Equity L/S Analyst | Forensic Accounting | India, Yellowstone Equity

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Equity Bottom-Up

Cholamandalam Investment and Finance / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/cholamandalam-investment-and" target="_blank" data-smartkarma-citation="entities:17583:1" rel="noopener">Cholamandalam Investment and Finance (CIFC IN)</a> ["Chola"] is an Indian NBFC with a focus on vehicle financing, especially commercial vehicles (CV), in rural and semi-urban areas. With the economy getting back on track post lockdown, CV cycle is poised to witness disproportionate recovery after going through a depressed cycle over the past couple of years. With rural and semi-urban economy recovering faster and seeing stronger resilience, Chola's CV financing book has all the more reasons to cheer given its strong focus on tier-II and below towns. Below we dive-deep into Chola's competitive strengths and potential for strong growth in the near future.

Cholamandalam Investment and Finance (CIFC IN) ["Chola"] is an Indian NBFC with a focus on vehicle financing, especially commercial vehicles (CV), in rural and semi-urban areas. With the economy getting back on track post lockdown, CV cycle is poised to witness disproportionate recovery after going through a depressed cycle over the past couple of years. With rural and semi-urban economy recovering faster and seeing stronger resilience, Chola's CV financing book has all the more reasons to cheer given its strong focus on tier-II and below towns. Below we dive-deep into Chola's competitive strengths and potential for strong growth in the near future.

2021 High Conviction | Cholamandalam Investment: A High Quality Play on CV Cycle Recovery in India

Lakshmi Iyer, CFA

Credit

We reiterate our buy recommendation on bonds issued by <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Holdings (IIFL IN)</a> (USD bonds due '23). While spreads have tightened following the release of 2Q FY'21 results, we feel there is potential for further tightening. The upcoming sale of part of the real estate portfolio could also prove supportive.<div class="content-highlight">Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.</div>

We reiterate our buy recommendation on bonds issued by IIFL Holdings (IIFL IN) (USD bonds due '23). While spreads have tightened following the release of 2Q FY'21 results, we feel there is potential for further tightening. The upcoming sale of part of the real estate portfolio could also prove supportive.Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Thematic (Sector/Industry)

A newly-appointed (on October 9, 2020) deputy governor of the Reserve Bank of India (RBI) has <a href="https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1101" target="_blank" rel="noopener">proposed</a>, for discussion, that large systemically-important non-bank finance companies (NBFCs) either convert themselves into banks, or that they contract assets, in order to protect financial stability. This proposal not only has major implications for prominent NBFCs some belonging to industrial houses, but also highlights the regulator’s present lack of capability to regulate such companies. Instead of arguing for the large NBFCs to either become banks or face an eventual demise by setting on a path to shrinking their size, the regulator should be examining how to improve its own regulation and supervision of large NBFCs. The collapses of IL&amp;FS (<a href="https://hemindrahazari.com/2019/01/31/ilfs-collapse-what-happens-when-infrastructure-development-is-privatised-hemindra-hazari/" target="_blank" rel="noopener">here</a>) and <a href="https://www.smartkarma.com/entities/dewan-housing-finance-corp" target="_blank" data-smartkarma-citation="entities:8142:1" rel="noopener">Dewan Housing Finance (DEWH IN)</a> (<a href="https://hemindrahazari.com/2019/01/29/panel-discussion-on-cobrapost-expose-of-dhfl/" target="_blank" rel="noopener">here</a>) were not only a failure of corporate governance and the economic slowdown, but also the consequence of a severe shortfall in regulatory supervision.Financial deregulation and the entry of more players in the strategic financial sector require a more vigilant, intrusive regulator armed with the necessary systems, processes and human resource talent to effectively regulate and supervise the sector. Sadly, the total officer strength of the RBI is currently below the levels of 2015, and it needs to invest in more resources for regulating the NBFC sector instead of proposing to compel large NBFCs to become banks. NBFCs cater to specific needs of the economy which the banks, for whatever reasons, have been unable to address, and while some NBFCs may want to become banks, others owned by industrial houses may not even be permitted to get bank licenses, and some may not even want to become banks. In such a scenario it is imperative for the regulator to implement systems and processes to regulate large NBFCs instead of floating such proposals in the public domain.

A newly-appointed (on October 9, 2020) deputy governor of the Reserve Bank of India (RBI) has proposed, for discussion, that large systemically-important non-bank finance companies (NBFCs) either convert themselves into banks, or that they contract assets, in order to protect financial stability. This proposal not only has major implications for prominent NBFCs some belonging to industrial houses, but also highlights the regulator’s present lack of capability to regulate such companies. Instead of arguing for the large NBFCs to either become banks or face an eventual demise by setting on a path to shrinking their size, the regulator should be examining how to improve its own regulation and supervision of large NBFCs. The collapses of IL&amp;FS (here) and Dewan Housing Finance (DEWH IN) (here) were not only a failure of corporate governance and the economic slowdown, but also the consequence of a severe shortfall in regulatory supervision.Financial deregulation and the entry of more players in the strategic financial sector require a more vigilant, intrusive regulator armed with the necessary systems, processes and human resource talent to effectively regulate and supervise the sector. Sadly, the total officer strength of the RBI is currently below the levels of 2015, and it needs to invest in more resources for regulating the NBFC sector instead of proposing to compel large NBFCs to become banks. NBFCs cater to specific needs of the economy which the banks, for whatever reasons, have been unable to address, and while some NBFCs may want to become banks, others owned by industrial houses may not even be permitted to get bank licenses, and some may not even want to become banks. In such a scenario it is imperative for the regulator to implement systems and processes to regulate large NBFCs instead of floating such proposals in the public domain.

RBI Proposal to Convert Large NBFCs into Banks: No Solution to the Problem of Regulatory Failures

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*Solid Number Appear Sustainable: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 2Q21 profits of INR 6.8 bn, increasing 113.9% linked quarter. Bottom-line improvement was attributed to two factors: 1) a net interest income improvement of INR 2.0 bn (11.0%) primarily as a result of NIM improvement - on the back of lower funding costs – of 61 bp to 7.24%; and 2) wouldn’t you know it, an INR 4.1 bn (38.4%) decline in loss provisions as net new NPL growth turned negative; and*Very Encouraging Credit Trends:  Most encouraging, and in contravention to sector trends that we have seen thus far, we note that Shriram’s level of net new NPLs linked quarter actually declined INR 2.2 bn or negative 10.0% on an annualized basis.

*Solid Number Appear Sustainable: Shriram Transport Finance (SHTF.IN) [Shriram] reported FY 2Q21 profits of INR 6.8 bn, increasing 113.9% linked quarter. Bottom-line improvement was attributed to two factors: 1) a net interest income improvement of INR 2.0 bn (11.0%) primarily as a result of NIM improvement - on the back of lower funding costs – of 61 bp to 7.24%; and 2) wouldn’t you know it, an INR 4.1 bn (38.4%) decline in loss provisions as net new NPL growth turned negative; and*Very Encouraging Credit Trends:  Most encouraging, and in contravention to sector trends that we have seen thus far, we note that Shriram’s level of net new NPLs linked quarter actually declined INR 2.2 bn or negative 10.0% on an annualized basis.

Shriram Transport Finance – Frightening Glory

*Better – But Not Good: Bank of Baroda (BOB.IN) [BOB] reported FY 2Q21 results of INR 16.8bn, quite a reversal of fortune from the losses of INR 8.6 bn in FY 1Q21. Several factors drove BOB’s outperformance: a) net interest income improvement of INR 7.5 bn (11.0%) linked quarter driven solely by NIM expansion of 31 bp to 2.86% while the loan book contracted 1.8%; b) fee revenue improvement of INR 2.6 bn (22.2%) on the back of higher loan processing fees as retail loan disbursements increased; and c) most importantly, an INR 26.3 bn (46.7%) reduction in loss provisions as annualized net new NPL creation dropped precipitously to just 2.0%;*Poor Reserve Cover: Excluding the September 2016 Supreme Court standstill on NPL classification, BOB’s NPLs still would have declined INR 19.9 bn (2.9%) and the NPL ratio would have been 9.30% - still improving 10 bp over the previous quarter. Anything over 8% suggest institutions are insolvent. By our calculation, however, BOB’s reserves still remain light by INR 245 bn or nearly ten quarters of pre-tax earnings – this prior to its merger with Vijaya and Dena Banks; and       *Capital Raise A Real Challenge: Merger-related challenges leading to growth slowdown, higher NPLs on portfolio alignment, and continued deterioration in the international business. Equity dilution is BOB’s single largest risk.

*Better – But Not Good: Bank of Baroda (BOB.IN) [BOB] reported FY 2Q21 results of INR 16.8bn, quite a reversal of fortune from the losses of INR 8.6 bn in FY 1Q21. Several factors drove BOB’s outperformance: a) net interest income improvement of INR 7.5 bn (11.0%) linked quarter driven solely by NIM expansion of 31 bp to 2.86% while the loan book contracted 1.8%; b) fee revenue improvement of INR 2.6 bn (22.2%) on the back of higher loan processing fees as retail loan disbursements increased; and c) most importantly, an INR 26.3 bn (46.7%) reduction in loss provisions as annualized net new NPL creation dropped precipitously to just 2.0%;*Poor Reserve Cover: Excluding the September 2016 Supreme Court standstill on NPL classification, BOB’s NPLs still would have declined INR 19.9 bn (2.9%) and the NPL ratio would have been 9.30% - still improving 10 bp over the previous quarter. Anything over 8% suggest institutions are insolvent. By our calculation, however, BOB’s reserves still remain light by INR 245 bn or nearly ten quarters of pre-tax earnings – this prior to its merger with Vijaya and Dena Banks; and       *Capital Raise A Real Challenge: Merger-related challenges leading to growth slowdown, higher NPLs on portfolio alignment, and continued deterioration in the international business. Equity dilution is BOB’s single largest risk.

India

Shriram Finance Limited provides consumer finance services. The Company offers automobile, commercial vehicle, business, and gold loan services. Shriram Finance serves customers in India.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Shriram Finance (SHFL IN)

2021 High Conviction | Cholamandalam Investment: A High Quality Play on CV Cycle Recovery in India

Chola is a high quality franchise with a leading presence in the CV segment. As the CV cycle recovers in India, Chola has potential to deliver 50%+...

Ankit Agrawal, CFA

IIFL Finance Ltd. - Reiterate Buy

IIFL bonds rose after it reported reported decent numbers for 2Q FY21. We foresee further spread tightening. The upcoming sale of the real estate...

Lakshmi Iyer, CFA

RBI Proposal to Convert Large NBFCs into Banks: No Solution to the Problem of Regulatory Failures

Instead of forcible conversion to banks the RBI should ensure that it improves the regulation of important NBFCs so as to ensure that these...

Hemindra Hazari

Shriram Transport Finance – Frightening Glory

SHRIRAM TRANSPORT FINANCE: Shriram Is Exhibiting Early Signs of Positive Credit Deltas, And Likely Exits This COVID Crisis Earlier Than Peer.

Thomas J. Monaco

Bank of Baroda – Scary On Halloween

BANK OF BARODA: Manufactured Profits Ahead Of Capital Raise. BOB Already Appears Insolvent With 9.3% NPLs and 10 Quarter Reserve Shortfall

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)