Jefferies picks Cholamandalam, Aavas as top NBFC ideas for 2023, finds value in LIC Housing
Cholamandalam Investment is Jefferies’ top pick among auto financiers, as the NBFC should deliver 24 per cent EPS CAGR and 19 per cent-plus ROE over FY23-25
- Jan 3, 2023,
- Updated Jan 3, 2023 12:27 PM IST
Jefferies said Cholamandalam Investment is its top 2023 pick among auto financiers. On the other hand, Aavas Financiers, said the foreign brokerage, is the best pick among housing finance companies (HFC). This is even as it also finds value in LIC Housing.
Jefferies in a note dated January 3 said it expects loans at its covered auto financiers to grow at 18 per cent YoY in FY24. It said net interest margins (NIMs) should ease across auto NBFCs, but lenders like Cholamandalam Investment that have seen higher cost of funding (CoF) increase upfront may see lower incremental NIM pressure in 2023, it said. Asset quality and credit costs have largely normalised, and should be stable in FY24, it said.
Jefferies said Cholamandalam Investment is its top pick among auto financiers, as the NBFC should deliver 24 per cent EPS CAGR and 19 per cent-plus ROE over FY23-25e. The brokerage sees unfavourable risk reward at M&M Financial Services.
Aavas Financiers should deliver 22 per cent loan CAGR over FY23-25, Jefferies said. It believes that the growth in core states like Gujarat, MP and Maharashtra where the NBFC entered during the last 4-5 years, and ramp up in new states like Karnataka, should still drive strong growth. This is even as it sees some moderation in growth in Rajasthan (39 per cent of AUM), especially as competition is rising from banks like AU SFB.
"We see some pressure on NIMs, but it should defend margins better vs. peers. Aavas has hiked PLR rates (i.e. rates on existing loans) by 160 bps (includes 35 bps hike wef Jan 2023), which is well above hikes taken by peers (0-25bps). We build 38 bps of NIM compression over FY22-25e; still we forecast 22% NII CAGR over FY23-25e," Aavas Financier said.
Jefferies said the opex intensity could stay high in FY23, but as lumpy tech capex fades and operating leverage benefits come through and that the opex intensity should moderate from current peak over FY24-25e.
"Asset quality metrics are improving, which should support lower credit costs over FY23-25e. We believe credit costs should be stable at 17-22 bps over FY23-25 (27 bps in FY22). We expect Aavas should deliver 23 per cent profit CAGR over FY23-25; ROE will edge higher to 16 per cent by FY25e. At 4 times FY24 BV, valuations are at a discount to its average P/B of 5.5 times since listing," it said.
Also Read: Midcap stocks to buy: Apollo Tyres, JB Chemicals, Cummins and APL Apollo are IIFL's 4 picks for 2023
Jefferies said Cholamandalam Investment is its top 2023 pick among auto financiers. On the other hand, Aavas Financiers, said the foreign brokerage, is the best pick among housing finance companies (HFC). This is even as it also finds value in LIC Housing.
Jefferies in a note dated January 3 said it expects loans at its covered auto financiers to grow at 18 per cent YoY in FY24. It said net interest margins (NIMs) should ease across auto NBFCs, but lenders like Cholamandalam Investment that have seen higher cost of funding (CoF) increase upfront may see lower incremental NIM pressure in 2023, it said. Asset quality and credit costs have largely normalised, and should be stable in FY24, it said.
Jefferies said Cholamandalam Investment is its top pick among auto financiers, as the NBFC should deliver 24 per cent EPS CAGR and 19 per cent-plus ROE over FY23-25e. The brokerage sees unfavourable risk reward at M&M Financial Services.
Aavas Financiers should deliver 22 per cent loan CAGR over FY23-25, Jefferies said. It believes that the growth in core states like Gujarat, MP and Maharashtra where the NBFC entered during the last 4-5 years, and ramp up in new states like Karnataka, should still drive strong growth. This is even as it sees some moderation in growth in Rajasthan (39 per cent of AUM), especially as competition is rising from banks like AU SFB.
"We see some pressure on NIMs, but it should defend margins better vs. peers. Aavas has hiked PLR rates (i.e. rates on existing loans) by 160 bps (includes 35 bps hike wef Jan 2023), which is well above hikes taken by peers (0-25bps). We build 38 bps of NIM compression over FY22-25e; still we forecast 22% NII CAGR over FY23-25e," Aavas Financier said.
Jefferies said the opex intensity could stay high in FY23, but as lumpy tech capex fades and operating leverage benefits come through and that the opex intensity should moderate from current peak over FY24-25e.
"Asset quality metrics are improving, which should support lower credit costs over FY23-25e. We believe credit costs should be stable at 17-22 bps over FY23-25 (27 bps in FY22). We expect Aavas should deliver 23 per cent profit CAGR over FY23-25; ROE will edge higher to 16 per cent by FY25e. At 4 times FY24 BV, valuations are at a discount to its average P/B of 5.5 times since listing," it said.
Also Read: Midcap stocks to buy: Apollo Tyres, JB Chemicals, Cummins and APL Apollo are IIFL's 4 picks for 2023