Mumbai: India’s mid-cap non-banking financial companies (NBFCs) are likely to post robust income and profit growth driven by strong demand for credit, but rising interest rates may put pressure on margins in the coming quarters.
A Reuters poll showed that three financing firms are expected to post a strong 30% growth in net profit and 27% rise in interest income.
“Volumes are the first and foremost driver of growth for NBFCs. We are not ruling out compression on margins, but may not significantly impact margins considering higher volumes for this quarter,” said Clyton Fernandes, analyst at Anand Rathi Financial.
October-December is usually a good quarter for such companies due to higher demand on the back of festival season.
Banks, bonds, debentures, commercial papers and external commercial borrowings are major sources of funds for non-banking lenders depending on their type.
Any rise in borrowing rates will impact their funding cost and pressure margins.
Rate hike concerns will continue amid tight liquidity for some lenders that are not postioned well, analysts said.
The spread, difference between the borrowing and lending rate, will stabilise at around 2.4% for FY11, said an analyst with a foreign brokerage.
During July-December, the Reserve Bank of India (RBI) has raised repo rates--the rate at which it infuses liquidity--by 100 basis points and reverse repo rates--the rate at which it absorbs liquidity--by 150 basis points.
“There will be some pressure on margin but not significant enough for this quarter as these companies operate at a higher net interest margin,” said Sampath Kumar, analyst with IIFL.
Growth rates, however, will moderate going forward, but it’s a cyclical phenomenon, Kumar said adding there are no asset quality concerns.
Auto, infra lenders better off
Auto and infrastructure financiers are the companies having strong operating position and can grow consistently, analysts said.
“If you look at auto financing companies, they have done well as auto sales have been robust,” said Deepti Chauhan, analyst at Asit C. Mehta Intermediaries.
In 2010, Indian auto companies have witnessed around 31% surge in sales of passenger vehicles, commercial vehicles, three-wheelers and two-wheelers, according to the Society of Indian Automobile Manufacturers.
Of the three companies for which the poll was held, Mahindra Finance is seen posting a nearly 39% growth in profit.
The impact of a rate increase on credit demand of an auto lender is not as significant as that of a bank, said an anlyst with a local brokerage house who declined to be named.
Lenders with infrastructure financing status such as Infrastructure Development Finance, and Rural Electrification Corp can access external commercial borrowings improving access to funds.
For Rural Electrification Corp, there will be no non-performing loans risk but open forex exposures can lead to some surprises, Kotak said in a note.
“Although rate hike will impact, the strong growth visibility, and asset quality will keep the growth intact for infrastructure-focussed NBFCs,” said the analyst with local brokerage.
Tapering off of economic growth is a potential risk to these NBFCs, an analyst with a foreign brokerage added.