Analysts see more downside for markets; remain selective on banks & NBFCs

The Indian equity markets extended their slump for the fifth consecutive session on Monday as financial stocks continued to tumble amid the ongoing crisis at IL&FS. The S&P BSE Sensex hit an intra-day low of 36,217 while the Nifty50 touched a low of 10,943.60.

Analysts say the markets (the Sensex is down over 800 points in two sessions) have been caught in a contagion of a sell-off in the banking and NBFC (non-bank finance companies) segments, which can accentuate further. Moreover, factors such as rate hikes by the US Federal Reserve, crude oil prices, the rupee, and trade relations between the US and China will have a bearing on overall sentiment. According to experts, stocks from the BSE universe, excluding the top 10 in market capitalisation, have seen their value erode by over ~15 trillion from the peak hit in January.

“Market correction was overdue, given the stretched valuations. With oil on the boil and the rupee going down, it was just a matter of time for the markets to take cognizance. Developments related to IL&FS, however, were foreseen. The current market movement is more of a contagion and has led to a risk-off phase now. The Nifty50 can dip another 500 points from here on in the worst-case scenario,” says Tirthankar Patnaik, India Strategist, Mizuho Bank.

Vinay Khattar, associate director and head of research at Edelweiss, too, believes that the markets are headed down in the near term. “The Nifty50 index can slip to 10,000-10,100, given the ongoing crisis at IL&FS and the macro headwinds in the form of rupee and oil prices, which are putting pressure on the fiscal situation. The pain would be felt most by rate-sensitive stocks and the mid- and small-cap segments. Investors should avoid these two and look at safe havens of fast-moving consumer goods (FMCGs) and the pharma and health care sectors,” he advises.

Banks and NBFCs

Among individual stocks in the NBFC segment, Bajaj Finance, Indiabulls Housing Finance, Reliance Home Finance, Central Bank of India, Cholamandalam Investment and Finance Company, and Ujjivan Financial Services were down in the range of 5-15 per cent on the National Stock Exchange (NSE) in intra-day trade on Monday. Despite the headwinds, analysts at Macquarie say good-quality, large NBFCs like HDFC with well-matched ALM (asset-liability management), a strong brand, and an ability to raise ECBs (external commercial borrowings) and public deposits can weather these transient storms.

Top 10 Companies on value erosion
“LIC Housing Finance, Shriram Transport Finance and Cholamandalam Investment and Finance may face near-term liquidity issues, given their negative (asset-liability) gaps (based on FY18 disclosures). HDFC, Indiabulls Housing Finance and Muthoot Finance appear to be better-placed. We like HDFC among large NBFCs, HDFC Bank among banks and ICICI Bank, as a play on the stressed asset recovery cycle,” wrote Suresh Ganapathy of Macquarie in a co-authored report with Nishant Shah and Akash Nainani. Analysts at Kotak Institutional Equities agree. NBFCs with strong parentage, i.e. sovereign/large financial institutions like LIC Housing Finance, Power Finance Corporation (PFC) and REC and business houses like Aditya Birla Finance, Bajaj Finance, Cholamandalam, Mahindra Finance will continue to earn support from debt markets and banks, they said.

“Underlying business trends in most asset classes (CVs, rural auto and retail housing) have been robust over the past few quarters. Supported by our thesis of strong fundamentals and business trends of NBFCs under coverage, we prefer to look beyond near-term volatility and find value gradually building up in select stocks,” wrote Nischint Chawathe, M B Mahesh and Dipanjan Ghosh of Kotak Institutional Equities in a recent co-authored report.

“The banking and financial sector has the maximum linkage with the rest of the sectors and till such time as oil and the rupee do not stabilise, investors will have to live with the pain,” said G Chokkalingam, founder of Equinomics Research & Advisory. He said investors should not exit the market altogether and look for quality names, especially in the mid- and small-cap space. “Avoid costly private lenders. Stay invested in quality IT and pharma names till such time as the rupee stabilises. One can also add quality mid-cap names after assessing the balance sheet strength and management quality,” said Chokkalingam.


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