Non-Banking Financial Companies (NBFCs) have been under severe pressure for over a year, but the sector now appears ripe for a turnaround.
Most NBFCs had a decent quarter amid a challenging environment as they reported steady net interest margins (NIMs) despite an increase in borrowing costs.
"A lot of pieces are falling in place for NBFCs. Stronger liability profile supported by more diversified, granular and longer duration bank borrowings, deposits and securitisation along with the lower cost of borrowing and normalisation of credit spreads, and a significant improvement in overall system liquidity will aid in a return of confidence to the sector," said JM Financial in a report on December 2.
With lower valuations, JM Financial believes the sector is attractively placed in the context of improving liquidity conditions, lower funding costs and lower credit spreads going ahead.
"Large retail finance NBFCs with strong promoter backing and well-managed ALM should do well going ahead. Consolidation or strategy recalibration among developer financiers will lead to higher market share and improved profitability for players like HDFC," said JM Financial.
Here are five stocks from the sector that, as per brokerages, can deliver healthy returns in a one-year timeframe.
Expert: Vinod Nair, Head of Research, Geojit Financial Services
M&M Financial Services | Buy | Target price: Rs 412
The analyst believes that an extensive branch network, diversified product portfolio, coupled with strong business tie-ups with OEM’s and a strong parentage will help the company. Despite the liquidity crunch in the NBFC sector as a whole, the company maintained positive liquidity gaps in all the buckets.
LIC Housing Finance | Accumulate | Target price: Rs 495
"We remain positive on LIC Housing Finance given the company’s extensive distribution network, strong brand value and reduction in competition from NBFCs in the housing finance space," Nair said. Stable NIMs and reduction in the cost of funds expected with NCDs at higher cost getting refinanced in H2FY20. The analyst values the stock at 1.2 times FY21E BVPS with a target price of Rs 495.
Can Fin Homes | Accumulate | Target price: Rs 432
Robust loan growth outlook with an increasing customer base, expansion of branches in tier 3 cities along with stable asset quality are expected to support the company’s overall margins and growth in the coming years. "We value the stock at 2.4 times FY21E BVPS with a target price of Rs 432," said Nair.
Brokerage: Anand Rathi Shares & Stock Brokers
Bajaj Finance | Buy | Target price: Rs 4,818
Bajaj Finance is one of the largest players in the rapidly growing consumer finance segment in India and a pioneer in introducing interest-free EMI finance options in more than 50 categories, ranging from consumer durables to lifestyle products to groceries.
Apart from consumer finance, the company also has substantial business penetration in SME, commercial and rural lending. With housing as a subsidiary, mortgages are also gaining traction.
The company offers a wide range of products to its customers through multiple segments which includes products such as consumer durable loans, digital product loans, lifestyle product loans, two-wheeler & three-wheeler loans, salaried personal loans, e-commerce consumer finance, working capital loans, loan to professionals, commercial loans, gold loans, home loans etc.
A well-diversified credit portfolio, focus on cross-selling, customer acquisition, systematic expansion in delivery channels both physical and virtual, and distribution of products through these channels are likely to sustain robust growth in AUM going forward.
HDFC | Buy | Target price: Rs 2,539
HDFC is the leading provider of Housing Finance in India with a gross loan book of Rs 4 lakh crore and about 19 lakh deposits accounts.
The company reported consolidated revenues of Rs 32,796.5 crore in Q2FY20, registering a growth of 43.2 percent on a year-on-year (YoY) basis.
The company witnessed growth in its businesses including life insurance and general insurance.
Management continues to see demand in the individual segments, particularly from the affordable housing segment. It also noted
that the company will continue to remain cautious about the non-individual loan portfolio.
"We believe HDFC will continue to benefit from its strong market position, continued growth in loans, healthy asset quality and stable spreads. In terms of macro scenario, the domestic mortgage has plenty of upside with low penetration levels. Also, favorable government policies and initiatives focused on affordable housing create impetus in the housing sector," said the brokerage.
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