This increase in NII will come even as vehicles may remain weak and cost of borrowing may remain elevated, analysts at Kotak Institutional Equities said, adding that they do not find any red flags on asset quality, although trends in credit cost trends may be mixed. .
“A combination of product diversification, focus on yields/fees and a benign credit cycle is likely to support the strong performance of vehicle finance NBFCs. We believe that loan growth moderation (17-24% in FY2025E) from current high levels reduces the risk of overheating and bodes well for all concerned,” the brokerage said in a report.
It expects vehicle sales growth to moderate to 3-9%, while the core segment growth will decline 200-1,200 basis points (bps) in FY2025 from current levels. In addition, credit cost is also expected to remain muted at 1.1% – 2.1% for all players.
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While the Street’s anxieties about the Reserve Bank of India’s (RBI) crackdown on NBFCs are high, Kotak Equities remains in favor of NBFCs of a vintage that has seen several cycles and regulatory headwinds.
Kotak Equities has upgraded its ratings on Cholamandalam Investment and Finance Company and Shriram Finance but remains somewhat watchful on trends at Mahindra Finance.
Cholamandalam Investment and Finance Company | Buy | TP: ₹1,019
The brokerage upgraded Cholamandalam Investment and Finance Company to “Buy” and has a target price of ₹1,019 per share on the stock, as it believes the company is a well-managed multi-product NBFC model, with stable performance over cycles and a spotless track record after the 2009 DBS exit will command rich valuations.
“Chola continues to deliver strong growth (moderating to 24% in FY2025E from 40% in FY2024E), shifting across product classes. Lower growth in unsecured loans (7% of loan book) and increase in NPLs in this segment had minimal impact on its overall financial performance in 9MFY24. We expect Chola to deliver a 23% loan book and revenue CAGR over FY2025-27E, translating to a 19% RoE,” the brokerage firm said.
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Shriram Finance | Buy | TP: ₹2,850
Kotak Equities upgraded Shriram Finance to “Buy” and raised the target price to ₹2,850 per share of ₹2,500 earlier, as it believes the company has outperformed expectations, after guiding mid-teens growth and RoE at the time of merger.
“It looks set to benefit from the merger and strong underlying economics in the former businesses of Shriram City Union Finance. The company reported loan growth of 20% in 9MFY24; its guidance of mid-teens growth may be conservative, in our view. The company managed margins intelligently by changing product mix,” the brokerage said.
At a high ECL coverage of 6.2% in 9MFY24, it finds tailwinds to credit costs for the company.
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M&M Financial Services | Add | ₹310
Mahindra & Mahindra Financial Services is likely to deliver 23% loan growth in FY2024, followed by 20% growth over the next two years. The change in the product mix in favor of low-risk (low-yield) loans put pressure on its profitability. RoE may remain range-bound at 12-14%, Kotak Equities said.
The company has guided for a 1.7% credit cost for the year, which depends on a strong collection performance in March 2024. ECL coverage (down to 3.8% from a peak of 4.5-7.2% in FY2020-22) provides low room for reduction, especially due to seasonal volatility in GNPLs, the brokerage firm added.
It reiterated its ‘Add’ rating on the stock and raised the target price to ₹310 per share from 305 earlier.
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Published: 11 Mar 2024, 12:19 IST