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    Fear over NBFCs overblown, most in good health: Brokerages

    Synopsis

    On Monday, Kotak Securities upgraded four NBFCs to ‘buy’ or ‘add’.

    Invest-Rise-Gain-1---GettyGetty Images
    MIBOR rate, another measure of system liquidity, has not shown any alarming spike recently and corporate bond market does not show any liquidity freeze situation.
    Non-banking finance companies (NBFCs) have borne the brunt of the market sell-off in the past two trading sessions. Fears over their dwindling liquidity, asset-liability mismatches (ALM) and cut in lending by banks have roiled the stocks, halting and reversing a more than threeyear bull run in finance companies.

    A closer look, however, reveals that much of the fear is unwarranted. A report by Investec Securities dated September 24 says that most of the top-rated NBFCs have fair liquidity and strong balance sheets and comfortable ALM positions. They also have a decent capital position, diversified borrowing and predominantly retail asset books. “We anticipate pressure on profitability for HFCs, but believe a sharp stock price reaction is unwarranted,” the report says.

    On Monday, Kotak Securities upgraded four NBFCs to ‘buy’ or ‘add’ saying that their robust operating models, parental support and business tailwinds provide comfort and ensure that liquidity remain strong.

    NBFC snip 1

    “The recent correction on the back of debt market liquidity concerns prompts us to review a few strong NBFCs,” said Kotak in the report. “Stress, if any, remains only to nearterm NIM.” Mahindra Finance, Shriram City Union, Shriram Transport Fin and Magma Fincorp have been upgraded to ‘buy’. Kotak retained ‘add’ call on L&T Finance Holdings with a target price of Rs 165. “Tailwinds in rural business and a cleaner book post write-offs in wholesale book will drive 18-19% RoE over the medium term,” the report said. Its exposure to NCDs is high at 45%; however, its parentage provides comfort to debt investors.

    PNB Housing Finance continues to retain a ‘reduce’ call given the change in ownership, which is an ongoing process.

    “Most of the NBFCs or housing finance companies have good business models. These companies tend to prosper in periods of good liquidity, but take a hit on perception in periods of stressed liquidity,” said Rajat Rajgarhia, CEO, Motilal Oswal Financial Services. “Over the next few days, we may see this fear peaking, but that will be a good opportunity to buy wellbacked NBFCs,” said Rajgarhia.

    Investec says in a stress scenario of a 250 bps increase in cost of funds from money market with no increase in advances, most HFCs/ NBFCs would be reasonably profitable though with a maximum decline of 30% in profitability. The report adds that system liquidity measured as net position in repo window and marginal standing facility remains far better than the position in 2013.

    MIBOR rate, another measure of system liquidity, has not shown any alarming spike recently and corporate bond market does not show any liquidity freeze situation.

    It says that the ALM position is strong and borrowing is diversified with limited exposure to the commercial paper market.

    Housing Development Finance Corp
    CMP: Rs 1,721.05; YTD Change (%): 0.6, P/BV: 2.9

    HDFC is seen as a good bet because of its strong brand. “Good quality, large NBFCs like HDFC with well-matched ALM, strong brand and ability to raise ECBs and public deposits can weather these transient storms,” said Macquarie.

    Bajaj Finance
    CMP: Rs 2,259.35; YTD Change (%): 28.6; P/B: 7.9

    Gaurav Dua, head of research at BNP Paribas-owned Sharekhan is underweight on NBFCs but prefers select companies such as Bajaj Finance as it is into short-term loans and carries lower risk of mismatch between asset and liability profile. Pankaj Pandey, head of research at ICICIdirect, says “It was expensive two years ago also but it is growing at a fast clip which has helped it sustain valuations.”

    L&T Finance Holdings
    CMP: Rs 130.05; YTD Change (%): -25.2; P/BV: 1.7

    L&T Finance Holdings is JM Financials’ top pick in the NBFC space, according to a recent report. The brokerage expects L&T Finance to report compounded earnings growth of 48% over FY18-FY20 and expect return on equity to improve to 21% in FY20 from 14.3% in FY18 driven by realisation of portfolio, improvement in credit costs and opex ratios. Kotak Institutional Equities believes that tailwinds in rural business, cleaner book post write-offs in wholesale book will drive 18-19% return on equity in L&T Finance over the medium term.

    Muthoot Finance
    CMP: Rs 431.6; YTD Change (%): -9; P/BV: 2.2

    Digant Haria, AVP-research at Antique Stock Broking said gold loans are short-duration loans and have small-ticket sizes and therefore, they will easily be able to pass on increased borrowing rates to their customers, which housing finance companies (HFCs) cannot do that easily. “Unlike most HFCs, who have negative ALM (asset liability management) gap, Muthoot has a positive ALM gap, which insulates its balance sheet from interim volatility,” said Haria.

    Cholamandalam Investment
    CMP: Rs 1,179.85; YTD Change (%): -8.8; P/BV: 3.6

    Kotak Institutional Equities said it likes the business of Cholamandalam given its strong execution, which is visible in the improving return on equity over the past few years. The brokerage also likes the stock because of diversification across vehicles and business loans.



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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