Jefferies picks Cholamandalam, Aavas as top NBFC ideas for 2023, finds value in LIC Housing

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.

Cholamandalam Investment | Target Rs 890

Jefferies said Cholamandalam’ s AUM should grow at 22 per cent CAGR over FY23-25e led by strong growth in vehicle finance and non vehicle finance segment. New business is seeing strong traction and if executed well could further boost growth, it said.

It expects Cholamandalam Investment to deliver 21 per cent net interest income (NII) CAGR over FY23-25e despite some pressure on NIMs.

"Impact of rate hikes has been front-ended for Chola due to higher mix of benchmark link loans, while impact of lending rate hikes on its floating LAP and home loan portfolio will reflect with a lag in coming quarters. We expect further margin pressure in next few quarters. Margins should stabilise thereafter in FY24e," it said.

Jefferies said Cholamandalam Investment has delivered better asset quality through cycles against peers.

While asset quality was dented post Covid like other peers, asset quality has improved in last 12 months. We believe credit costs should be broadly stable over FY23-25e. We believe Chola should deliver 24 per cent EPS CAGR and best in class ROE of 18-20 per cent over FY23-25, which should support premium valuation.

Aavas Financiers | Target Rs 2,850

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.

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