Non-Banking Financial Companies (NBFCs) are likely to post steady earnings in the June quarter of the financial year 2022-23 (Q1FY23), said brokerage house Motilal Oswal, even though in general, Q1 of a fiscal year is a seasonally weak quarter both in terms of disbursements as well as asset quality.
However, MOSL expects Q1FY23 to be slightly different with healthy disbursement momentum across both vehicles as well as housing financiers.
"The deterioration in asset quality (typical of Q1) is also not as pronounced this time around with housing financiers likely to report a sequential improvement in asset quality while we expect a minor sequential asset quality deterioration (seasonal) for the vehicle financiers," it noted.
The brokerage estimates that NBFCs in its coverage universe are likely to deliver 26 percent YoY growth in their net interest income (NII) and a whopping 175 percent YoY growth in their net profit in Q1FY23. The major surge in net profit comes on the back of a low base in Q1FY22, which was impacted by the COVID-19 pandemic.
It forecasts strong YoY growth in earnings for Shriram Transport, Bajaj Finance, and LIC Housing, while it sees a decline in earnings for Manappuram Finance due to muted loan growth and deterioration in margin profile.
Housing Finance Companies (HFCs)
MOSL also noted that while large HFCs have raised their prime lending rates (PLRs) to transmit the increase in repo rates to customers, the smaller affordable housing financiers have restrained from increasing the lending rates just yet.
As per the brokerage, property registrations continued to remain buoyant all through 11QFY23 and home loans continued to witness healthy demand despite increasing interest rates and concerns about inflation. It expects HDFC and LIC Housing to deliver strong retail home loan disbursements while it forecasts others such as PNB Housing to see relatively modest disbursements while it aligns with its new business model.
It expects the growth in assets under management for NBFCs and HFCs to be healthy in the June quarter driven by healthy disbursements and a low base of Q1FY22. It also sees asset quality improvement for the housing financers in the June quarter.
Hence, the impact on margins on such firms will be limited in Q1FY23 but the impact in the remainder of FY23 will be the key to monitor for the cohort of lending NBFCs/HFCs, the brokerage pointed out.
Meanwhile, vehicle financiers have increased their lending rates by around 25 bps in June 2022 but on many occasions, the increase was selectively done in particular lower-yielding product segments, it said.
MOSL further noted that passenger vehicles continue to exhibit strong demand evident in their long waiting periods, meanwhile, medium and heavy commercial vehicle (M&HCV) volumes have also continued to demonstrate a recovery in the last four to five months.
For Shriram Transport, MOSL estimates a 13 percent QoQ decline in disbursements while for Chola Invest it sees disbursements remaining flat sequentially. It expects a seasonal deterioration in asset quality across all three-vehicle financiers. Vehicle financiers will be most vulnerable to margin compression in the remainder of this fiscal year but the impact in Q1FY23 has been insignificant, it added.
The brokerage report also stated that the growth in the health insurance industry in Q1FY23 has been mainly driven by strong premium growth in the group health business, whereas the retail health business has seen some slowdown.
Stand-alone health insurance firms continue to gain market share, especially in the retail health segment, whereas PSU players have reported weak performance in both group and retail health businesses, it added. However, claim ratios are likely to see sharp improvement with no material impact of COVID claims. Non-COVID claims are also likely to see some normalization, the report further forecasts.
The brokerage continues to favor financials as a) franchises with strong balance sheets and b) those companies which can change their asset/liability mix to mitigate the impact on margins. Its top picks in the sector are Cholamandalam Invest, Shriram Transport, IIFL Wealth and Star Health.