CV Loan Repayments Though Steady Has An Overhang That May Affect The NBFC Industry
The auto industry is going through a tough patch of late and this is reflecting upon the NBFC industry. Performance of that industry whether in terms of sales or repayment discipline will affect the NBFC industry positively or adversely.
And a commonly held perception of charging a higher interest rate to make up for the risk is not a panacea for success.
We analyse securitised pool performance of various NBFCs (Non Banking Finance Companies) as monthly collection trends provide early asset quality signals for various asset categories like CV, Cars and MFIs (Micro Finance Institutions),” say Adarsh Parasrampuria and Parul Gulati of Prabhudas Lilladher in an analysis of NBFCs.
According to experts, the overall collection in CVs has been holding relatively firm with just a marginal moderation in CV collections. But this does not mean that a sigh of relief can be breathed. “However, CRISIL continues to sound cautious on the CV cycle given macro weakness and the latest freight rate/availability data is also not very inspiring,” say Parasrampuria and Gulati.
In an analysis India Ratings & Research brought out some interesting linkages between CV loans and the industry. According to research from the agency delinquency for CV loans increases with an increase in interest rates. To cite an example once past the 90+ days past due date delinquency rates for new and used CVs (Commercial vehicles) shoot up to 3.6% and 2.7% respectively (with the provision for the loan’s Internal rate of Return is 25%+. If IRR is below 25% then delinquency stands at 1.8% and 0.7% respectively for new and used CV loans respectively.
There is another interesting angle that India ratings have found. “The rise in delinquencies at lower vehicle values indicates the weaker credit profile of borrowers who seek to finance commercial vehicles of smaller values,” say analysts Arvind Rana and Sandeep Singh of India Ratings. For CV loans (both new as well as used) below Rs. 2.5 lakh (Rs. 0.25 million) the average delinquency rate is 3.1%. Compare this with, new and used CV pools with vehicle value above Rs. 7.5 lakh (Rs. 0.75 million) show average 90+ days past due delinquency rates of 1.8% and 0.6%, respectively.
And lastly a geographic angle! Andhra Pradesh, Tamil Nadu and West Bengal show defaults that are lower than the average. On the other hand Madhya Pradesh, Uttar Pradesh and Maharashtra show defaults above the average.
So how do things look at for the industry going forward? “Overall collection in CVs has been holding relatively firm with just a marginal moderation in CV collections,” say Parasrampuria and Gulati of Prabhudas Lilladher. However, they also note that CRISIL continues to sound cautious on the CV cycle given macro weakness and the latest freight rate/availability data is also not very inspiring.
Most NBFCs and HFCs (Housing Finance Corporations) have shown strong stock performance and valuations on some names are getting demanding now. “We have downgraded IDFC/HDFC to ‘Accumulate’ from ‘BUY’ after Q2FY13 as valuations,” say Adarsh Parasrampuria and Parul Gulati of Prabhudas Lilladher. This is since current valuations do not leave room for upside.
“Shriram’s valuation is reasonable at approximately 1.8 times FY14 book but we remain cautious on the CV cycle at the margin,” the duo say.
“Mahindra Finance has outperformed significantly and that will restrict near-term stock performance but MMFS remains our preferred structural NBFC play with a possible surprise on margins (easing rates) and higher growth (pre-election year) in FY14,” Parasrampuria and Gulati end.