Investor Faith In Vehicles Financiers Will Be Put Test

While the prognosis for the Vehicles sector appears to be improving, the increasing interest rate cycle may have an impact on non-bank lenders’ profitability.

Shares of non-bank lenders, especially car loans, have seen an alarming level of confidence among investors amid widespread global economic downturns.

Such optimism is justified as disbursements have improved significantly in recent months and profits in the fourth quarter of FY22 have been strong.

Even though the Nifty 50 has dropped by 10 percent a year so far, Shriram Transport Finance Corporation shares in used car holders have maintained their initial profit. Those of Cholamandalam Investment and Finance Company and Mahindra & Mahindra Financial Services increased by about 20 percent over the period.

Investors — IMAGE SOURCE – SILICON INDIA

Analysts say the optimism is based on solid pay and a positive outlook in the automotive industry. Mahindra Finance’s cash disbursements are tripled in May each year, the company said in a recent business review on trading. Shriram Transport Finance chief executive Umesh Rewankar has indicated a 12 percent loan growth target for FY23 and expects commercial vehicles to show rapid growth over the next three years.

More importantly, the vision of the automotive industry seems to be improving. Managers’ comments from car companies about future growth have been positive. In addition to the ongoing two-wheeler pain, it is expected that both sales of commercial vehicles and passengers may also increase.

A survey of the homes of buyers’ houses shows that sales in June could go back to most car parts. Analysts at Jefferies India have indicated that even sales of two-wheelers could recover.

We see a strong trend of 2W renewal and growth of 15% / 20% / 15% in FY23 / FY24 / FY25. they said in the text. This reflects well on lenders in terms of growth.

Key lenders in the automotive finance sector such as Mahindra Finance focusing on rural areas, Shriram Transport Finance focusing on used vehicles and various Cholamandalam have successfully overcome this epidemic.

The pressure caused by the epidemic has been addressed and there is little chance of new problems, according to analysts. This is another important reason why investors should stay with these companies in a hostile market. The vision for the quality of the goods is optimistic.

That brings us to areas where there are potential problems for investors.

Marginal Trouble

One of the main concerns is the effect of an increase in interest rate cycles. Analysts expect to hit the edge on almost all non-bank lenders, and car lenders are the same. Car lenders are among the most vulnerable to mortgage lending, unlike real estate finance companies that enjoy competitive prices.

Many non-bank lenders have a large share of lending in the form of bonds. The profitability of a business bond has risen more than 100 points in the past two months, even for the most limited companies. Crisil expects borrowing costs from non-bank lenders to increase by 85-105 bps in FY23.

The interest rate has shifted to NBFCs, where the State Bank of India raises the repo rate by 90 bps by two levels… with floating bank loans and is now marked on foreign gaps as a reprint from October 2019, passing faster compared to interest rates linked to interest rates. in finance. rating company means the latest note.

Analysts of Motilal Oswal Financial Services also expect FY23 to be a challenging year at the end.

Just as car financiers benefit from the decline in the interest rate cycle above FY21-22, few of them even report high historical spreads and NIM (interest rates), we believe FY23 will be a test of real credit for the strength of debt and hybridization. of different franchises. Motilal Oswal states in a recent post.

Therefore, margins have declined in Shriram Transport Finance over the past three years. Lenders’ margins have dropped to 7.9 percent in FY22 from 8.4 percent in FY19. Cholamandalam and Mahindra Finance went well, however. The spread of both lenders has improved slightly, though analysts say this may be temporary.

Companies are likely to change their loan terms by demanding additional sales paper after rising interest rates. Cholamandalam is doing well among the three due to the various loan letters.

Car sponsors have a vision for strong growth, controllable pressure and a well-developed emerging market on their side. All they need to do is give them an outlet and the support they need to keep going.