Is this the right time to buy shares of NBFC companies?

Categories: Blog
November 27, 2016Posted By Admin

Shares of non-banking financial companies (NBFCs) including micro finance institutions (MFIs) and housing finance companies (HFCs) witnessed selling pressure falling by more than 30% after the government’s move to withdraw Rs.500 and Rs.1,000 notes. Manappuram Finance, Can Fin Homes, Shriram City Union Finance, Bharat Financial Inclusion, Muthoot Finance, Capital First, JM Financial, GIC Housing Finance, Gruh Finance, Dewan Housing Finance (DHFL), Bajaj Finance and Bajaj Finserv have came down 5% to 40% since 8th Nov

The  NBFCs sector over a last few years has structurally strengthened both from the business diversity as well as financial resources raising ability that has gone up significantly. It is evident that over the last four years NBFCs share of the credit pie in the Indian financial system has gone up from around 12 percent to 15 percent and over the next three years we expect it to move to 18 percent.

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Now coming on to demonetization we believe that in the short-term i.e., say during next couples of months there will be an impact on NBFCs which are having cash intensiveness in nature like used commercial vehicle financing, the gold loan financing entities, micro finance institutions. So, entities where high degree of cash intensity is there both in terms of collections and dispersals there will be a significant impact on their businesses.

It is expected that cash-flows of the households, farmers, and the self-employed category, may be impacted for some time due to withdrawal of 86% of the currency from the system until normalcy is restored and business align themselves to the non-cash mode of payments including electronic payments. There is a risk of borrowers losing their discipline who used to pay their small repayments in cash. So as long as this disruption is temporary in nature and will get over in the next month or two companies and borrowers should be able to manage that. However, if the disruption prolongs and goes beyond say two to three months that is when asset quality challenges would manifest.

According to Reserve Bank of India (RBI’s) recent guideline of a couple of days back that if there is any delay in payments which are due in November and December that need not be classified as nonperforming assets. As per the conventional definition there is a 60 day grace period for those receivables as well. Though this could relieve some pressure if the system is to be restored in due course time, there will be challenges if it prolongs more than three months.

Though the prices are looking attractive with their sharp fall, it’s better to wait before taking any final call regarding investment in NBFCs. While the cash crunch in the system has already got priced in the market, the asset quality of these companies will decide their performance going forward. If the system restoration takes more time than expected, the books of these companies will definitely get effected. While this quarter (Q3FY17) will any way get impacted, the next two quarterly results are the watch out factor for these companies.