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Given the tight liquidity conditions, NBFC-MFIs have increasingly opted for the securitisation route to meet their growth targets , collectively they raised around Rs. 26,200-crore in FY2019 as against Rs. 9,700-crore in FY2018 through this route . The reliance on securitisation was particularly high during the second half of fiscal 2019, and almost half of the incremental disbursements would have been met from the funds raised through securitisation. The number of entities taking part in the securitisation market too increased sharply to 43 as against 24 in FY2018, of which 14 were first time entrants. On the flip side, tighter liquidity conditions have raised funding costs . Also, while the pass through certificates ( PTCs) have been the preferred route in the past, the recent trends indicate a sharp rise in direct assignment (DA) transactions. Going forward, securitisation is expected to continue as a main source of funding for NBFC-MFs in FY2020, though the growth rates are likely to moderate.

We also take a look at the emerging challenge that has arisen due to the US ban on Iranian imports. With the end of the six-month period on May 2, 2019, India, which meets 10% of its crude needs from Iran, would be adversely affected. The Iranian oil supplies have fallen significantly, with Brent touching a six-month high, crossing US$74/bbl. While India has already reduced its imports of Iranian oil, post November 2018, some of the PSUs which had continued to procure Iranian oil would have to look for alternative suppliers. Since the Iranian oil is sold at a discount of US$1-2/bbl, compared to similar crude oil grades from the Middle East, providing a higher credit period, the refineries as a whole are likely to be negatively impacted by as much as Rs 2500 crores, with the discontinuation of the Iranian imports.

Lastly, we examine the growth prospects of the auto ancillary sector. ICRA expects that higher content per vehicle to support new emission norms following the transition to the BS VI and the mandatory safety norms will drive demand growth, despite relatively muted demand from the OEM sector. Thus, ICRA estimates that the industry is likely to grow at around 8-9% in FY2020 as against the weighted average growth on 9-10% in FY2019. This is despite the several headwinds in the form of tighter financing environment in the domestic market and the muted outlook in the global market. Operating margins would remain in the range of 13.75 % to 14.25% in the medium term. We also expect the capex spend to continue as in the past, driven by investment in capacity creation, emission and safety-related products in addition to the need to cater to new industry segments.

The issue concludes with the regular features: monthly rating updates, upcoming ICRA events, and news features related to the company.

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Anjan Ghosh
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  From ICRA Research
   
  NBFC-MFIs opt for securitisation route to raise Rs. 26,200 crore in FY2019; records growth of around 170%
 

Vibhor Mittal, Head-Structured Finance On the back of a tight liquidity environment, NBFC-MFIs significantly banked on the securitisation route to meet their growth targets in FY2019. As per ICRA estimates, NBFC-MFIs raised around Rs. 26,200 crore through this route in FY2019 (~170% growth over Rs. 9,700 crore quantum witnessed in FY2018). Securitisation has always been an important funding tool for NBFC-MFIs, but the dependence was particularly high during the second half of fiscal 2019. In FY2018 and H1 FY2019, it contributed to only 18 - 20% of the overall disbursements. However, this number leapfrogged to 37% and estimated 50% in Q3 FY2019 and Q4 FY2019 respectively. In other words, almost half of the incremental disbursements in Q4 FY2019 is estimated to have been met through the securitisation route. Investors were also comfortable buying retail loan portfolios originated by these entities, as opposed to taking direct on-balance sheet credit exposure, especially for small and medium-sized entities. Securitisation as % of disbursements  for NBFC-MFIs

The securitisation market in India can be segregated into two types of transactions – rated Pass Through Certificate (PTC) transactions, and unrated Direct Assignment (D.A.) transactions (bilateral assignment of pool of retail loans from one entity to another). The PTC route has historically been the preferred route for the microfinance asset class due to the absence of any credit enhancement in D.A. transactions. However, recent trends indicate a sharp increase in D.A. transactions. As per ICRA estimates, D.A. transaction volumes undertaken by NBFC-MFIs were around Rs. 13,500 crore for FY2019 as against only Rs. 4,000 crore and Rs. 3,000 crore in FY2018 and FY2017 respectively. The increase in direct assignment transactions for micro loan asset category validates the fact that investors are comfortable with the asset quality of the underlying loans, and even willing to take credit exposure to this asset class without any credit enhancement. The improved investor confidence is noteworthy, especially in view of the woes faced by the sector, post the demonetisation.

ICRA has also noted a sharp increase in the number of NBFC-MFIs taking part in the securitisation market in FY2019. Nearly 43 entities raised funds through the securitisation route in FY2019 (as opposed to only 24 such entities in FY2018). Out of this, as many as 14 entities were first time entrants in the securitisation market, which is an encouraging development. However, tighter liquidity in the market resulted in increased funding cost. The yields were higher by 100-150 bps for both Priority Sector Lending (PSL) driven and non-PSL transactions in Q3 FY2019 over the lows seen in FY2018. However, with some easing in systemic liquidity, yields have come off by around 25-30 bps in Q4 FY2019.Movement in PTC yields for NBFC-MFI transactions

Despite the inherent nature of the asset class and having witnessed several headwinds (demonetisation, local and political issues in some areas, several state-level elections, cyclones and floods in some parts of the country and farm debt loan waivers in some geographies), the sector has displayed remarkable resilience. The collection efficiencies in ICRA-rated micro loan securitisation transactions have remained high at more than 99% on an average for transactions rated since CY2017.

ICRA believes securitisation is likely to remain a key source of funding for NBFC-MFIs this fiscal as well. However, with factors like some consolidation in the sector (banks and other large NBFCs looking to acquire MFIs), banks increasingly looking to partner with NBFCs for originating PSL assets (either through the BC channel or through the co-origination model), and improving liquidity conditions, the dependence on securitisation could moderate in the near to medium term.

  Disruption of Iranian oil imports to hit domestic refineries
 

K Ravichandran, Sr. Vice President & Group Head, Corporate Sector Ratings India is set to face another challenging round of discussions with the US on averting the ban on Iranian oil imports. India had been one of the eight countries on a six-month waiver to continue to import Iranian oil, albeit in lesser quantities. With the six-month period ending on May 2, 2019, the US has clarified non-exemption from the subsequent ban for all countries. India is expected to negotiate with the US counterparts on extending the waiver, given that India currently meets more than 10% of its oil requirements from Iran. In FY2019, India imported 24 million MT of crude from Iran, which made it the third biggest supplier of crude for India.

Iranian oil exports globally are already reported to have fallen to 1 million barrels per day (mbpd) from erstwhile 2.5 mbpd, prior to the partial ban imposed by the US in November 2018. With the US talking tough on not extending the waiver to the eight countries, Iranian oil could completely vanish from the market. The oil prices are already spiking up in anticipation of the supply-side reduction, and Brent has touched a six-month high crossing US$74/ bbl. As per an ICRA note, the increase in international oil prices is a credit negative for the Indian economy, given that every US$1/ bbl rise in oil price increases the country’s import bill by ~US$1.4 billion. Every US$10/ bbl increase in crude oil prices increases the fiscal deficit by about 0.1% of the GDP.

We are already seeing the rupee depreciate due to the rising current account deficit (CAD) since every US$10/ bbl increase in crude oil price increases the CAD by about 0.4% of the GDP, and India’s inflation by 10 bps. The complete ban on Iranian exports on the other hand, raises the prospect of retaliatory measures by Iran, including blocking of oil tanker movements through the Straits of Hormuz, which has the potential to flare up oil prices. In this context, the increase in oil supplies by OPEC to compensate for the loss of Iranian oil from the market would play a key role in determining oil prices in the near term.

India had already reduced its imports of Iranian oil post November 2018 as the private refineries had completely stopped Iranian oil imports. Indian PSUs like Indian Oil Corporation Limited, Mangalore Refinery and Petrochemicals Limited and Bharat Petroleum Corporation Limited, had continued to procure Iranian oil and would have to look for alternate sourcing strategies in the event of the non-extension of the US waiver.

The domestic refineries are eyeing alternate arrangements to meet the absence of Iranian imports. While Saudi Arabia and Iraq are likely to be the key markets to fill the gap, the refineries are also looking at crude from the US and a few South American countries like Brazil and Mexico. Nonetheless, the Iranian oil is sold at a discount of US$1~2/ bbl compared to similar crude oil grades from the Middle East. Additionally, the Indian refineries benefit from the higher credit period of 60 days offered on Iranian oil, compared to a 30-day credit period, typically offered by other suppliers. As per our estimates, the annual operating profits of the domestic refining industry could be negatively impacted by as much as US$350 million (~Rs. 2,500 crore) with the discontinuation of Iranian oil imports.

  Safety norms, BS VI transition to drive auto ancillaries revenue growth in FY2020, despite tepid auto OE volume growth
 
Subrata Ray, Sr. Group Vice President, Corporate Sector Ratings

Higher content per vehicle to support new emission and safety requirements is expected to drive the demand for auto ancillaries, despite relatively muted auto original equipment manufacturer (OEM) demand. As per ICRA’s note on the auto component industry, the weighted average growth in demand for auto components from OEMs is estimated at 9-10% in FY2019 (as against 9.5% in FY2018) supported by strong commercial vehicle (CV) volumes. The growth for FY2020 is likely to be around 8-9% YoY. This is taking into consideration the likely automobile volume growth of 8-9% during FY2019 and ~7% during in FY2020, as against 14.5% growth in FY2018 and 5.4% in FY2017.

In the 11M FY2019, automotive OE production volumes grew by 8.8%. With pre-GST inventory destocking leading to a sharp contraction in auto original equipment manufacturer (OEM) sales volumes during April-July 2017, the base effect translated into volume growth across several OE segments and in the replacement market during 11M FY2019. However, there has been a lull in most segments, except tractors, since November 2018. Yet, in tractors, while production is growing at a healthy pace, sales have been muted since January 2019.

In the aftermarket, sales were impacted in FY2018 because of the GST-related inventory destocking in Q1 FY2018 and initial GST implementation-related uncertainties in Q2 FY2018. Demand picked up in Aug/Sep 2018, with a sharp revival from Q4 FY2018 onwards. While aftermarket sales witnessed double-digit growth on a YoY basis in H1 FY2019 (excluding tyres and batteries), ICRA research estimates 0-2% growth during Q3 FY2019 due to the high base effect of Q3 FY2018 and tightened financing environment. The collection cycle in the replacement segment has also stretched with the ongoing tightness in liquidity.

The domestic auto-component industry is also likely to be impacted by the global automobile demand. The global automotive outlook is relatively muted. The US Class 8 truck retail sales exhibited a strong growth of 37% in CY2018. While this growth momentum is likely to continue in CY2019, the US class 8 Truck order book has been dropping since Nov 2018, after a record 4,90,000 unit of orders in CY2018, and this would impact sales in CY2020, given the lead time to execution. The European passenger vehicle (PV) demand too is likely to be muted for CY2019 following a decline in PV registrations since September 2018, post mandatory compliance with new emission standards (Worldwide Harmonised Light Vehicle Test Procedure) and Brexit-related uncertainties.

The upswing in commodity prices over the last few quarters is reflected in ICRA’s small car cost index breaching the previous peak (FY2015) in FY2018 and inching up further in 9M FY2019. The OEM price pass-through clause, which several tier-1 ancillaries enjoy, and operating leverage benefits from higher volumes, has mitigated the impact on operating margins to an extent. However, the current softening in commodity prices is hampering pass-throughs. Overall, ICRA expects commodity prices to moderate marginally during FY2020, easing margin pressure for the industry.

In terms of revenue growth for Q3 FY2019 for ICRA’s industry sample (48 auto ancillaries), the same showed continued traction, growing by 11.4%. However, this was the lowest quarterly YoY growth since Q2 FY2018. For 9M FY2019, the industry witnessed a top line growth of 18.2% YoY, supported by the strong volume growth in Q1 and Q2 FY2019 and commodity pass increases. Operating profit margins, however, contracted by 120 bps YoY to 12.9% during Q3 FY2019, impacted by the inadequate pass-through of crude price hikes, INR depreciation, and commodity price increases, even as auto component companies benefitted from high volume growth and consequent operating leverage benefits. For 9M FY2019, the OPM of ICRA’s sample increased marginally by 10 bps YoY to 13.5%, predominantly aided by margin improvement in tyre companies (which had a dull Q1 FY2018 due to high rubber prices and GST implementation).

ICRA expects revenues for the industry to grow by 10-11% in FY2020, driven by increased content per vehicle, supported by the transition to the BS VI and mandatory safety norms, despite muted volume growth for most automotive segments during FY2020. Operating margins will remain in the 13.75%- 14.25% range in the medium term. Capex was high at 6-7% of the operating income during the past three years (FY2016-18). This trend is expected to continue during FY2019-23 also, driven by investment in capacity creation, emission and safety related products, powertrain electrification and localisation of the same and non-core investments to support the defence, aerospace and engineering industries.

Robust demand of the past year has led to a sharp increase in capacity utilisation during the latter part of FY2018, triggering capex. While the recent softness in demand has led to a cautious approach on capex in the immediate term, ICRA research is tracking capex worth Rs. 31,000 crore across 45 auto component majors to be executed over the next three years (FY2019-23), as against Rs. 24,800 crore (for the same sample) over the past three years (FY2016-18).

     
 
           
 
   
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