Investors seem encouraged by a healthy 14% growth in its loan book and the implications of a good monsoon boosting demand. However, elevated operating costs and higher bad assets proportion are headwinds.The stock currently trades at 2.6 times its FY18 expected book value, which appears a tad expensive.
More than 50% rally this year so far, already seems to discount some of the near-term positives.
To be sure, loan disbursement in the quarter stood at a healthy 29% thanks to improving rural sentiment after a good monsoon and the beginning of festive season. As a result, the assets under management have grown 14% YoY to Rs 43,855 crore, its fastest growth in at least four quarters.
However, the management acknowledged that the growth is primarily driven by farming-related cash flows and it is yet to see a broadbased pull, especially from the infrastructure-linked sector. Annual growth rates in disbursements of utility and commercial vehicles remain muted compared to that of tractors and used cars.
Due to elevated operating cost, which the company said was due to dealer commissions and legal costs related to handling NPA accounts, the pre-provision operating profit fell 10% from last year. Given that the company is looking at a substantially high level of gross non-performing assets -11% of total assets -while it continues to increase growth, oper ating cost is not likely to come off in the near-term.
The trajectory of cost-to-income ratio, an efficiency parameter, is likely to remain elevated. Against an average ratio of 35% for most part of the last two years, the last two quarters saw the ratio at 47.6% and 44.2%, respectively .
Even provisioning requirement is likely to stay elevated given the quantum of GNPAs (Rs 4,748 crore.) As the company has already adopted the guidelines that required NBFCs (non-banking financial companies) to treat a loan as an NPA once the payment is due 120 days by end of FY17, total provisions for the quarter of Rs 2,462 crore also had an impact of Rs 44 crore from this change.
Going ahead, the requirement for a shift by FY18 towards 90 days overdue to be termed as NPA is an overhang on the stock. Unlike the last two quarters when the provisions witnessed a fall, in Q2FY17, loan loss provisions stood at `304 crore, up 10% versus last year.