Anand Rathi Research - wirc-icai.org · PDF fileOnly one bank branch per 14,000 people ......

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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

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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

What makes NBFCs successful?

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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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Anand Rathi Research

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

Key Shortcomings

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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)

(%)

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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

Opportunities unlimited for NBFCs

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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

CASE STUDIES

Mahindra Finance

Bajaj Finance

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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

(%)

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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

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Anand Rathi Research

THANK YOU

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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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