NBFCs feel the squeeze
The NBFC sector has been under pressure due to rising cost of funds, which have gone up for mainly and that is one of the reasons stocks have been under pressure. In past year, major NBFCs have cracked 40-50 % under pressure. With interest rates expected to peak over the next few months, analysts say that it’s time to look at fundamentally stronger players.
Over the past few months, NBFCs have had to accept stricter rules and appear to be on even keel with banks on how they classify assets and bad loans. The double whammy has come in the form of the nervous macro environment in India where sustained tightening and rise of rates by the Reserve Bank of India (RBI) stymied credit growth. This has also expanded the risk of bad loans, especially, for those NBFCs that have concentrated portfolios in the areas of power, construction or even infrastructure.
Home Loan NBFCs: In this segment, after HDFC, the second largest firm is LIC Housing Finance. However, analysts feel its prospects are quite dull.
“While we continue to believe that LIC Housing Finance is a robust franchise given the competitive advantages on both sides of the balance sheet, its present valuation appears to more than factor in these strengths, even as cyclical pressures impacting growth and margins, coupled with regulatory changes, could lead to muted 8 per cent earnings CAGR over FY11-FY13,” said Agarwal.
Margins of housing finance NBFCs appear to be under threat for those with falling incremental spreads. In addition, a bigger fixed rate portfolio in a high interest rate environment, lower proportion of high-yield developer portfolio, coupled with increased borrowings are challenges.
Hire purchase and lease NBFCs appear weak: Shriram Transport (SHTF) recorded a muted performance for 2QFY12, which was well below market consensus. Higher provisions for NPAs dragged down performance. The management has attributed the sharp increase in provisions to the sudden deterioration in the performance of assets that were deployed in Karnataka for transporting iron ore. But, most importantly, the company’s management lowered the guidance for disbursement volumes sharply.
Mohan Swamy, head of research at RBS Equities, believes that financing demand in the auto sector is headed for cyclical moderation driven by high interest rates, fuel costs and a weak economic outlook. That said, RBS has recently initiated coverage on another auto financier Mahindra Finance on the back of continued demand buoyancy in its core rural market, diversified loan book and low regulatory risks compared with other NBFC peers.
With more than 30 % correction since its October 2010 peak, Shriram Transport Finance’s regulatory risk appears to be priced in, but could remain an overhang over the near term, RBS added. While both NBFCs are strong candidates for a bank licence, Mahindra Finance’s M&M parentage and predominantly rural and semi-urban focus (in sync with RBI’s financial inclusion focus) makes it a stronger contender for an eventual licence.
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