UBS cuts target price of NBFCs by up to 65% on growth, NPA concerns

Mumbai: Foreign brokerage UBS has slashed target prices of nonbanking finance majors by 11-65 per cent on slow loan growth and an increase in non-performing loans for all product segments. The brokerage has downgraded Bajaj Finance to ‘sell’ from ‘neutral’ and slashed target price on it to ₹1,600 from ₹4,600 as it believes that risks for further de-rating of the stock are very high if recovery is slow. This is the second downgrade for Bajaj Finance by a large brokerage in recent weeks after Bernstein downgraded the stock to ‘underperform’. UBS has also downgraded Ujjivan to ‘neutral’ due to asset quality concerns in the microfinance sector. UBS said lockdown in urban areas due to Covid-19 spread could be longer than May 3, economic recovery could be gradual and there could be loss of loan discipline given the moratorium. The brokerage is also concerned about liquidity freeze for the small and medium enterprises and the self-employed segments. “Despite sharp share price corrections, a slower-than-expected recovery could drive a further 20-40 per cent downside,” said UBS.


HDFC


It is best placed among the NBFCs due to aggressive provisioning

Economic slowdown would raise asset quality pressure in nonretail segment

HDFC has been cautious on growing in corporate/construction finance

BAJAJ FINANCE

Underlying risks on asset quality are high

Concerned that any recovery would be slower even if lockdown is lifted

This would lead to higher impact on business growth and credit costs

SHRIRAM TRANSPORT FINANCE

Lockdown could impact gross non-performing loans (NPLs) of financials, hit cash flows

Shriram is better placed

Risk-reward is favourable, stock trading 25 per cent lower than previous trough valuations during global financial crisis/demonetisation

M&M FINANCIAL SERVICES

Expect loan growth to moderate sharply as new auto sales remain under pressure

If monsoon is average/above average, it would reduce asset quality pressure

Risk-reward is favourable

CHOLAMANDALAM

Expect growth to slow sharply as auto sales decline in FY21

Chola is still trading at a premium valuation to Shriram Transport, M&M Financial

Believe risk-reward is more favourable for Shriram Transport, M&M Financial

AU SMALL FINANCE BANK

Concerned about loans to SMEs and small and medium players in auto segment

Despite the correction, AU is still trading at significant premium to peers

Any rise in gross NPLs could drive a de-rating

UJJIVAN FINANCIAL

Share of microfinance book still very high

Lower collections in microfinance segment could significantly impact earnings

Risk-reward is unfavourable due to asset quality uncertainty

EQUITAS HOLDINGS

Equitas would be impacted by likely increase in delinquencies

Loan book is more diversified

Large part of microfinance is in Tamil Nadu where repayment track record has been better