In the course of recent months, shares of non-banking financial companies have been on a joyride despite the fact that the bad-loan issue has dragged banking stocks down. NBFC stocks have even bested stocks of private banks, which had been until now financial specialists’ top picks. Some NBFC shares have surged 60-80% in the present rally with financial specialists purchasing these in view of the higher growth numbers and unrivaled asset quality reported by them.
Yet, does the danger reward equation support interest in NBFC stocks at current levels? The income for the March quarter unmistakably uncover a wide gap in the nature of financials between the banking and non-banking sector. On a total level, benefit after tax for private sector banks expanded by 23% while that for NBFCs rose 32%. Public sector banks endured immense misfortunes because of stricter non-performing asset provisioning while NBFCs figured out how to clock this growth keeping up a solid asset quality in their loan book.
These players are making their presence felt in the credit space, across segments, eating into the market share of banks. With banks concentrated on firefighting the NPA issue, NBFCs’ more healthier books have placed them in a superior position to extend their loan book. Housing finance is one fragment where NBFCs have shone brilliant.
A Crisil report says share of NBFCs in the housing finance industry has expanded from 26% to 38% contracting the share of banks from 74% to 62%. This rising pattern separated, NBFCs as of now command segments like automobile finance and consumer durable finance. The engaged methodology of NBFCs has made them investor top picks while they are seen to be best put to tap opportunities emerging from the base of the pyramid. A few microfinance-centered NBFCs and additionally home finance suppliers obliging low ticket-size borrowers are in the spotlight for this reason. The vast majority of these NBFCs offer a play on bountiful monsoon which is relied upon to resuscitate rural consumption. Higher disposable income in the hands of rural households would likely see an expansion in the loan books of these companies.
“The rural, semi-urban focus offered by these players has attracted the attention of investors,” says Ambareesh Baliga, a Sebi-registered inde pendent market analyst. Microfinance institutions-turned small finance banks Equitas Holdings and Ujjivan Financial Services both enjoyed spectacular debuts on the bourses riding on the same theme.The two stocks are currently trading at 58% and 72% above their offer price. Lalit Nambiar, fund manager at UTI Mutual Fund, reckons some NBFCs have benefited due to their exposure to niche segments like tractors or HCV finance. Shriram Transport Finance and Sundaram Finance are leaders in this segment. Home finance firms such as CanFin Homes, Gruh Finance and Repco Home Finance are gaining because of their presence in the lower income segments.
These lenders can benefit from a Budget provision that allows firsttime home buyers more deduction for interest payment of Rs 50,000 per annum for loans up to `35 lakh sanctioned during this financial, provided the home value is less than Rs 50 lakh.
What must you do?
Unmistakably, NBFCs have been a modify nate play in the financial services space with investors moving far from luxuriously esteemed private bank stocks. In any case, do these stocks give great purchase opportunity at current levels? Valuations have surged in the late run-up with Bajaj Finance and Sundaram Finance trading at 6.5 times and 4.2 times the book value, respectively. To boot, housing finance major HDFC – the biggest listed NBFC – is trading at 3.8 times its book value.
A few analysts propose the time has come to be careful given the danger-reward equation is less positive. Kotak Securities in a report notes how the banking and financial services area has seen an amazing change in discernment in the previous couple of weeks and alerts against over- optimism in NBFC stocks. “We take note of that the market had been quite prompt to honor the quick growth in assets of banks in the course of recent years, only to regret it later ,” the report calls attention, including, “We don’t question the credit procedures of NBFCs however basically highlight that the stocks have revitalized strongly on any expectations of growth in their assets.”