Retail NBFCs losing steam?

The uncertain macroeconomic environment, high borrowing cost and sustained slowdown in the commercial vehicle segment had not deterred investors from buying shares of retail NBFCs (non-banking finance companies) in 2013.

Most retail NBFC stocks gained between 19 and 40 per cent, compared with a 11 per cent decline in the Bankex (the BSE's benchmark index for banking shares) last calendar year.

But analysts cautioned the euphoria might not sustain in 2014, as a weak economy, emerging credit quality stress and tepid loan demand were expected to cap earnings' growth of retail financiers.

Santosh Singh, analyst with Espirito Santo Securities, in his recent note to clients, said: "Will 2014 see an encore? A tall order in our view...We think calendar year 2014 would be more challenging, as the sustained slowdown weighs down the commercial vehicle segment, reins in growth rates and affects asset quality at NBFCs. High interest rate levels is another dampener for the sector."

While a combination of better margins and stable asset quality helped retail NBFCs outperform their rivals in the banking sector in the last 12 months, analysts pointed out that some of these companies were now witnessing stress on their credit portfolios.

Mahindra & Mahindra Financial Services, which was one of the top performers in 2013 with a 43 per cent rise in share price, reported a 25 per cent sequential increase in gross non-performing assets in the third quarter of this financial year. On a year-on-year basis, the gross non-performing assets increased by 51 per cent, primarily because of delays in customer cash flows in certain states, continued weakness in its southern markets and high stress in the commercial vehicle segment. The management may have guided for improvement in asset quality in the fourth quarter, but not many appear convinced.

"A sharp spike in non-performing assets had negatively surprised. With the downward revision in growth and higher credit cost, we have downgraded the earnings estimates by 14 per cent," Alpesh Mehta, analyst with Motilal Oswal Securities, wrote in his earnings review report on Mahindra & Mahindra Financial Services.

India Ratings, in its report on structured finance performance for the third quarter of 2013, warned that the performance of commercial vehicle loans continued to be stressed, while the delinquency rate is rising rapidly in construction equipment finance.

The optimism over rural demand also appears to be waning. "While the going was good for the rural economy over the past decade and corporates capitalised on this, of late we have seen some negative commentary that has raised concerns over whether or not the last decade of real rural growth is sustainable in the coming years," Espirito Santo's Singh said.

Experts said the last decade of rural growth was fuelled by government spending and was unlikely to sustain.
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