An increase of 140 to 165 basis points (including the 90 basis points already announced in May-June 22) in political repo rates is likely in FY23. Meanwhile, semiconductor shortages are expected to continue as supply issues cannot be fully resolved in FY23.
If fuel prices were to remain or moderate from current levels, we do not estimate a material impact on demand for vehicles or on reimbursements or collections. However, if fuel prices were to rise 10-15% from current levels, we expect higher delinquencies, particularly in the CV-CE segment.
Commodity price inflation results in larger ticket sizes for new and used vehicles. This will also contribute to the growth of disbursements in FY23.
Rising interest rates, taken in isolation, will not have a direct impact on demand for passenger vehicles or commercial vehicles, but even a moderate economic slowdown has the potential to sustain purchasing demand muted new vehicles.
Commercial vehicle (CV) demand has shown an improving trajectory over the past four to five months.
We expect demand momentum to continue in FY23, with increased capacity utilization driven by infrastructure spending that will fuel demand for newer vehicles.
In 1HFY23, lenders will seek to minimize the impact of higher borrowing costs by reducing excess liquidity and increasing the proportion of short-term borrowing (to the extent that their ALM allows).
Asset quality for the three vehicle financiers –
(CIFC), M&M Financial Services (MMFS) and (SHTF) – showed strong improvement, with NS3 for each comfortably below 4% in March 2022.
Write-offs were high, suggesting repossessions and settlements have been used more aggressively to affect asset quality improvement, even as the RBI NPA circular comes into effect from October 2022.
We expect vehicle financiers to use operating and credit cost levers to deliver healthy RoA, despite the expected NIM compression.
We model an AUM CAGR of 21%/12%/11% and a PAT CAGR of 14%/26%/17% for CIFC/MMFS/SHTF in FY22-24. This will result in a 2.6%/1.9%/2.3% RoA and a 19%/9%/12 RoE for CIFC/MMFS/SHTF in FY24E.
We maintain our preference for CIFC, followed by SHTF.
Cholamandalam Investment and Finance Company: Buy| Objective Rs 780 | 19.6% increase
CIFC benefits from a well-diversified loan portfolio, with new businesses taking shape. It may have more leverage than its other peers to deliver healthier RoA/RoE.
Solid asset quality is the hallmark of CIFC. Its recent foray into SME and consumer lending opens up exciting new possibilities. It has partnered with various FinTechs for consumer and personal loans.
We strongly believe that CIFC will be able to expand its capabilities in new ventures and carve out its “right to win” in these segments.
Shriram Transport Finance Company: Buy| Target Rs 1,450 | LTP Rs 1266 as of July 4 | 14.5% increase
SHTF has witnessed the first green shoots of the new CV application. Management said a new cycle of vehicles had begun, after being delayed due to geopolitical issues and rising crude prices. He expects a strong resume cycle over the next three years.
A higher ticket size (the price of new/used vehicles) will support the growth of disbursements. Additionally, we believe that the merged entity will emerge stronger than the respective stand-alone companies.
(The author is Head – Retail Research,
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)