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Fund managers build positions in robust NBFCs to cash in on IL&FS overhang

IL&FS
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The share prices of non-banking financial companies (NBFCs) have been one of the major casualties of the crisis caused by the Infrastructure Leasing & Financial Services (IL&FS) default in September last year. However, fund managers are using this correction to build positions in NBFCs they feel are better-placed to deal with liquidity challenges.

Anand Shah, head (investments) and deputy chief executive officer of BNP Paribas Mutual Fund (MF), said, “We have increased our exposure to NBFCs in September and October, especially in the business-to-consumer NBFCs. We see liquidity coming back for NBFCs, which are reasonably capitalised. We have made use of the correction in some of the blue-chip NBFCs and increased our exposure.”

The consumer finance player Bajaj Finance has seen MF schemes’ monthly average exposure rise from 2.3 per cent in September to 2.6 per cent in December.

The rise in exposure levels shows some fund managers have seen the stock correction as a buying opportunity. Between September and December, the stock has declined as much as 30 per cent on a closing basis, before seeing a strong recovery.

Besides consumer-facing NBFCs, companies focusing on niche business areas are also on fund managers’ radar. “Those (NBFCs) with niche capabilities and stronger balance sheets can offer good opportunities,” said Vinit Sambre, head (equities) of DSP Investment Managers.

Analysts and fund managers see vehicle financiers to benefit from the expected strong commercial vehicle (CV) growth cycle.

S Krishnakumar, chief investment officer (equity), Sundaram MF, said, “The CV cycle is on an uptrend and should see robust growth over the next 12 months. The deadline for meeting the new emission norms is April 2020 and this should also support demand.”

Krishnakumar added that CV financiers should continue to grow at high single-digit to mid-teens. However, the caveat is to avoid companies that have asset-liability mismatches.

Analysts at Motilal Oswal Financial Services are bullish on vehicle financiers Shriram Transport Finance Company (STFC) and Mahindra & Mahindra Financial Services (M&MFIN).

“STFC has the lowest dependence on commercial papers and the highest share of public deposits. We expect its balance-sheet growth to remain in mid-to-high teens and reduction in credit costs to result in more than 17 per cent return on equity over the medium term,” the brokerage said in a recent note.

According to analysts, the valuations are reasonable as the stock is trading at its lowest price-to-book seen in a decade.

STFC’s share price has corrected as much as 30 per cent between September and December before seeing an upmove. The MFs’ exposure levels towards the company saw the sharpest rise in October, when the stock was at its recent lows. The exposure was up from 1.29 per cent in September to 1.49 per cent in October.

Analysts at another brokerage said M&MFIN is in a sweet spot as fringe NBFCs are losing their competitive edge due to liquidity squeeze. Its strong presence in the rural economy also bodes well as rural cashflows have been healthy in the past two years.

The MFs’ exposure levels in M&MFIN have gone up from 1.7 per cent to 1.9 per cent between September and December. In the same period, its share price hit a low of Rs 356, or 27 per cent lower from the levels before the IL&FS crisis spooked the markets.

Cholamandalam Investment and Finance Company, which also has a vehicle finance business, has seen MFs’ exposure levels rise from 1.55 per cent in September to 1.64 per cent in December. The scrip has fallen as much as 28 per cent during this period before recouping its losses.

Source: Business Standard