CBDT clarity on cash acceptance bring breather for NBFCs; BFIL & Ujjivan top bets

Essentially, per the section, no person shall receive an amount of Rs 200,000 or more in cash:

(a) in aggregate from a person in a day; or (b) in respect of a single transaction; or (c) in respect of transactions relating to one event or occasion from a person.

But, CBDT has now issued a circular and clarified that receipt of one loan instalment will qualify as a separate transaction, thereby ending the ambiguity.

“It has clarified that all the instalments paid for a loan shall not be aggregated for the purposes of determining the applicability of the provisions of section 269ST. This should come as a significant relief to NBFCs and HFCs, with collections in cash whose operations could have been significantly affected otherwise,” Morgan Stanley said in a note.

“NBFCs, like Mahindra & Mahindra Finance and Shriram Transport Finance in our coverage, have a high share of cash collections (50-60%) as their borrower base earns primarily in cash,” it said.

The silver lining:

The NBFC sectors outperformed the benchmark indices in the last one year with some stocks rallying as much as 90 percent. REC rose as much as 89 percent, followed by Bajaj Finserv which rallied as much as 75 percent, Bajaj Finance gained 68 percent in the same period.

Shriram Transport Finance slipped by 15 percent, while M&M Financial Services rose marginally in the same period. Bharat Financial Inclusion which slipped 2 percent while Ujjivan dropped over 20 percent could be contra bets.

“While there is little doubt that demonetization was black swan event for the microfinance industry, the slower than expected pace of improvement in collections over past six months has dented the confidence of investor community,” Antique Broking said in a report.

The sentiment got further soured by the farm loan waivers announced by various states and most MFIs including Bharat Financial Inclusion (BFIL) are corrected to levels where risk reward might be favourable.

“Investors should stick to strong players, risk-reward favourable at current prices. Give the diversified geographic presence, strong control over operations and healthy capital position, we expect Bharat Financial Inclusion & Ujjivan to rebound strongly in H2FY18,” said the Antique Broking report. It further said that valuations have corrected to reasonable levels and risk reward has turned favorable.

Antique maintains a buy rating on BFIL and upgrade Ujjivan to BUY rating. It downgraded Equitas to HOLD given the weak earnings trajectory on account of running down of the microfinance book.