as well as small finance banks such as Ujjivan and Equitas witnessed earnings pressure in Q4

The popular belief is that India is well past the demonetisation disruption. Among many indicators, the performance of a few non-banking financial companies (NBFCs) in December quarter tempted investors to believe that the note ban’s impact on the financial system was lesser than expected. But, as the Reserve Bank of India’s dispensation on bad-loan recognition faded out in March quarter (Q4), it appears that the Street’s cheer on certain cash-dependent NBFCs was perhaps early. Apart from demonetisation, state election in Uttar Pradesh (UP) and mayoral polls in Maharashtra prompted politicians to pitch for farm loan waiver, which in turn affected the collection discipline, particularly for microfinance institutions (MFIs). Severity of these issues could compound with a likely drought in regions of Maharashtra and Tamil Nadu.

"Even as the impact of demonetisation has more or less played out, there are socio-political issues in states such as UP, Madhya Pradesh, Vidarbha region of Maharashtra, Karnataka, and Tamil Nadu. These issues cropped up since January 2017. While some of them are being addressed, it could take at least three months for normalcy to return," says Krishnan Sitaraman, senior director, CRISIL.

Analysts are hence turning cautious on stocks of NBFCs, particularly rural and cash-dependent ones that had a weak Q4, as well as small finance banks (SFBs) with significant rural exposure. They have tempered down their expectations on these stocks. Since October 2016 (before demonetisation), analysts have slashed their price targets for Bharat Financial Inclusion (BFIL), Shriram Transport and Ujjivan by 12-13 per cent.

In case of BFIL, analysts at Kotak Institutional Research have cut their earnings per share estimates for FY18-19 by 9-12 per cent due to higher provisions and operating expenses. The brokerage suggests that while the Street dismissed 2011-12 crisis in Andhra Pradesh (AP) as a black swan event, high provisions are likely to weigh on the MFI industry every few years. "Six years after AP crisis, the industry is now hit by crises in Maharashtra. Since these are short-term unsecured loans, loss related default tends to be high," the report notes. Also, the overhang of a likely merger with a bank could keep BFIL's stock in check in short term.

Similar concerns loom over Ujjivan. Microfinance continues to account for a major chunk of its operations (85 per cent of its assets under management or AUM) even as it has commenced operations as a small finance bank (SFB). Analysts at HDFC Securities, while lowering their net profit estimates by 27 per cent and 25.5 per cent for FY18 and FY19, respectively, add that even as Ujjivan is a structural story of lending to under-served segments, the current challenges remain for the financier. Among the lot, Equitas seems to be an exception as it commenced SFB operations ahead of Ujjivan. Equitas's target to reduce the share of MFI in overall loans to 30 per cent by FY18 is also positive. Analysts at Motilal Oswal Financial Services say that high growth in secured products like micro LAP (loan against property) and vehicle finance and newly launched products such as housing, business, gold and agricultural loans should aid the loan book growth going ahead.

Surprisingly, even as vehicle financiers were expected to post decent Q4 results, Shriram Transport and M&M Financial missed estimates. Analysts at JPMorgan remain 'underweight' on M&M Financial on concerns of an adverse environment, which could continue to pressure asset quality and earnings. Even if Shriram Transport is better placed as it is less dependent on rural customers, Jefferies, with a 'hold' recommendation on the stock, notes that loan growth and asset quality were affected by demonetisation even in Q4. "Growth should be lukewarm in first half of FY18 due to pre-buying in Q4 and truck operators deferring purchases till GST (goods and services tax) implementation issues are resolved," the analysts point out.

ANALYSTS ARE TURNING CAUTIOUS ON NBFCs, PARTICULARLY RURAL AND CASH-LEANING ENTITIES