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NBFCs: Beaten down, but some pockets of resilience remain

Asset quality issues and capital scarcity in the midst of slowing demand in mainstay businesses have taken their toll on the sector, but some players focused on niche segments have been able to weather the storm

, ET Bureau|
Last Updated: Dec 21, 2019, 04.19 PM IST
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The pain in the broader NBFC sector may persist for some more quarters until liquidity improves. Investors therefore need to tread cautiously and focus on the companies that have demonstrated a sustained momentum.
ET Intelligence Group: Broader indices have yielded double-digit returns in 2019 so far after a tepid show in the previous year. However, non-banking finance companies (NBFCs) have yet to show a major recovery.

For the first time since 2015, the ET NBFC Index has not outperformed the benchmark S&P BSE Sensex by a sizeable margin. Tepid flow of fresh capital amid asset quality issues, slowing corporate activities, slackening demand in the real estate market and unseasonal rains affecting agriculture are the major issues faced by the sector.

The S&P BSE Sensex gained a little more than 13% from the beginning of the year till November-end while the ET NBFC Index was up 14.4%. In contrast, the excess return or alpha of the sector index over the benchmark index was at least 300 basis points or 3 percentage points in the previous four calendar years. Barring a few lenders, most of the NBFCs have reported lacklustre performance so far in 2019-20.

Investors therefore need to be mindful about what lies ahead for the sector. NBFCs focusing on vehicle financing, real estate and loan against property (LAP) continued to face challenges in the second quarter of the current fiscal. Auto finance companies were hit by the slump in both passenger and commercial vehicle sales.

According to an Edelweiss Securities report, aggregate assets under management (AUM) of auto lenders including Mahindra and Mahindra Financial Services and Shriram Transport Finance grew at a six-quarter low of 8.2% year-on-year in the three months ending September. However, an uptick in this segment is expected in the current quarter following the higher festive demand in October.

In the real estate segment, companies having exposure to developer loan category showed stress while those in the affordable housing category reported improvement. Aavas Financiers, which focuses on affordable housing, reported 41.9% year-on-year increase in its AUM in the July-September quarter. The stock is trading at a steeper price-book (P/B) multiple of seven.

Another lender in the housing finance segment that has been performing well despite stress in the sector is Can Fin Homes, promoted by Canara Bank.Can Fin Homes derives over 71% of its business from the southern states of the country. The real estate markets in these regions have reported relatively less stress. The lender’s net interest income grew 32% and net profit 31% annually in the five years to 2018-19. It has guided to grow the loan book 26% per annum to Rs40,000 crore by 2021-22. The stock has gained nearly 48% in the past 12 months and trades at a P/B of around 2.7.

Listed microfinance companies including CreditAccess Grameen and Spandana Sphoorty have been on a steady course. Compared with the broader NBFC sector, microfinance companies have reported higher loan book growth, better asset quality, higher credit growth and higher net interest margins (NIM). The microfinance segment reported 48% year-on-year loan growth at the end of September, compared with 8.1% growth in the non-food credit. CreditAccess reported 12.1% NIM, 0.52% gross non-performing assets (NPA) and 3.7% sequential loan growth in the September quarter. The stock trades at a P/B of 4.5. Spandana Sphoorty Financial, which was listed in August, reported 37% year-on-year growth in the advances, gross NPA of 0.8% and NIM of 19.6% in the September quarter. The stock is available at a P/B of around 3.4.

The pain in the broader NBFC sector may persist for some more quarters until liquidity improves. Investors therefore need to tread cautiously and focus on the companies that have demonstrated a sustained momentum.

They can consider stocks such as CreditAccess Grameen, Spandana Sphoorty Financial and Can Fin Homes for further analysis before investing. In addition, they can track the recently listed Ujjivan Small Finance Bank to see whether it continues to grow its business after listing.
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