Bullish on rural and consumer finance NBFCs: JM Financial

Non-Banking Financial Companies (NBFCs) reported a pretty strong set of numbers during the current quarter, says Karan Uberoi of JM Financial Institutional Securities. "Most of the retail based NBFCs reported earnings growth of about 25-30 percent with healthy loan growth in excess of 20 percent," he adds.

In NBFCs, he is extremely bullish on rural finance plays and consumer finance plays. "We would recommend investors to have a portion of their portfolio in both private sector and the retail based NBFCs," adds. Also read: Prabhudas Lilladher bets on 8 midcaps for long term Below is the edited transcript of his interview with CNBC-TV18's Reema Tendulkar and Gautam Broker. Q: What have you made of all the NBFC earnings which have come through in this quarter? What the outlook is going forward? A: NBFCs reported a pretty strong set of numbers during the current quarter. Most of the retail based NBFCs reported earnings growth of about 25-30 percent with healthy loan growth in excess of 20 percent. Margins improved sequentially. Asset quality trends were pretty stable. Going forward, I would expect the retail NBFCs to continue to report improving margin trends with stable asset quality and loan growth of about 20-25 percent. Given that, I am extremely bullish on retail based NBFCs. Q: Wholesale funding costs have gone down significantly. Given that backdrop, what's your top pick at this point in the NBFC space? We have different categories of them, CV financing, gold loans, which ones do you prefer at this point? A: We are actually restricted to four-five names. So, therefore, I wouldn’t like to name stocks. But, generally, we are extremely bullish on rural finance plays and consumer finance plays. I think rural finance cash flows are going to be pretty strong, one year before an election year, given that government agencies will start spending. And consequently rural cash flows are going to be extremely healthy. That bodes well for both, growth as well as for asset quality. On the consumer finance side, I think urban consumer finance plays will continue to report healthy growth in excess of 25-30 percent. We have had NBFCs coming in our conference. They witnessed healthy growth in the month of October so far. So, yes, I would be bullish on rural and consumer finance plays. Q: We have seen some disappointing asset quality figures from a couple of PSU banks. Particularly from NBFC, what have you made of the asset quality? What are the trends? Is that something which is going to turn into a problem for NBFCs, going forward? A: For NBFCs, the key factor is that the book is granular. They finance productive assets. So, it is predominantly income generating assets and they are extremely well focused in the areas in which they operate. So, yes, NBFCs have reported a sequential increase in absolute level of gross NPLs to the tune of about 10-12 percent. But it is not a big concern at all. During the second half, we are actually going to witness a decline in gross NPLs for most of these NBFCs. Q: Do you cover the other financials as well or is it restricted only to NBFCs? A: We look at insurance companies and some banks as well. Q: Among banks private sector banks, public sector and NBFCs, what would be your preference? Would you first go with private sectors then the NBFCs and then public PSUs? What's the order of preference at this point? A: Right now, there are a couple of names in the private sector banks and couple of names in the NBFC space, especially on the rural finance side, which we are extremely bullish on. We would recommend investors to have a portion of their portfolio in both private sector and the retail based NBFCs. On PSU banks, selective names have reported a pretty healthy set of numbers. That has been better than our estimates like a Oriental Bank of Commerce. It has done well. However, on PSUs, you have to be extremely selective. Go for those PSUs which have strong CASA wherein they have high tier I ratio. There wouldn’t be any book value dilutions, going forward, but be extremely selective and careful in these PSU banking. We believe that slippages will remain at pretty elevated levels, going forward, over the next couple of quarters. Q: For all our retail audiences, can you give us a few conviction buys that one could consider in the NBFC or even in the banking space, which one would come out as your top buy? A: I wouldn’t be able to comment on a particular name. But go for the smaller private sector banks that are well positioned to gain market share and some of the rural based and urban based consumer retail NBFCs. I think they will continue to gain market share and report 20-25 percent kind of an earnings growth.