Emkay feels housing finance companies (HFCs) are better placed compared to asset finance companies (AFCs).
Share prices of non-banking finance companies/housing finance companies, as well as banks, were hit hard on April 3 after a media report indicated that NBFCs/HFCs are not eligible for a three-month moratorium on term loans borrowed and are liable to pay regularly.
Reports further stated that the only option open for NBFCs/HFCs would be a separate LTRO (long-term repo operation) window through which banks can infuse sufficient liquidity in order to smoothen bond market transactions.
Among others, Axis Bank, ICICI Bank, M&M Financial, SBI, HDFC, Indiabulls Housing, HDFC Bank, Kotak Mahindra Bank, IndusInd Bank were also caught in a bear trap, falling 2-9 percent.
But after discussions with management of various NBFC/HFC, brokerage Emkay cleared that the moratorium is applicable to NBFC/HFCs as well.
"Term loans obtained from banks by all NBFCs/HFCs are fully eligible under the moratorium and our discussions suggest that many NBFCs/HFCs would avail the same. But NBFCs/HFCs are not eligible for deferment of interest on working capital loans," it said.
Technically, the brokerage feels not allowing NBFCs/HFCs to defer their term loans during the current crisis would completely deteriorate the entire liquidity measures undertaken by the RBI.
During the recent monetary policy meet (March 25-27), the RBI has offered a moratorium of three months to all term loan borrowers, who are likely to be impacted by the lockdown and social distancing during the COVID-19 outbreak.
"Since the deferment is available from banks, NBFCs with an elevated share of bank borrowings (Cholamandalam Investment, M&M Financial, Shriram Transport) may opt for a similar deferment from banks and are relatively safeguarded. However, NBFCs with a higher share of bond market borrowings (LIC Housing) could raise incremental money from the LTRO window at the cost of margins," Emkay said.
Its assessment suggests that NBFCs with relatively stronger liability franchise (HDFC, Bajaj Finance) would anyhow be better placed, as their ability to raise funds at lower costs would aid margin disruptions.
After further discussions with management, Emkay indicated that the only unclear aspect of this entire exercise is the rating downgrade of securitized pool of assets of such NBFCs and HFCs.
"As per management, the pool of assets, including such deferred loans, should be exempted from downgrade as the said restructuring mandate is from the RBI," the brokerage said.
"In case of ratings downgrade of such pools, NBFCs would suffer further margin pressure due to elevated discounting by pool buyers. Also, many financial institutions may opt to stay away from the securitization of these assets," it added.
NBFCs/HFCs are confident of resolving this issue with the RBI and SEBI soon.
Hence, considering above parameters, Emkay feels housing finance companies (HFCs) are better-placed than asset finance companies (AFCs) as the overall impact of the deferment would be more visible in AFCs since recoveries are better among large-ticket secured loans.
HDFC remained its preferred pick with safer asset composition (salaried mortgages), longer maturity duration (72 months) and superior collection efficiency (99 percent digital).
"Cholamandalam Investment has high preference followed by Bajaj Finance post the recent correction; however, elevated discretionary exposure (including auto) and shorter maturity duration keep us cautious. We prefer M&M Financial Services the least due to rising delinquencies and low coverage," said the brokerage which advised buying HDFC (with a target of Rs 1,971, potential upside of 31.4 percent), Cholamandalam Investment (Rs 253, potential upside of 102.4 percent), Bajaj Finance (Rs 3,137, upside of 42 percent).
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.