Bernstein Bullish On Niche Lenders In India; Bets On IndusInd Bank, Muthoot Finance

Global brokerage Bernstein said it is bullish on the niche lenders in India’s financials sector and initiated coverage on IndusInd Bank Ltd. and Muthoot Finance Ltd. with Outperform ratings.

The Indian banking sector remains in good shape with strong credit growth, benign asset quality and still healthy margins, continuing to play host to some great compounding stories, Bernstein said in an investor note.

“While the large private sector banks remain clean compounding stories with their continuous deposit market share gains and emerging scale benefits, the niche lenders [typically operating as non-bank financial companies (NBFCs) and housing finance companies (HFCs)] offer equally compelling compounding stories,” it added.

The brokerage said niche lenders with innovative credit products and business models have proven to be a perfect match for large segments with healthy credit demand that is not met by traditional banking products.

This combination has driven the NBFCs’ strong growth (10-year loan CAGR of around 14% versus banks' <10%) to a size that is around 75% of the private sector banks while delivering stellar shareholder returns along the way, it added.

“We are bullish on the niche lenders that are going deeper into the mass market segments through well established and differentiated operating mode,” analysts Pranav Gundlapalle, Ishan Mittal and Dhruv Luthra wrote in the note.

Bernstein said the niche lenders also offer an effective way to play the below trends in the financial sector:

• A shift from the consumption to investment cycle in the economy

• A slowdown in the consumption credit growth even as select mass market focused segments remain attractive

• The start of a rate easing cycle (that favors NBFCs versus the banks)

• The increased regulatory scrutiny within the sector.

Following are the key highlights from the Bernstein’s view:

INDUSIND BANK

• Starts IndusInd Bank at Outperform call and a target price of 1,800 rupees per share.

• Sees IndusInd Bank as a quasi-NBFC, given its NBFC-like loan book composition and a weak deposit franchise.

• The bank is well-positioned for a potential rate easing cycle and has high exposure to attractive segments (commercial vehicles and microfinance).

• Between FY24-FY26, IndusInd Bank’s ROE is likely to be around 15%-16% and a loan growth of 18%.

MUTHOOT FINANCE

• Starts Muthoot Finance at Outperform with a target price of 2,000 rupees per share.

• Sees a long and shiny road ahead for gold loans, a unique segment in India arising from Indian households’ insatiable love for gold and its use as a collateral for borrowing.

• Muthoot is the best play in the gold loans segment.

• Expects 19% earnings CAGR (FY24-FY26) for Muthoot Finance.

Bernstein started coverage on Bajaj Finance Ltd., with Market Perform call and a target price of 6,800 rupees per share.

The brokerage said Bajaj Finance has been a true superstar in the Indian lending landscape with flawless execution, but much of that is priced into its rich valuations. “While we see a still healthy growth ahead, we see room for consensus earnings cuts, given several headwinds,” it added.

Bernstein said these challenges include 1) a sector-wide trend of slowdown in consumption credit, 2) an already high scale of Bajaj Finance that limits outperformance versus the sector, 3) risks of scale-up in new segments having limited overlap with current core segments, and 4) increased competitive intensity.

The brokerage expects an earnings CAGR of 21% (FY24-FY26) for Bajaj Finance.

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