Sector UpdateUpdate | Technology
Sector | 26 November 2024
Financials - NBFCs
Motilal Oswal values your support in the
EXTEL POLL 2024 for India Research, Sales,
Corporate Access and Trading team.
We
request your ballot.
Best Domestic
Brokerage
# Ranked Top 3
(CY21-CY23)
Turbulence in the near term but fundamentals still robust
Regulatory scrutiny more intense than before; froth in valuations comes off
Vehicle Finance: AUM growth YoY
Power Finance: GNPA (%)
The past 12 months have been highly eventful for the NBFC sector. Over the
past year, we (in India as well as globally) have repeatedly moved our goalpost
for interest rate cuts, which are naturally expected to benefit the NBFC/HFC
sector. While repo rate cuts are yet to happen in India, what kept the NBFC
sector in the thick of the action (for better or worse) was the intense and
sustained regulatory scrutiny (occasionally even culminating in a ban on
business activity; Exhibit 2) and the weakness (over the last six months) in retail
asset quality, particularly unsecured. Add to this the narrative of a slowdown in
consumption, evident in the last quarter, which has prompted us to revisit our
outlook on loan growth for financial lenders.
This was followed by a correction in stock prices of NBFCs (alongside a decline in
the broader NIFTY and the Financial Services Index). The price corrections in
certain NBFCs were accentuated by the high ownership of FIIs (who have
recently been net sellers in Indian equities) despite strong earnings consistently
delivered by these companies over the past year (Exhibit 6).
NSEBank Index was up ~2% in the last three months and NSE Financial Services
Index was up 3% compared to NIFTY, which declined 3% over the last three
months. Within Financial Services, the brunt of the stock price performance was
higher for NBFCs due to the reasons we outlined earlier. Exhibit 5 shows the
price performance for the NBFC universe under our coverage. Among large caps,
we have seen a decline of 9% and 4% in CIFC and SHFL, respectively, over the
last three months. Exhibit 3, displays the earning cuts observed in our NBFC
coverage universe post 1HFY25 results.
Views on the NBFC sector and our recommendation at this juncture
Gold Finance: AUM growth YoY
We expect this turbulence in the NBFC sector to sustain in the near term given
the heightened anxiety that we sense among investors regarding the 1)
regulatory undertones and supervisory audits, 2) weakening of retail asset
quality, (particularly unsecured), and to a lesser extent, 3) moderation in the
outlook on loan growth in vehicle finance.
At this juncture and in the near term, it is important to identify hiding spaces
(safe zones) where one can park their investments rather than making
aggressive bets in the NBFC sector. One positive outcome from the recent
correction in the NBFC sector is that the froth that had built up in some NBFC
stocks has now come off and will soon start providing much more valuation
comfort instead of unsubstantiated expansion in P/BV multiples that we had
observed until recently.
Abhijit Tibrewal - Research Analyst
(Abhijit.Tibrewal@MotilalOswal.com)
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com) |
Raghav Khemani
(Raghav.Khemani@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.