Prime Stock Recommendation: An NBFC player in its second innings

1. 

   Hari

   April 3, 2025 at 2:25 pm

   Bro, you are writing too much! Keep it simple, you need not have to prove your point.
2. 

   akash bohare

   March 26, 2025 at 7:58 am

   Thanks again Team for a wonderful article!
   I have two general question-
   1) what is better to increase ROE- High ROA(7-8%) with low leverage or Average ROA(2-3%) with high leverage? (Eg- Aptus ROE is almost touching 20% due to very high ROA).
   2) And How should we look at fund raise of M&M Financial ? Does it affect shareholders return negatively?(at 20% AUM growth and projected 15%ROE it may need to raise capital every few year)
   Thanks again Team PI, always wait for your articles
   1. 

      N V Chandrachoodamani

      March 26, 2025 at 10:18 am

      Welcome your query sir,

      This is a great question

      The short answer is “optimum capital utilisation”

      Consider Aptus increasing its leverage to 4X (means 25% capital adequacy) and then its NIM will fall (as increased borrowings lead to increased interest out flow and lower NIM) and RoA will fall. But RoE will go up past 18% as equity capital is not going to go up.

      This is the desirable trajectory for Aptus and mgmt. may be looking at this trajectory only.

      In general, a 20% capital adequacy (5X leverage) is Ok and if an NBFC is able to generate RoA of 2.5%+ and RoE of 15%+, that is fine.
      Provided this is coming from healthy lending segments combined with controlled operating costs (opex/cost to income ratio) and credit costs (actual NPA write-offs)

      There are NBFCs incl. MFI lending at 23-25% and showing high NIM and RoA just because NPAs are low currently/at good times. But the 23-35% interest rate on lending reflects “existence of risk” and so their current RoA should not be taken for granted. It will give negative surprise at some point of time in terms of NPA spike and write-offs.

      Coming to M&M Fin, they will be able to fund FY26 growth through internal capital as FY25 RoE will be 12-13% (more or less equal to growth rate in current environment). New capital will be sufficient for another 3 years.

      So, if they deliver on their strategies they can deliver 7% NIM, 2.25-2.5% RoA and 15%+ RoE and that is a good outcome for an NBFC trading at 1.8 times book.

      If they execute this well, then they will be able to move forward with lower dilution in future and support 15-16% AUM growth.

      Hope this clarifies

      Thank you
      1. 

         akash bohare

         March 28, 2025 at 5:17 am

         Thank U sir for such a detailed reply …..

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