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NBFCs primed for a comeback

The company’s debt-equity ratio was at 2 at the end of the quarter.

, ET Bureau|
Dec 01, 2018, 02.42 PM IST
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The company clarified in the July-September results presentation that it had no exposure to the affected businesses of IL&FS. Its stock is trading at a P/B of 2.2.
Stocks of non-banking financial companies (NBFCs) have come under the scanner since the default by IL&FS, the country’s leading infrastructure lender. The IL&FS crisis has brought to the fore the issue of mismatch between the maturity durations of assets (the advances) and liabilities (borrowings from banks and other institutions that help in creating loan assets) of lenders. In cases where the duration of liabilities is shorter than that of assets, the NBFCs find it difficult to repay the principal.

While stocks of most NBFCs have been under pressure since August, when IL&FS reported a major default, a handful of companies have reported prudent management of assets and liabilities along with sustainable growth in advances. Typically, larger NBFCs with strong parentage and management are regarded as safe bets for the long term. Besides, there are a few small and medium-sized companies in the sector trading at relatively lower valuations after the recent fall in stock prices. These companies are perceived to be observing strict controls over the asset quality and have sound management teams. We list some of the promising bets for investors with a long-term horizon.

Creditaccess Grameen
The company offers loans mainly to rural women by using the joint liability group model wherein in case of a default by a member, the remaining members of the centre repay the loan. This arrangement helps reduce the incidence of defaults due to peer pressure in groups. The company expects a higher cash inflow than outflow until 2019-20, thereby putting concerns over asset-liability mismatch to rest. The gross loan portfolio expanded 47 per cent year-on-year to Rs 5,794 crore at the end of September 2018 while the gross non-performing assets (GNPA) were 1 per cent, reflecting a better control over asset quality. The stock is trading at a price-book multiple of 2.4.

Indostar Capital
Given the sharpening focus on the retail segment, Indostar Capital looks well-placed to take advantage of the improving liquidity condition. Its retail portfolio includes vehicle finance, affordable housing loans and lending to small and medium enterprises. The proportion of the retail segment in the assets under management increased to 37 per cent in the quarter to September from 22 per cent a year ago. In the same period, the GNPA ratio reduced to 0.9 per cent from 1.9 per cent. The company’s debt-equity ratio was at 2 at the end of the quarter. The stock is trading at a P/B of 1.2.

L&T Finance Holdings
Over the past two and a half years, the company has been on course to expanding the retail book comprising rural and housing sectors, along with select wholesale financing. It has reduced exposure to construction equipment, gold loans, commercial vehicles and leasing activities, which had a higher proportion of non-performing assets. Its stage 3 GNPA (90 days past due) as a percentage of total advances fell to 7.1 per cent in the September quarter from nearly 11 per cent in the year-ago period. The NPA provision improved to 62.5 per cent from 53.6 per cent and the return on equity was 18.5 per cent. The company clarified in the July-September results presentation that it had no exposure to the affected businesses of IL&FS. Its stock is trading at a P/B of 2.2.

MAS Financial Services
Incorporated in 1995, Ahmedabad-based MAS Financial Services provides lending to micro, small and medium enterprises (MSME), and loans for housing and vehicles. It has a network of 121 branches in Delhi-NCR, Gujarat, Madhya Pradesh, Maharashtra, Karnataka, Rajasthan and Tamil Nadu. Three-quarters of its loan book is assigned to MSME, which qualifies for priority sector lending. The company utilises just over 50 per cent of the total cash credit limit available from banks, thereby ensuring sufficient liquidity. Its debt-equity ratio is 2.9, lower than 5-6 for some of the other well established NBFCs. The company’s GNPA was 1.4 per cent at the end of the September quarter. Its stock is available at a P/B of 3.9.
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