NBFC - Avoid Companies with Weak Fundamentals
The market downturn has seen NBFC stocks plunging to their lowest valuations in five years. The battering of NBFC stocks comes at a time when a committee headed by former RBI deputy governor Usha Thorat has proposed regulatory changes in terms of increased capital adequacy and tougher provisioning norms. When implemented, they could pose challenges for NBFCs, especially asset financing and infrastructure NBFCs. Some of them, like REC, PFC and IDFC, seem to have factored in regulatory changes and are now quoting at a price-book value, or P/B, which is nearly half their average P/B of the past five years.
The P/B ratio is a measure of a company’s m-cap compared to its book value of equity. It provides the value the market has assigned to a stock based on the accounting value of the firm's equity. The scenario is different for housing finance companies, or HFCs. Although the National Housing Bank raised provisioning requirements putting their profitability under pressure. For example, LIC Housing is trading at a P/B of 2.46 which is higher than 1.9, its 5-year average P/B. Profitability of HFCs will be under pressure as provisioning expenses will go up. However, valuations don’t seem to factor this. Stocks of transport finance companies, which attracted investors earlier, appear to be most exposed to the proposed changes. These stocks have fallen sharply during the current rally so much so that most of them are trading at two-third of their 5-year average P/BV.
Gold loan NBFCs are gaining prominence due to rising gold prices. Mannapuram Finance has generated a return of over 650% in the past three years. Moreover, after the Usha Thorat Committee’s recommendations, there is far less regulatory uncertainty for gold loan companies making them an attractive buy. While REC, IDFC, Mannapuram & PFC should be accumulated on dips, investors should sell stocks such as Shriram Transport Finance and LIC Housing. Investors also should not buy even in the event of a correction, unless their fundamentals improve.
Source - Economic Times
The market downturn has seen NBFC stocks plunging to their lowest valuations in five years. The battering of NBFC stocks comes at a time when a committee headed by former RBI deputy governor Usha Thorat has proposed regulatory changes in terms of increased capital adequacy and tougher provisioning norms. When implemented, they could pose challenges for NBFCs, especially asset financing and infrastructure NBFCs. Some of them, like REC, PFC and IDFC, seem to have factored in regulatory changes and are now quoting at a price-book value, or P/B, which is nearly half their average P/B of the past five years.
The P/B ratio is a measure of a company’s m-cap compared to its book value of equity. It provides the value the market has assigned to a stock based on the accounting value of the firm's equity. The scenario is different for housing finance companies, or HFCs. Although the National Housing Bank raised provisioning requirements putting their profitability under pressure. For example, LIC Housing is trading at a P/B of 2.46 which is higher than 1.9, its 5-year average P/B. Profitability of HFCs will be under pressure as provisioning expenses will go up. However, valuations don’t seem to factor this. Stocks of transport finance companies, which attracted investors earlier, appear to be most exposed to the proposed changes. These stocks have fallen sharply during the current rally so much so that most of them are trading at two-third of their 5-year average P/BV.
Gold loan NBFCs are gaining prominence due to rising gold prices. Mannapuram Finance has generated a return of over 650% in the past three years. Moreover, after the Usha Thorat Committee’s recommendations, there is far less regulatory uncertainty for gold loan companies making them an attractive buy. While REC, IDFC, Mannapuram & PFC should be accumulated on dips, investors should sell stocks such as Shriram Transport Finance and LIC Housing. Investors also should not buy even in the event of a correction, unless their fundamentals improve.
Source - Economic Times
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