Fixed Income Securities Analysis - NBFC Sector - India - 2003

Authors

• Narayana Rao

Published

Creative Commons Attribution 3.0 License

Version 4

Last edited: 04 Nov 2008

Exported: 26 Nov 2011

Original URL: http://knol.google.com/k/-/-/2utb2lsm2k7a/432

This provides analysis of fixed income securities of NBFC sector carried out in year 2003 as an illustration.

 

Industry Synopsis

 

The companies within the universe of analysis were typically retail-financing companies, with particular emphasis on auto and consumer durables. While some were independent NBFCs, like Cholamandalam Investment and Finance, Lakshmi General Finance, others were captive financing companies with strong parentage such as Bajaj Auto Finance Ltd. and Ashok Leyland Finance Ltd.

 

Nature and Size

The retail financing industry is cyclical in nature.

After housing finance and auto loans are important areas in India. There are big players like Tata Finance, Ashok Leyland Finance, GE Countrywide, and Sundaram etc. Banks, both public and private sector, have jumped into the auto loan segment and are have snatched sizeable market share from NBFCs.

 

 

Market size (2003)

The market size of commercial vehicle segment is around Rs130bn and finance volume is around Rs95bn. The market leader Ashok Leyland Finance has just 5% market share, as there is tough competition in this segment. The market is highly fragmented and this segment is expected to increase in the near future.

 

Cars and MUV are the biggest segment in auto finance with the market size is of around Rs200bn and finance volumes of around Rs150bn. Most of the banks and finance companies are tying up with the auto manufacturers to give a boost to this segment. GE Countrywide has a tie-up with Maruti and SBI has tied up with Telco.

 

The two-wheeler segment is another area. The market size of this segment is around Rs160bn and finance volume is around Rs100bn. In this segment, motorcycle is the most promising area for the finance company.

 

Segment	Industry Size	Size of Consumer Financing	% of market through financing
Commercial Vehicles	Rs.130 billion	Rs. 95 billion	73
Cars and MUVs	Rs. 200 billion	Rs. 150 billion	75
Two wheelers	Rs. 160 billion	Rs. 100 billion	63%

 

 

 

Consolidation in industry

 

ICICI Bank did 100 per cent takeover of the Mumbai-based, auto-dealer finance company, Transamerica Apple Distribution Finance Ltd (TADFL) in May 2003. 

 

 

Competition from banks & Position of NBFCs

 

 

 Sundaram Finance, Ashok Leyland Finance and Cholamandalam Finance recorded sizzling growth rates in the year ended March 2002. The period since has been no different with growth rates remaining strong. Indeed, the top-rated companies have managed to consolidate their position in the industry.

 

The focus on the growing retail financing market, their strengths in the management of a retail portfolio and the failure of a number of NBFCs have helped their performance. The turn of events in the economy, such as the liquidity in the banking system, too has helped these companies with better credit rating. With the advantage of low-cost funds, banks have eaten into the market share of NBFCs. But the top-rated ones have managed their costs better and, therefore, countered the competition from banks.

 

 

While the market itself is large enough for a number of players, it is also growing rapidly.

But, spreads have been under pressure, especially in the car-financing segment. In fact, private and foreign banks are said to virtually control this market in the metros. Some of the top-rated NBFCs describe the pricing in the car financing market in the metros (with lending rates now touching 8 per cent) as insane. Most NBFCs have been pushed out of the metros.

However, for top-rated NBFCs, the following have emerged as a source of strength:

 

· Reach into a number of non-metro locations;

· Focus on commercial vehicles and two-wheelers; and

· Strong relationships with their customers and manufacturers

 

 

Competition for NBFCs has mainly emerged from the new private sector banks, such as ICICI Bank and HDFC Bank, and foreign-owned banks. These banks operate from less than 200 locations, many of which are in the metros. On the other hand, a top-rated NBFC such as Ashok Leyland Finance operates from 251 locations, many of which are in the non-metros. A company such as M&M Financial Services, which had total assets of a little less than Rs 1,000 crore at the end of March 2002, operates from 151 locations.

Having been in the business for many years, companies such as Ashok Leyland Finance and Sundaram Finance also boast of strong relationships with their customers. Like the old private sector banks, some of the top-notch NBFCs have customer relationships that have grown over the years. Loyalties are strong and pricing, while being important, is less of an issue.

 

Companies such as Ashok Leyland Finance, Sundaram Finance, Bajaj Auto Finance, Mahindra & Mahindra Financial Services and Cholamandalam Finance also have strong relationships with manufacturers. These linkages have assumed importance given the intensity in competition.

 

 

NBFCs have also benefited from focussing on financing commercial vehicles and two-wheelers. These markets have been growing as rapidly as the car financing market. In fact, disbursements of a few top NBFCs in the car financing market have either plateaued or declined since March 2002. In contrast, competition from private and foreign banks is much less intense in the commercial vehicle and two-wheeler segments. The linkages with manufacturers and customers are also helping them boost disbursements.

 

Performance Indicators

 

Top-rated NBFCs have not only been successful in managing their market share but also in protecting their profitability. A combination of the factors cited earlier had helped these NBFCs earn better returns on their deployment. In fact, almost all the top-rated NBFCs enjoy a return on total assets that is higher than HDFC Bank's, one of the better-run banks. The higher return on assets was despite their operating cost ratio being similar to that of HDFC Bank. For example, operating expenses as a proportion of net margin worked out to 68 per cent for HDFC Bank. On an average, this was not significantly higher than the ratio for most top-rated NBFCs. If return on assets were still superior, then it was because of the higher return on their funds. For top NBFCs, the interest income worked out to 17-21 per cent of their total assets for the year ended March 2002.

The liquidity in the banking system also helped these finance companies. Spreads over government securities for AAA rated corporate sector debt instrument are now only 50 basis points. In other words, if the cost of funds for banking companies has declined sharply, then top-rated NBFCs have also benefited from such a decline in interest rates. Some of these companies are now raising funds at 7-8 per cent.

 

Also, these companies have displayed the ability to manage their portfolio without large incidence of non-performing assets. For instance, Ashok Leyland Finance, Cholamandalam Finance and Bajaj Auto Finance boast of net non-performing assets to net advances ratio of less than 1 per cent. It was higher at around 2.4 per cent only in the case of Sundaram Finance. This again has helped them lower the overall cost of operations and, thereby, protect their profitability.

 

Higher profitability and innovative financing options, such as securitisation, have also helped in boosting the capital adequacy ratio of these NBFCs. Sundaram Finance, Ashok Leyland Finance, Bajaj Auto Finance and M&M Financial Services, among others, boast of capital adequacy ratios upwards of 15 per cent. In other words, their balance sheets continue to be strong to accommodate further growth in disbursements.

 

 

 

 

CAMEL Analysis

 

A comparison for the companies analyzed is follows:

 

Criteria	Bajaj Auto Finance	Lakshmi General Finance	Ashok Leyland Finance
Capital Adequacy
CAR (%)	35.2	17.9	19.1
Increase in Net Worth	Rs. 19.9 crore	Rs. 15.4 crore	Rs. 131 crore
Gearing	1.28	2.8	3.6
Asset Quality
NPA (%)	1	1.4	0.9
Recognition of NPA (dpd)	360	180	180
Disbursements proportion	Auto – 48% Consumer Durables-49% Others-3%	Cars- 21.5% ·         Commercial Vehicles- 60.6% Others- 17.9%	Cars and MUVs-17.6% Construction Equipment-11.4% 2 wheelers- 19.2% Commercial Vehicles- 51.8%
Management
Parent ownership/stake	46% stake held by Bajaj Auto Ltd.	91% stake of SFL and its directors	46% ownership by Hinduja group, possible takeover by IndusInd Bank in future
Earnings
OPBDT	Rs. 45.6 crore	Rs. 35 crore	Rs. 103.6 crore
OPBDT growth	(13.6%)	15.5%	28.9%
Size of disbursements	Rs. 762 crore	Rs. 406 crore	Rs. 1870 crore
Growth in Disbursements	24.6%	19.8%	1.1%
ROA	3.6%	2.7%	2.3%
Liquidity
Cash flow from operations	Rs 8 crore	Rs. (20.5) crore	Rs. 286 crore
Interest Coverage	2.82	1.99	1.63

 

 

Report Generation for investment decision

 

On the basis of the above analysis and information, a structured  one page report that captures in a snap shot the results of the company study, can be generated for the fund manager’s initial perusal by the analyst or analysis department. 

 

This knol is substantially based on the company internship report by Ms. Sakshi Budhiraja. The project was done under my guidance.