Illustration by Ajay Mohanty
The latest candidate in the rating downgrade cycle — PNB Housing — saw its stock price fall over 8 per cent. Not just that, it took a whole bunch of its peers down, with stocks of non-banking financial companies
(NBFC) — Indiabulls Housing, Dewan Housing, L&T Finance, Shriram Transport, M&M Finance
and Repco Home Finance — falling 3-8 per cent.
While liquidity concerns felt by Reliance Capital’s home and commercial finance businesses also impacted sentiment, analysts view PNB Housing’s rating downgrade as a larger concern. Earlier, despite its relatively higher exposure to loan against property (LAP) and small businesses, investors were convinced about PNB Housing’s strong underwriting capabilities. Analysts say that with the firm’s credit rating now under watch, they may have to revisit their conviction on PNB Housing and its peers, especially those heavy on the LAP segment.
Pockets such as vehicle sales and housing are not displaying strong demand off-take, either. Analysts, hence, advise investors to remain cautious on the entire NBFC
space. “Until now, loan growth was strong, which buttressed the asset quality of NBFCs,” says Siddharth Purohit of SMC Global. However, with companies
now going slow on disbursement, asset quality could take a beating as well, in the coming quarters, he adds.
The sector is also facing additional challenges in the form of escalating cost of capital. Analysts at Investec Securities note that bond yields have increased by 50-150 basis points (bps) across NBFCs, consequent to the liquidity crisis triggered by IL&FS defaults.
Interestingly, despite costs increasing significantly, financing remains selectively available. “Many tier-2 players continue to witness elevated levels of financing stress and the sector in general will need to calibrate its growth and margin trajectory. We do not see any normalisation soon,” analysts at JPMorgan note.
Further, with Rs 1.3 trillion out of Rs 3 trillion of mutual funds’ exposure to NBFCs likely to mature in the next three months, it may compound pressure for the sector.
Under these circumstances, Abhimanyu Sofat, Vice-President (Research) of IIFL, says it won’t be wise for investors to bottom-fish.
“NBFCs aren’t out of the woods and until liquidity sets in, there’s more trouble,” he warns. Top names such as HDFC, Bajaj Finance and Cholamandalam Finance continue to be the preferred NBFC