Vehicle finance NBFCs to see strong performance, says Kotak Equities; upgrades Cholamandalam, Shriram Finance to ‘Buy’

This growth in NII would come even as vehicle volumes may remain subdued and cost of borrowings may remain elevated, analysts at Kotak Institutional Equities said, adding that they do not find any red flags on asset quality, though trends in credit cost trends may be mixed. 

“A combination of product diversification, focus on yields/fees and benign credit cycle will likely support the strong performance of vehicle finance NBFCs. We believe that loan growth moderation (17-24% in FY2025E) from current elevated levels reduces the risk of overheating and bodes well for all stakeholders,” the brokerage said in a report.

It expects vehicle sales growth to moderate to 3-9%, while core segment growth to decline 200-1,200 basis points (bps) in FY2025 from current levels. Moreover, 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 over the Reserve Bank of India’ (RBI) crackdown on NBFCs are high, Kotak Equities stick to preferring NBFCs of vintage that have seen multiple cycles and regulatory headwinds.

Kotak Equities has upgraded its ratings on Cholamandalam Investment and Finance Company and Shriram Finance but remains a bit 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-run multi-product NBFC model, with stable performance over cycles and unblemished track record after the exit of DBS (2009) will command rich valuations. 

“Chola continues to deliver strong growth (moderating to 24% in FY2025E from 40% in FY2024E), toggling across product classes. Lower growth in unsecured loans (7% of loan book) and rise in NPLs in this segment had minimal impact on its overall financial performance in 9MFY24. We expect Chola to deliver 23% loan book and earnings CAGR during FY2025-27E, translating to 19% RoE,” said the brokerage firm.

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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 from ₹2,500 earlier, as it believes the company has bettered expectations, after guidance of mid-teen growth and RoE during merger. 

“It appears to benefit from the merger and strong underlying economy in erstwhile Shriram City Union Finance’s businesses. The company reported 20% loan growth in 9MFY24; its guidance of mid-teen growth may be conservative, in our view. The company has managed margins smartly by shifting product mix,” the brokerage said.

At 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 will likely 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 has exerted pressure on its profitability. RoE may remain range-bound at 12-14%, Kotak Equities said. 

The company guided for 1.7% credit cost for the year, which hinges on strong collections performance in March 2024. ECL coverage (down to 3.8% from 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 has reiterated its ‘Add’ rating on the stock and raised the target price to ₹310 per share from 305 earlier.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 11 Mar 2024, 12:19 PM IST