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India Equity Research | Banking and Financial Services Sector Update

Business model in question November 26, 2008

NBFCs facing near-term structural challenges
Kunal Shah
In the wake of weakening macro environment and tight funding, non-banking finance +91-22-4040 7579
companies (NBFCs) are currently encountering structural challenges in the form of
increased refinancing risk, short-term asset-liability mismatch leading to decelerating
growth, margin compression, higher credit costs, and increased capital requirement. Vishal Goyal, CFA
Hence, we believe, their profitability (RoEs) is likely to be under pressure in the +91-22-4040 7540
medium term. We interacted with managements of various NBFCs to understand their
asset-liability profile and growth momentum amidst the recent turbulence.

Refinancing at risk; margins likely to be under pressure
The proportion of borrowings maturing within a year for various NBFCs is estimated to
be in the 10-70% range (with an average at 25-30%) and their reliance on mutual
funds (MF) recently has increased significantly (CRISIL estimates MF borrowings to
have risen to 40-45%). In a tight liquidity scenario, NBFCs are finding it difficult to
refinance their short-term obligations. Down-selling opportunities are also low in an
inactive securitisation market. Though the Reserve Bank of India (RBI) has initiated
several measures to ease liquidity pressure on NBFCs in the short term, we believe,
margins will compress due to refinancing pressure, heightened funding disadvantage
compared to banks, and shift to low yield assets and longer dated liabilities.

Growth likely to moderate as core segments face headwinds
In the past two months, many NBFCs have deliberately put on hold incremental
sanctions as they are utilising inflows to repay their short-term obligations. CRISIL
estimates average decline in disbursements in this period at ~50%. Even if liquidity
eases, we believe, growth will be moderate over the next 12-18 months as core
segments, to which NBFCs primarily lend (viz., CV financing, personal loans,
securities-based lending, and home equity loans), are facing significant headwinds.

Higher risk of delinquencies
Many NBFCs, in the past two-three years, went up the risk curve and ventured into
riskier segments, viz., unsecured loans, used CVs, capital market lending, etc. NBFCs’
origination structure is also tilted towards direct selling agents (~85%) and customer
profile is concentrated on the self employed segment (~75%) which increases their
risk profile. Among retail loans, we believe, mortgages, though safest, may still
witness higher (than past) slippages of more than 1% due to declining property prices
and reduced repayment capacities. Auto and CV loans will carry relatively higher risk,
with NPAs in the 3-4% range. Two wheeler and other unsecured loans may witness
delinquencies upwards of 6%. Overall, slippages may increase by ~2%.

Valuation gap between better-positioned and average players to widen
The current downturn, when compared to the one in mid 1990s, appears similar with
respect to asset-liability mismatch and economic conditions, but is different in terms of
the regulatory framework and credit standards. NBFCs, by virtue of having greater
operating flexibility and ability to specialise in a high growth niche segment, will continue
to offer superior return potential. However, the performance gap between better-
positioned and average players in the sector will widen in the current turbulence.
Companies that build differentiation across: (1) specialisation in stable-to-high growth
and low risk segments; (2) flexibility in product and liability mix; (3) sound risk
management standards; and (4) established origination and recovery capabilities, will
successfully sail through this adverse period and benefit from premium valuations. While
valuation multiple of other players is likely to contract. We, therefore, recommend
investors to consolidate their portfolio in the NBFC space towards companies that qualify
on these parameters, viz., HDFC, LIC Housing Finance, and Power Finance Corp.
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited


growth will be moderate over the next 12-18 months as core segments to which NBFCs primarily lend (viz. dip in prices of underlying assets. and home equity loans). viz. We interacted with managements of various NBFCs to understand their asset-liability profile and momentum in growth in the past two months amidst the current turbulence and steps initiated by them to face these adversities.NBFC NBFCs facing near term structural challenges In the wake of weakening macro environment and tight funding a tight liquidity scenario. securities-based lending. capital market lending. Weakening macro environment and subdued capital market conditions will increase the risk of delinquencies for NBFCs. shift to low yield low risk assets (mortgages. Many players went up the risk curve and ventured into riskier segments. „ Even if liquidity eases. Consequently. However. heightened funding disadvantage compared to banks with RBI cutting CRR and SLR requirement aggressively. particularly.. CV financing. we have also discussed the need for the NBFC business model and the key success factors in the current environment. the NBFC sector is encountering serious structural challenges in the form of: „ Increased risk of refinancing or rollover of their short-term borrowings (particularly mutual funds) and higher short term asset-liability mismatch. Edelweiss Securities Limited 2 . unsecured loans. „ General economic slowdown. their profitability (RoEs) is likely to be lower in the medium term from 16-18% over FY04-08. etc. personal loans. we have tried to highlight: • Asset-liability profile. • How different is the current downturn from that in mid 1990s? Despite the period of comparative difficulty that NBFCs may undergo over the next 12-18 months. auto financing) and towards longer dated liabilities.. particularly for mortgages. „ Over the medium term. the proportion of short-term borrowings vis-à-vis assets. „ Decelerating disbursement growth . used CV financing. CRISIL estimates average ~50% decline in disbursements by NBFCs (rated by it) in September and October. home equity loans. companies are deliberately utilising incremental inflows to repay their short-term obligations than growing the asset book. declining interest rates will ease some pressure. and higher interest rate background may stress asset quality of NBFCs. NBFCs’ margins are likely to be under pressure due to refinancing pressure. • Why growth for the NBFC sector is likely to moderate in the near term and margins will be under pressure? • Outlook on their asset quality. are facing significant headwinds. In this report. we believe.

from 30% in FY08. Cholamandalam DBS. Short-term borrowings are higher than the industry average for Reliance Capital. In case of HDFC. PFC. while this proportion is low for LIC Housing and IDFC. LIC Housing Finance and Shriram City Union. SREI Infra and Shriram City Union has more assets maturing within one year than liabilities. refinancing of this will be relatively difficult and NBFCs will have to resort to more expensive funding. Rural Electrification. while Reliance Capital and Cholamandalam DBS has more liabilities maturing within one year than assets. Reliance Capital. Shriram City Union and SREI Infra in the range of 40-70%. while it is higher for Cholamandalam DBS. With debt funds increasingly facing redemption risk. Edelweiss Securities Limited 3 . Chart 1: Relative proportion of assets and liabilities maturing within a year High Chola DBS Rcap Liabilities MMFS SCUF SREI HDFC REC PFC LICHF Shriram Transport Low Low High Assets Source: Company. assets and liabilities maturing within one year are matched effectively. Moreover. the proportion of borrowings through mutual funds by NBFCs (rated by it) has increased to 40-45% currently. Mahindra Finance. According to CRISIL. Mahindra Finance. and LIC Housing Finance. Our recent interactions with managements of various listed NBFCs and broad analysis of their asset liability structure suggest that the proportion of borrowings maturing within a year is in the range of 10-70% (with an average at 25-30%). Our interactions with managements of various listed NBFCs suggest that borrowing through a mutual fund for a majority of them is less than 20%. We also analysed asset and liability profile of various NBFCs across maturities to understand if there is any significant mismatch in the near term. and Mahindra Finance (between 35-65%). Edelweiss research Besides this. NBFC Refinancing at risk (MF borrowings). proportion of MF borrowings is below 10%. short term asset-liability mismatch NBFCs have resorted to short-term borrowings to fund assets with relatively longer maturity. mutual funds will be more selective in choosing sectors they would prefer to lend to. NBFCs’ reliance on mutual funds as a source of funds has increased significantly in the past two-three years. In case of Power Finance. as finance from them was relatively cheap compared to banks (due to tax arbitrage). and conducive capital markets supported their growth.

NBFCs are finding it increasingly difficult to roll over or refinance their short-term obligations. „ NBFCs (NBFC-ND-SI) and housing finance companies have been temporarily permitted to raise short-term foreign currency borrowings under the approval route to the extent of 50% of their net worth. Moreover. „ Standard asset provisioning requirement for banks on advances to NBFCs has been reduced from 2% to 0.5% of NDTL to ease liquidity stress faced by NBFCs and mutual funds. stands reduced to 100%. thereby adversely impacting their ability to sustain growth. „ Special term repo facility has been instituted under LAF for banks with associated SLR exemption of 1. „ NBFCs have been allowed to issue perpetual debt instruments that can be included in tier 1 capital (up to 15% of the total tier 1 capital). which attracted higher risk of 150% based on credit rating. In the past two months. exposure to asset financing companies. Edelweiss Securities Limited 4 .NBFC RBI initiatives to ease liquidity crunch In the current tight liquidity conditions.4%. RBI has initiated several measures to augment liquidity for NBFCs to enable them to continue lending for productive purposes and also maintain asset quality: „ Risk weights on banks’ exposure to non deposit taking systemically important NBFCs (NBFC-ND-SI) reduced to 100% from 125% earlier. irrespective of their credit rating.

Consequently. You have seen a slowdown in our overall balance sheet growth. Rise in default levels has unnerved the market. aggressive push. „ Auto finance: Dip in demand of underlying asset classes is likely to be a major drag. In fact. focusing on profitability and not really worrying about asset growth and that is what we will continue to do for the remainder of this year…” Source: Q2FY09 earnings call Reliance Capital: “…Our focus in this business has always been on the quality of credit that we sourced and not just growth. You have seen a slowdown in the growth of our loan book. is not expected to continue and NBFCs will turn cautious and adopt stringent underwriting norms. „ Capital market lending: Lack of IPO financing and weakness in capital market activity will affect margin funding and promoter financing activities. in the light of prevailing market conditions. particularly small-ticket. as many players are exiting this business. prompting some players to curtail their operations or exit the two-wheeler finance market. NBFCs’ growth will moderate further over the next 12-18 months as the core segments NBFCs primarily lends to are facing significant headwinds: „ Personal loans: Being a non-collateralised product. as we said earlier this is the time to focus on conserving liquidity. which. decided to slow down the growth of our book. It sees significant decline in personal loans. many NBFCs have deliberately put on hold incremental sanctions/approvals in the past two months. while slowdown in CV and car financing is in line with industry-wide deceleration in demand. Comments from management of IDFC and Reliance Capital: IDFC: “…we would be facing significant headwinds that come from increasing macro risk…we will be focused more on managing our existing assets and will be risk averse about booking new assets. as witnessed in the past. from October. you have seen a decline in our gross disbursements. we have put on hold further disbursals and will review resumption as the situation in credit markets improve…” Source: Q2FY09 earnings call Edelweiss Securities Limited 5 . overtime. CRISIL estimates ~50% decline in disbursements for NBFCs (rated by it) in September and October. and you have seen a decline in our approvals…” “…We. there is no change in our strategies whatsoever. generate higher RoE. NBFC Growth likely to moderate as core segments face headwinds Though growth momentum was sustained till July 2008. They are utilising inflows (through borrowings and repayments) to repay their short-term obligations rather than growing the asset book. we have deliberately further slowed down the growth till September 2008. „ Infrastructure lending is highly levered to economic growth and deceleration in GDP growth may adversely impact project implementation with a lag effect. Our focus would be on increasing our asset yields more than growing our assets and also on allocating capital to businesses. Disbursement in home equity loans is also slowing down due to longer maturity of these products and anticipation of dip in real estate prices. In fact if anything there are reasons to be even more cautious than we were 6 months ago and to that extent. the risk of delinquencies is high as a weakening economy will adversely impact average annual income and unemployment rate. Even if liquidity eases. We continue to remain cautious for exactly the same reasons that we were 6 months ago. However. 6 months ago.

8 47.9 52. Edelweiss research „ Funding disadvantage compared to banks will reappear with the RBI cutting CRR and SLR requirements aggressively. However.7 6. demand for credit is huge.5 8.0 2.3 6.0  1.9 45.3 6.8 6. while the proportion of deposits and borrowings from banks/FIs has declined significantly from 12% to 5% and from 43-45% to 39%. Table 1: Rising dependence on borrowings through bonds/debentures/CPs Proportion (%) FY04 FY05 FY06 FY07 FY08 Bonds/Debentures/CPs 41. over the medium term.0  2.5 46.5 2. 20-25bps benefit to margins of banks due to recent CRR cut of 350bps to 5.0  4.7 Deposits 12.0  (% points) 3.6 43.3 Leverage (x) 5. Besides.6 Source: Capitalline. we believe NBFCs’ margins will be under pressure due to the following: „ Refinancing of short-term borrowings at relatively higher cost in a tight liquidity scenario—spreads between AAA corporate bonds (one year) and treasury bills (one year) have shot up 250-300bps to 4-5%. Edelweiss Securities Limited 6 . Over the past four years.5 39.5 2. currently.8 44. Chart 2: Spreads between AAA bonds and T-bills widened to 4-5% 6. and NBFCs are effectively successful in passing on pressure of increased funding cost to customers and maintaining spreads.8 2.0  5.0  1‐Sep‐06 1‐Sep‐07 1‐Sep‐08 1‐Mar‐06 1‐Jul‐06 1‐Mar‐07 1‐Jul‐07 1‐Mar‐08 1‐Jul‐08 1‐Jan‐06 1‐Nov‐06 1‐Jan‐07 1‐Nov‐07 1‐Jan‐08 1‐Nov‐08 1‐May‐06 1‐May‐07 1‐May‐08 (1.8 6.1 Working capital/cash credit 2.0) 3 months 6 Months 1 year 10 Year Source: Bloomberg „ Lower dependence on wholesale funding and rising reliance on retail deposits. NBFCs will increasingly shift their borrowing mix in favor of longer dated maturities to match the duration profile of asset.5% and 100bps SLR cut to 24%.5 42. the top listed NBFCs (mentioned in Annexure) have increased their dependence on bonds/debentures/CPs (proportion has gone up to 53% in FY08 from 42% in FY04).NBFC Margins likely to be under pressure Amidst lack of liquidity. the cost of which is higher than wholesale funding on a steady state basis. respectively.9 Loans from banks/FIs 43.0  0.2 5.1 5.

2 7.0 15. two- wheeler financing) to low yield.5 Source: Edelweiss research Note: Difference in operating expenses and credit costs may further increase variance in RoAs of banks and NBFCs „ Shift from high yield.2 Net interest income 4.0 24.0 Assumptions Leverage (x) 13.0 12. - Interest expenses 9. .3 81.8 Amount raised for maintaining SLR 33.0 12.4 3.7 129. capital market financing.2 Interest on CRR .5 1.2 15.9 5.0 Yield on SLR (%) 8.0 Interest on SLR 2.0 5.2 9.5 Yield on retail loan (%) 12. low risk products (mortgages.0 8.0 12. high risk products (STPL loans.0 100.2 Deposits/borrowings required 92.7 3.7 7.5 6. NBFC Table 2: Funding disadvantage to NBFCs compared to banks (INR) Banks Deposit taking Pre CRR/SLR cut Post CRR/SLR cut NBFCs Amount of loan 100.0 5.7 18.0 100.0 Net interest margins 3. Chart 3: Interest yield on various asset classes Small ticket PL Used CV Big ticket PL 2-wheeler IPO financing Margin funding New CV New car Mortgage 0 10 20 30 40 50 (%) Interest yield Source: CRISIL estimates.0 Incremental cost of deposits/borrowings (%) 7.0 8.9 31.0 13. - Interest earned on loan 12.1 Amount raised for maintaining CRR 9. .5 - SLR rate (%) 25. Edelweiss research Edelweiss Securities Limited 7 .2 4.3 9.5 CRR rate (%) 9.7 2.2 - Total deposits/borrowings 135.0 Equity contribution 7.0 Yield on CRR (%) .7 97.8 9.3 92.0 12. auto financing).

Mortgages. Chart 4: NBFCs Banks Salaried class 24% Self employed non- Self profession employed Salaried 40% profession class 5% 50% Self employed non- Self profession employed 71% profession 10% Source: CRISIL estimates Moreover. The risk will be relatively higher in auto and CV loans. Chart 5: NBFCs Banks Direct selling team 15% Direct selling agents 40% Direct selling team 60% Direct selling agents 85% Source: CRISIL estimates Edelweiss Securities Limited 8 . it is around 40% for banks. may still witness higher-than-past slippages of more than 1% due to declining property prices and reduced repayment capacities. While the proportion of business done by DSAs is ~85% for NBFCs. Since NBFCs charge higher interest rates compared to banks and do not have access to a readymade customer base (including corporate salary accounts) to cross sell retail finance products. Two wheeler and other unsecured loans may also witness delinquencies upwards of 6%. The target customer profile of NBFCs is also distinct when compared to banks. though safest among retail loans. this increases the risk of delinquencies for NBFCs.NBFC Higher risk of delinquencies Many NBFCs have built significant scale in the past two-three years and during this period many players went up the risk curve and ventured into riskier segments. During weakening macro environment and subdued capital market conditions. Self employed professionals and non-professionals constitute ~75% of their customer base. slippages may increase by ~2%. with NPAs in the 3-4% range. the origination structure for NBFCs is tilted towards direct selling agents (DSA) compared with the direct selling team (DST) in case of banks. while the salaried class accounts for the balance. Overall. they concentrate more on the self employed segment.

and had set up large countrywide distribution networks on the back of buoyant economic conditions. among others. In the 1990s. NPA provisioning. Sensing the risk profile of these NBFCs and the need to protect and comfort depositors. thereby creating an asset-liability mismatch.0 12. but is different in terms of regulatory framework and credit standards. unsecured personal loans. CRISIL downgraded 149 NBFCs (FY98-99) in anticipation of their deteriorating business and credit fundamentals. the RBI Act was amended in 1997. Companies have been able to expand their resource profile by diversifying their funding avenues. a strict control on credit standards and overheads. When economic recession and liquidity crunch triggered in the late 1990s. „ Lending turning bad in worsening economic conditions. since FY01-02. appears similar with respect to asset-liability mismatch and economic conditions. while assets were lent for the long term. „ Regulatory changes related to limitation on deposit acceptance. there were practically no entry norms for NBFCs (required to be registered only under the Companies Act).0 0. This affected the solvency of NBFCs. coupled with use of innovative borrowing tools such as securitization. The new regulation required compulsory registration of all existing and newly incorporated NBFCs with the central bank. Chart 6: Asset quality improving since FY01 15. it prescribed certain minimum capital requirement as a basic entry norm. their business model was built by targeting short-term deposits/borrowings. „ Asset-liability mismatch and inability to recapitalise themselves. many of them lacked credit appraisal. NBFC How different is current downturn from that in mid 1990s? The current downturn.0 (%) 6. Further. and tightened income and NPA recognition norms. has resulted in improved profitability. In addition. and resulted in large number of weak companies exiting the market. with many companies defaulting their depositors. when compared to the one in mid 1990s. However.0 9. business models of existing NBFCs improved significantly.0 3. However. Moreover.0 FY98 FY01 FY02 FY03 FY04 FY05 FY06 FY07 Gross NPAs Net NPAs Source: RBI Edelweiss Securities Limited 9 . „ Small balance sheet size and low asset profile. while the banking sector was highly regulated. Their number increased to well over 40. They were able to build dominant positions in segments like vehicle financing. The risk profile of several NBFCs heightened due to: „ Slow industrial growth and difficult business environment. low cost of operations and simplified sanction procedures with flexibility and timeliness in meeting niche credit needs (in products and customer segment unserved by banks) boosted growth of NBFCs.000 by 1996. and recovery skills. and default by certain large NBFCs. monitoring.

we believe. The latter are subject to directed lending with respect to priority sector lending and exposure cap on segments like commercial real estate and capital market lending (which are perceived to be risky). Edelweiss Securities Limited 10 . capital market lending. commercial real estate etc) to benefit from the credit boom. promoter funding. NBFCs. • Going up the risk curve: Many NBFCs have gone up the risk curve and diversified their product portfolios into riskier asset classes (unsecured loan. However. Considering the above competitive advantage. unlike banks. Shriram Transport.NBFC The current regulatory framework for NBFCs is relatively strong compared to the 1990s in terms of higher capital adequacy requirement and more disclosure norms. over the longer term. NBFCs. can build differentiation on the following parameters: • Product segment: NBFCs specialising in asset classes where growth momentum is expected to continue and are in a relatively safer risk spectrum like residential mortgages (HDFC and LIC Housing) and infra financing (PFC. an entity cannot own more than 10% without RBI approval and foreign holding is capped at 74% for private banks and 20% for state owned banks. the performance gap between the better-positioned and average players in the sector will widen. NBFCs which have avoided venturing into riskier asset class will tend to benefit. their business model will continue to be relevant to the Indian financial system and will complement banks due to the following unique advantages: „ NBFCs have created a niche for themselves by being more specialised. Magma Shrachi etc).. „ NBFCs have built strong origination capabilities with experience and better understanding of regional dynamics and customer needs. IDFC. and high on service quality compared to banks. However. • Episodic lending: Buoyant economic growth and conducive capital markets opened up credit opportunities for short-term episodic lending. run the risk of asset liability-mismatch as they are highly dependent on short-term borrowings (particularly from mutual funds) and prone to systemic deterioration in asset quality. These opportunities have almost dried up in the present environment and may affect growth prospects of NBFCs focused on this segment (NBFCs floated by brokers). „ Allows flexibility in capital infusion . nimble. which though incidental. according to us.there is no cap on ownership limit for NBFCs and even 100% foreign shareholding is allowed subject to minimum capitalisation requirement under FDI norms. even today. in case of banks. Moreover. NBFC business model has superior return potential over long term The following 12-18 months are going to be a period of comparative difficulty for NBFCs as the concerns begin to unfold. credit appraisal and recovery mechanisms have improved significantly in the past few years. we believe. NBFCs will continue to offer superior returns and will remain relevant in the Indian financial services space. weakening macro environment may increase the risk of delinquencies in this portfolio. provided strong boost to their asset growth and profitability. and REC) will fare better compared to those operating in segments where anticipated dip in demand for underlying asset class and risk of defaults may drag down growth and profitability (MMFS. NBFCs that have built this loan book probably in the past two-three years will have more stress. Moreover. NBFCs had also increased their focus on lending to certain segments like IPO financing. etc. „ They have better operating flexibility in terms of business segments and geographies. Players able to face current turbulence will emerge winners In the current environment. However. We believe.

0 0. LIC Housing Finance. • Renewed focus on product and channel innovation. recommend investors to consolidate their portfolio in the NBFC space in favour of companies that qualify on the above parameters viz. established origination skills. Companies that build differentiation across the above parameters will successfully sail through this adverse period and benefit from premium valuations. • Flexibility in product and liability mix: Shift from short-term funding to longer dated loans/bonds and ability to increasingly tap more retail deposits. Chart 7: Price to book vis-à-vis RoEs of various NBFCs 30.0 Dewan Gruh Fin MMFS IBFSL IDFC 10.0 1. and PFC.0 STFC 25. switch from high yield..0 2.0 0. HDFC. NBFC • Underwriting standards and recovery capabilities: Players with robust risk management systems.5 2. We.5 PB .0 0.0 HDFC (adj for subs) RoEs FY09(%) LICHF 20. While valuation multiple of other players is likely to contract.0 Magma Sundaram SREI Finance 5. prudent underwriting standards. and strict credit appraisal/recovery capabilities will stand out in the current environment (HDFC and Shriram Transport have strong historical track record on these parameters).0 REC PFC SCUF 15.5 1.FY09 (x) Source: Edelweiss research Edelweiss Securities Limited 11 . therefore. high risk assets to low yielding segments.

16.9 12.9 20.5 10.9 28.3 15.7 Not rated LIC Housing Finance 172 14.0 17.7 0.8 0.3 0.8 16.3 Buy Magma Shrachi# 182 3.9 0. 32.0 8. 22.6 2.8 3.3 10. 16.6 0.6 13.0 loss .2 0.3 2.6 40.3 0.9 9.9 3.8 Buy Edelweiss Securities Limited HDFC (adj for invt in associate/subs) 2.2 1.1 15.4 1.0 11.5 Buy Shriram City Union Finance 343 15.9 20.7 0.4 Not rated * consensus estimates for FY09E # earnings of H1FY09 annualised for FY09E.3 13.8 10.7 1.1 1.5 0.2 0.9 11.9 1.5 4.0 Not rated Mahindra Finance* 190 18.9 7.2 12.351 384.7 Not rated Indiabulls Financial Services* 95 24.7 Not rated Cholamandalam DBS# 30 1.0 Reduce Sundaram Finance# 176 9.1 0.1 23.7 12.7 3.7 0.7 5.7 15.6 16.2 2.3 18.6 0. 18.5 7.2 0.5 1.9 7.2 Not rated SREI Infrastructure Finance 44 5.1 .6 14.8 0.7 Not rated Gruh Finance# 91 4.7 .3 3.1 0.2 Accumulate Rural Electrification Corp 57 48.4 9.7 0.9 0.2 1. 15.3 Not rated Dewan Housing# 66 3.12 NBFC Valuation metrics Company name Price Mkt Cap P/B P/E RoEs Gross NPA Net NPA CAR Rating (INR) (INR bn) (x) (x) (%) (%) (%) (%) FY08 FY09E FY08 FY09E FY09E FY08 FY08 FY08 HDFC 1.8 4.1 10.0 8.4 0.4 9.3 .2 Accumulate IDFC 51 66.6 1.6 4.4 1.8 19.1 7.4 16.8 0.2 .5 1.9 0.4 4.2 1.0 0.2 12.9 15.6 0.2 10.1 6.0 Not rated Shriram Transport Finance* 200 40.7 0.2 0.0 1.8 14.8 5.8 Buy Power Finance Corp 106 121.2 1.4 7.4 1.5 1.3 3.7 4.3 0.4 1.7 9.5 14.6 0.7 .0 19.2 Not rated Bajaj Auto Finance# 76 2.1 3. .7 15.6 2. BV for H1FY09 .8 17.8 0.4 5.3 24.0 0.1 15.7 1.9 0.4 18.7 1.8 0. 0.3 1.6 0.7 3.7 .

0 (%) 500 24. deliberate attempts by banks to stay away from some asset class (viz..7 tn in FY08 1. two wheelers.) that focus on wholesale lending. However. and continued demand for wholesale funding provided strong tailwinds for the NBFC sector. PFC.250 60. and personal loans at INR 450 bn (of which small ticket would be ~10%).0 0 0. Over the past few years.0 (INR bn) 750 36.7 tn in FY08. The retail finance market was estimated (by CRISIL) at INR 2. IDFC. CV. housing finance. SREI Infra.) and regulatory constraints on banks’ exposure to commercial real estate and capital market activity.0 Small tkt PL Mortgage Used car Big tkt PL Old CV New car New CV New UV 2-wheeler Disbursements (FY08) NBFCs market share Source: CRISIL estimates Aggressive lending by banks in retail since 2001 has diluted the supremacy of NBFCs in various segments and the latter’s market share has declined significantly in housing finance. has helped NBFCs gain lost ground in the past 12-18 months. retail credit boom. REC. auto finance (excluding CVs) at INR 640 bn (24%). and car financing. small ticket personal loans..0 1. Most players are primarily active in the retail finance space. NBFCs’ business model has strengthened considerably on the back of a niche created by them (with respect to products and geographies they cater to) and access to varied funding sources (borrowings from mutual funds and resort to securitisation). with housing finance being the largest segment at ~INR 1 tn (35% of retail finance market). NBFC NBFC business model has strengthened over the years Buoyant economic growth. Chart 8: Retail financing—Market size of INR 2. etc. while there are a few specialised financiers (viz.0 250 12. Edelweiss Securities Limited 13 .000 48. etc. including project and equipment financing. CV financing (used and new) at INR 630 bn (23%).

25 tn loans during FY08 (30% growth over FY07). The strong disbursements momentum continued in H1FY09 as well.25 tn in FY08 625 500 375 (INR bn) 250 125 - Infra Mortgage CV Car/UV / Personal Consumer 2-wheeler loans durable FY07 FY08 Source: Company. While mortgages and infrastructure financing maintained growth of 25-30%. Chart 10: Top 15 listed NBFCs disbursed INR 1. disbursed INR 1. on a consolidated basis. Edelweiss research Edelweiss Securities Limited 14 .6 tn by FY08 end.NBFC Chart 9: Market share of NBFCs has declined with entry of banks 90 80 70 60 50 (%) 40 30 20 10 - New car New CV Mortgage FY02 FY08 Source: CRISIL estimates Top listed NBFCs (mentioned in Annexure). recording 20% plus growth for major NBFCs. thereby creating a loan book of ~INR 2. growth in CVs and personal loans was much higher than the industry average.

0 6.7x in FY04 to 6.9 30 3.8 20. 5.5 16.5 .0 FY05 FY06 FY07 FY08 FY05 FY06 FY07 FY08 RoEs (LHS) RoAs (LHS) Leverage (RHS) Revenues (LHS) PAT (LHS) NIMs (RHS) Source: Company.0 7. reported 29% CAGR (over FY04-08) in revenues (net of interest expense) to INR 136 bn in FY08 and 20% growth in profits to INR 65 bn. RoEs maintained between 16% and 18% 150 4.4 0 3.0 5. mainly due to increase in leverage from 5.2 120 4. Chart 11: PAT grew at 20% CAGR. Edelweiss research Edelweiss Securities Limited 15 .0 6. on a consolidated basis. RoEs have been maintained in the 16-18% range over FY04-08.8 (INR bn) 90 4.6x in FY08.8 4.3 (%) (%) (%) 60 4.3 12.0 8.0 5. NBFC These top listed NBFCs.

NBFC Annexure Listed NBFCs discussed in the report HDFC Power Finance Corp IDFC Rural Electrification Corp Shriram Transport Finance Mahindra Finance LIC Housing Finance Shriram City Union Finance Sundaram Finance SREI Infrastructure Finance Magma Shrachi Dewan Housing Gruh Finance Bajaj Auto Finance Cholamandalam DBS Edelweiss Securities Limited 16 .

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Edelweiss is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. 430 Reduce Bank Result Update 03-Nov-08 Shriram Valuation premium 342 Reduce City Union at risk. copied. of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. Recent Research Date Company Title Price (INR) Recos 25-Nov-08 Axis Bank Asset quality 377 Buy concerns overdone. However. or use by. Visit Note 06-Nov-08 Kotak Mah. +91 22 2286 4256 Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services: Allahabad Bank. Edelweiss Securities Limited generally prohibits its analysts. 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Result Update Distribution of Ratings / Market Cap Rating Interpretation Edelweiss Research Coverage Universe Rating Expected to Buy Accumulate Reduce Sell Total Buy appreciate more than 20% over a 12-month period Rating Distribution* 82 56 29 8 178 Accumulate appreciate up to 20% over a 12-month period * 2 stocks under review / 1 rating withheld Reduce depreciate up to 10% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) 67 54 57 Sell depreciate more than 10% over a 12-month period This document has been prepared by Edelweiss Securities Limited (Edelweiss). group companies. and no part of his or her compensation was. Mumbai – 400 021. Past performance is not necessarily a guide to future performance. This information is strictly confidential and is being furnished to you solely for your information. publication. SREI Infrastructure Finance. 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