NBFCs have been re-rated in the last 3 years due to market share gains in total credit as well as benign liquidity.
Non-banking finance companies or NBFCs have been in limelight so far this calendar and have been clear outperformers in the past 3 years. As many as 6 stocks have more than doubled investors’ wealth in the last one year and nearly 20 stocks gave over 50 percent return.
NBFC segment has outperformed the market on the back of higher growth in the loan book as well as improvement in spreads (difference in borrowing and lending rates).
NBFCs also benefited from the falling interest rate environment and massive growth in underpenetrated sectors where the reach of banks was limited.
“A large part of the NBFC segment has outperformed the market on the back of higher growth in the loan book as well as improvement in spreads. Apart from focusing on under penetrated customer segments and geographies, NBFCs have been gaining market share in loans,” Shibani Kurian, Sr. Vice President and Head of Equity Research, Kotak Mutual Fund told Moneycontrol.
“Further, as interest rates have been falling, the NBFCs which are mainly wholesale-funded have benefited from falling cost of funds and hence, have also seen an expansion in net interest margins (NIMs). This, in turn, has resulted in a multiple expansion (P/BV) for many NBFCs,” she said.
Looking the performance of the stocks in the sector – almost six stocks have remained Darlings of D-Street which include names like Muthoot Capital Services, Motilal Oswal Financial Services, Purshottam Investofin, L&T Finance Holdings, Bajaj Finance, and Upasana Finance which have more than doubled investors’ wealth so far in the year 2017.
As much as 18 stocks rose more than 50 percent so far in the year 2017 which include names like Magma Fincorp, M&M Financial Services, Bharat Financial, Manappuram Finance, Muthoot Finance etc. among others.
Indian non-banking financial companies (NBFCs) have got re-rated in the last 3 years due to market share gains in total credit as well as benign liquidity. Private banks, as well as NBFCs, have captured most of the market share which is over 50 percent, data showed.
“NBFCs have gained market share in the last 5 years in key product segments such as mortgages, LAP and commercial vehicles due to their expertise and stronger distribution networks in faster growing retail and SME loans,” UBS said in a note.
“While the gradual formalisation of the economy would increase competition in niche areas like rural lending, SMEs, small fleet operators, and microfinance in the long term, we believe NBFCs will benefit from a shift from the unorganised to the organised sector in the medium term,” it said.
The market is rewarding the non-banking finance companies (NBFCs) with lofty valuations (3.6x P/B) for 40 percent earnings growth. For the past decade, NBFCs' loans/AuMs have been surging at high teen CAGR, but they still do not appear excessive, said a report from a global investment bank.
“Unlike other markets where NBFCs usually trade at a discount to banks on account of credit risk and liquidity risk (wholesale funding), in India their valuations are broadly similar to private banks', suggesting market comfort with the consistency of their earnings and returns,” Credit Suisse said in a report.
"The stocks are up more than 40 percent YTD and valuations for private players are 1 SD to 2 SD ahead of historical averages. We would hold our positions for now and buy further gradually (and on dips). Our analysts on the ground like private sector retail banks (HDFC Bank, IndusInd), one corporate lender (ICICI Bank), and most NBFCs (except Bajaj Finance)," it said.
Will the outperformance continue?
NBFCs have outperformed the market so far in the year 2017 and are trading at a premium to their 5-year average P/BV. Sustained market share gains as well as increase in loan growth could lead to outperformance.
Government surveys and expert reports suggest a higher share for the unorganised sector in rural and semi-urban markets and in loan demand for low-income households; a shift from the unorganised to the organised sector is likely to benefit niche NBFCs, said a report.
“NBFCs have outperformed the market and are trading at a premium to their 5-year average P/BV, which we believe is due to better asset growth and margin improvements, but at discount to retail-oriented banks,” UBS said in a report.
“While current valuations partially factor in growth opportunities in the retail and SME spaces, in our view, sustained market share gains and loan growth despite intense competition from banks could drive further outperformance,” it said.
More mutibaggers in making from NBFCs?
After the dream run in most of the NBFCs so far in the year 2017, the next trigger questions is – will the rally continue in most of the stocks which have given stellar returns?
Yes, NBFCs will continue to hog the limelight, but not all of them. Investors now have to be really careful while picking stocks in this space or even allocating fresh money, suggest experts.
“NBFCs continue to show lot of potential and there is a possibility for still attractive stocks. As there is lot of untapped market, opportunities & segments provide opportunities for NBFCs,” Lalitabh Shrivastawa, AVP Research, Sharekhan told Moneycontrol.
“We like Capital First, Bajaj Finance and LIC Housing Finance in the NBFC space,” said Shrivastawa.
NBFCs have benefited due to their exposure to niche segments like tractors or HCV finance. The banks are not lending for fear of accumulating more bad loans and the NBFCs are taking advantage of that.
Ritesh Ashar, Chief Strategy Officer at KIFS Trade Capital likes L&T Finance which is amongst the top 5 NBFC present in the market available at lower valuations.“The market cap of L&T Finance is higher than all listed public sector bank except State Bank of India. The recently listed AB Capital looks lucrative at these price for long term investor.
DHFL has considerably the largest loan book after HDFC, Bajaj Finance and Finserv,” he said.
“Within the NBFC space, given the current valuations, one has to be careful in choosing those companies which have a genuine competitive advantage which would result in sustained growth trajectory and also have robust risk management and underwriting standards,” said Kurian of Kotak MF.
“Also, NBFCs which have seen sharp growth in some segments such as Loan against property and developer funding could see some issues on asset quality which is currently not reflected in valuations,” she said.
Improving macroeconomic conditions, higher credit penetration, increased consumption and strong urban demand etc. will drive growth for the NBFC segment.
Devarsh Vakil, Head – Advisory (PCG), HDFC Securities likes CAPF and Cholamandalam.
"CAFL is well-on track in maintaining steadfast AUM growth, improving NIM on changing loan mix towards higher yield segments and improving cost efficiencies," he said."In Cholamandalam growth is expected to continue in the coming years on the back of factors like good monsoon, GST implementation, decreasing interest rate etc." added Vakil.