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Analyst Corner: Strong BAF, MMFS results expected in consumer finance sector


Liquidity issues are set to affect loan growth and margins at NBFCs/HFCs in 3Q, but the impact should be mixed across our coverage. We expect BAF and MMFS to report strong results. Asset quality should be broadly stable. Liquidity issues are easing and the funding environment is likely to stay tighter than in recent years. Potential stress in the developer segment remains a key risk. We prefer niche asset financiers with strong parentage. Top picks are BAF, MMFS.

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We expect the aggregate profit of our coverage to grow 19% YoY (2Q 38% YoY). Note, YoY figures are not strictly comparable as 3Q FY19 estimates are on Ind-AS basis, while 3QFY18 is as per GAAP. We believe the impact of the liquidity squeeze on BAF and MMFS was lower in 3Q (positive ALM, strong parentage). We expect BAF to report strong earnings led by 37% YoY loan growth, despite modest margin compression. At MMFS, we expect profit to grow 31% YoY, led by improving rural demand, market share gains, and stable asset quality. At SHTF, we expect profit to grow by 18% YoY. We expect loan growth to be mixed across HFCs. We forecast modest profit growth at PNB Housing (13% YoY), LICHF (11% YoY) and Repco (19% off low base). Although asset quality should be stable, we watch out for initial signs of stress in the developer segment.

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We forecast the aggregate loan growth of our coverage to decelerate to 24.9% YoY (2Q 25.4%) on tighter liquidity. Consumer loan growth should stay strong on the stable festive season and strong online sales, which should offset recent softness in physical sales. We forecast 37% YoY loan growth at BAF. Auto sales have moderated, but the slowdown seems to be mainly in urban areas, as per our checks. Rural demand has been strong. We forecast 25.5% AUM growth at MMFS in 3Q.