De-monetization of Currency a Curse for NBFCs or blessing in disguise !!!!!!!!!!!!!

The only topic that is in discussion today in India is De-monetization announced by our respected PM. The capital market also reacted boldly to these. On one hand where the Fixed Income market saw a fantastic run northwards, on the other hand equity market reacted negatively. Apart from real estate and the related sectors like building products, cement etc, one of the sector that were among the casualties was the NBFC sector.

Last year in one of my article https://vjblogsite.wordpress.com/20...n-bfsi-sector-in-the-listed-space-real-worth/, I discussed the virtues and vows of investing in BFSI sector especially the NBFCs. NBFCs has given multifold return in past several years, irrespective of the market cycles.



Carrying on to the argument I just wanted to re-arrange my thoughts and see that if the fate of these NBFCs has gone for a toss or it’s just another hiccup where there is an opportunity to shuffle your portfolio and include these if missed earlier.


To categorize the NBFCs, we see the following:

a. Asset Finance Company (Likes of SREI)

b. Investment Company (Likes of Bajaj Holdings)

c. Infrastructure Finance Companies (likes of IDFC)

d. Loan Companies (Likes of Baja Finance)

e. Housing Finance Companies (Likes of HDFC)

f. Gold Loan Companies (Likes of Muthoot Finance)

g. Micro-Finance Company (Likes of Ujjivan Financial Services)

h. Non-Banking Financial Company – Factors (NBFC-Factors) – no listed Companies

i. Diversified NBFC (Bajaj Finance)

In my last discussion we have seen that the number of NBFCs getting listed has been increasing and it was 53 last September. Out of these we see most of the listed companies that gave good return are Housing Finance companies, Gold Loan Companies, Micro Finance Companies and Diversified NBFCs.

We will try to do impact analysis of the various types of NBFCs.

a. Asset Finance Companies: Not much impact in the short term as no short term liquidity pressure impacts the repayment of these loans. On the contrary as the finance of the companies owning these assets improves due to lower inflation, better business dynamics and adequate liquidity it will help the companies to speed the repayment cycle.

b. Investment companies: No impact in short term, but better in longer term due to better valuations.

c. Infrastructure Finance Companies: No impact in short term, better in longer term if economy improves due to the circular impact of this demonetization.

d. Loan Companies: The loans given to SMEs or small borrowers/farmers/consumers may get impacted in very short term may be a quarter to the maximum. This is because lot of collections are made in cash, which is inadequate today. However, the parallel initiatives taken by the Government will help in overcoming the whims of the situation.

e. Housing Finance Companies: Negative for those having a portfolio of Loan against Property as property prices as expected to correct in short term and Loan to Value Ratio is expected to Rise, which is a risk. However, The NBFCs are expected to adjust these in their repayment schedule or tenure.

At the same time I see huge opportunities for HFCs as now the homes will be more affordable, consumer’s purchasing power is expected to increase (as inflation is expected to fall) coupled with lower interest rate scenario. Apart from this, due to the curb in black money and demonetization a gradual shift towards cashless transaction will lead people to tend towards higher loan value. Thus, after a quarter or so I see huge opportunity for these HFCs to grab the market share.

f. Gold Loan Companies: Some pain for these NBFCs seems to be there for short as well as medium term. Most of the repayment from the customers of these NBFCs happen in cash, thus in short term there may happen a liquidity crunch. Apart from that as the per the global macro situation, Gold prices are expected to remain at the current levels or may correct. Thus, the Loan to Value ratio will increase thereby impacting the growth for newer loans for these companies.

g. Micro-Finance Company (Likes of Ujjivan Financial Services): These companies may get hurt most in the short term as most of the repayment happens in cash. This is a severe problem that MFIs are facing currently. There may be incidence of increase in NPAs for these NBFCs in the short term as well. However, we know that the collection system is very strong and people taking loan do repay due to social pressures, thereby chances of large scale defaults are less.

However, looking from a different angle, I see that the growth of this category of NBFCs happened in the past to curb the wrong doing of high cost local moneylenders/Mahajans. Now if the banking system penetrates and habit of these customers changes to cashless economy, the trust of the customers will be inclined more towards these NBFCs and will lead to higher growth in medium to longer term.

h. Non-Banking Financial Company – Factors (NBFC-Factors) – no listed Companies

i. Diversified NBFC (Bajaj Finance): This is a category of NBFCs that has emerged over the years, who are in category of Loan NBFC, HFCs etc. They are expected to get hurt the least out of the lot due to diverse nature.

I would also like to make an argument that just couple of weeks back we all were gung go on the consumption theme on the back of the following reasons:

a. Good Monsoon

b. Lower Inflation

c. 7th Pay Commission

d. Lower Interest rate scenario

Now if we see all the above factors are still intact. The only issue is that Indians are largely driven by cash economy, and at the current scenario cash liquidity is low with the consumers. However, the important question is that “Is it going to persists for a very long period??”

In my view the government along with RBI is going to increase the withdrawal/exchange limit every 4-5 days as an when the pressure seems to ease and the new Rs 500 currency is issued. What will these people do with the white money?? Either they will invest (Gold, Land and real estate, financial instrument) or they will spend on consumption of luxury or life style spending. The consumption is bound to come back in 2-3 months’ time period.

Thus, overall I see that if we overlook the short term negative impact of few NBFCs like Loan Companies, HFCs, and Diversified NBFCs (which is already captured in the recent fall), there is a huge opportunity to grab now. We recommend to BUY in quality HFCs like HDFC, Repco Home Finance and Diversified NBFCs like Bajaj Finance and Capital First.

 

In which category does Arman Finance fall?
Do you have any views on Arman Finance for the long term?

 

This was initially started as Loan NBFC with 2w and 3w loans. Gradually with its wholly owned subsidiary its book got more concentrated to MFI. Thus logically it will be treated as MFI bassed NBFC, though technically it can be considered Diversified NBFC.

Compare to other NBFCs, its loan book is very small. The scope though in longer term is huge. However, the competition will also be there. All in all better to go with a diversified and pan india based MFI like Ujjjivan if have to go to MFI, else invest in Diversified NBFCs like Bajaj Finance or Capital First.

 

Thank you for the prompt reply sir.