Consumer Finance Sector Faces Near-Term Headwinds, But Recovery Expected In Second Half: Jefferies
Jefferies has flagged near-term challenges for India’s consumer finance sector, citing subdued loan demand and rising asset quality risks, but remains optimistic about a recovery in the second half of the fiscal year. The brokerage highlighted macroeconomic pressures, potential stress from trade tariffs, and the impact of GST rationalisation on disbursement and loan-to-value ratios.
Subdued Loan Demand and Rising Asset Quality Risks
According to Jefferies, loan demand has been subdued, with July freight rates steady month-on-month and up 6% year-on-year. However, CV operators indicate pressure on rates and margins. The firm noted that tractor registrations have been good, with over 32% year-to-date growth, signaling better rural sentiment on good monsoon.
The brokerage believes the proposed GST cuts could provide a boost to demand, especially in the two-wheeler and passenger vehicles segments. The proposed GST cut for CVs (from 28% to 18%) can improve affordability of new CVs, but price deflation will be a drag on disbursement value. The firm expects disbursements to pick up from 20 to 30 in anticipation of the cut.
Rising Stress in MSMEs and Retail Segments
On asset quality, Jefferies warned of rising stress in MSMEs and retail segments. Stress has increased across segments, including MSME, due to slowing macroeconomic growth, and tariffs can increase stress in select pockets. Citing TransUnion CIBIL data, Jefferies pointed out that delinquencies have increased in smaller ticket business loans, with 90-720 DPD for loans under Rs 1 million increasing by 70bps year-on-year.
The brokerage also flagged risks from trade tariffs, particularly in export-heavy sectors like textiles and gems. Exports in affected sectors account for $19-20 billion and employ over 50 million people. The firm sees some asset quality risks in retail and MSME, especially in select pockets due to tariffs.
Margins to Improve in Second Half
Despite these headwinds, Jefferies expects margins to improve in the second half. Margins in the first half were range-bound and should start to improve in the second half, especially for fixed-rate lenders like auto NBFCs, cards, and gold NBFCs. The firm added that spreads at affordable housing finance companies should also improve as yields are stickier versus prime housing loans.
Valuations Remain Reasonable
Valuations in the sector remain reasonable, according to Jefferies. The sector faces near-term growth and asset quality headwinds, but NIM expansion can cushion the pressure on earnings. Sector valuations are reasonable, near the 10-year average P/B.
Top Picks
Jefferies’ top picks include Bajaj Finance, Cholamandalam Investment and Finance Company, and Shriram Housing Finance, with Muthoot Finance seen as a defensive play. The firm prefers select diversified NBFCs like BAF, given its ability to toggle across segments, and as pressure in MSME BL (12% of AUM) is not as high as feared.
For Indian investors and traders, it is essential to keep a close eye on the consumer finance sector, as it is a significant contributor to the country’s economic growth. The sector’s performance can have a ripple effect on the overall economy, and investors should be aware of the potential risks and opportunities.
In conclusion, while the consumer finance sector faces near-term headwinds, Jefferies remains optimistic about a recovery in the second half of the fiscal year. Investors should consider the potential risks and opportunities in the sector and make informed decisions based on their investment goals and risk tolerance.
Key Takeaways
- Jefferies has flagged near-term challenges for India’s consumer finance sector, citing subdued loan demand and rising asset quality risks.
- The brokerage believes the proposed GST cuts could provide a boost to demand, especially in the two-wheeler and passenger vehicles segments.
- On asset quality, Jefferies warned of rising stress in MSMEs and retail segments.
- Despite these headwinds, Jefferies expects margins to improve in the second half.
- Valuations in the sector remain reasonable, near the 10-year average P/B.
- Jefferies’ top picks include Bajaj Finance, Cholamandalam Investment and Finance Company, and Shriram Housing Finance.
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