India Inc's NBFC (non-banking finance companies) billionaires club is shrinking rapidly. While there were nine billionaire promoters among the listed NBFCs in March 2018, the number is now down to just three - promoters of Muthoot Finance, Cholamandalam Investment and Finance and Bajaj family-owned Bajaj Finance.
In contrast, the value of promoter's stake in Indiabulls Housing Finance, Dewan Housing Finance (DHFL), Edelweiss Financial Services, Indiabulls Ventures, Shriram Transport and J M Financial Services, has gone below Rs 6500 crore since the IL&FS crisis broke out in September last year, pushing them out of the billionaires club.
Excluding Bajaj Finance, the value of promoter stake in NBFC industry is now down to $11 billion from around $18 billion at the end of March 2018.
The biggest haircut has been witnessed by the promoters of housing finance companies, vehicle financiers, SME lenders and brokerages.
Excluding gold loan companies, which have seen a rally in their stock price in line with rise in gold prices, the promoter wealth in the sector has more than halved to $7.7 billion from $15.6 billion at the end of FY18.
The valuation of promoter's stake in Indiabulls Housing is down 82 per cent to Rs 2,259 crore (as on October 4, 2019) while for DHFL, the figure is down 94 per cent to Rs 385 crore. For J M Financial, the promoter stake which was valued at Rs 6,701 crore in March 2018, is now Rs 3,783 crore, a decline of 43 per cent during the period. For Shriram Transport, there has been a reduction of 29 per cent to Rs 6,333 crore since March 2018.
"NBFCs focussed on lending to infrastructure and real estate are especially witnessing troubled times as these sectors themselves are facing headwinds," says G Chokkalingam, Founder, Equinomics Research and Advisory.
The analysis is based on the market capitalisation and promoter stake of the non-banking finance companies that are part of BSE500 index. The market capitalisation is for the period ending March 31, 2018 and October 4, 2019 and the promoter stake is as on March 31, 2018 and June 30, 2019. The two have been used to calculate the change in the market value of promoter stake between March 2018 and October 4, 2019.
The list only includes individual or promoter-owned NBFCs and excludes institution-owned NBFCs such as Housing Development Finance Corporation, LIC Housing, IDFC, Canfin Homes and M&M Finance, among others.
Genesis of decline
The decline in NBFC valuations has its roots in defaults by IL&FS, a large and reputed housing finance company. Soon after it defaulted on repayment of debt in September last year, DHFL found itself in trouble because of squeeze in liquidity when a fund house sold Rs 300 crore of its commercial paper (CP) at a discount to raise funds.
Although the fund house later said it was a routine exercise not triggered by concern over DHFL's health, the damage had been done. The DHFL stock fell more than 60 per cent intraday, roiling other NBFC stocks too. The panic continues till date.
This triggered a liquidity squeeze for the entire NBFC sector, leading to downgrades, further impacting their ability to raise capital.
While various regulatory initiatives to enhance funding to NBFCs have improved market sentiments, it has not done enough yet to help the sector come out of the woods. "In an environment where access to funding has become a function of market confidence, the quantum and quality of liquidity cushion will become a key differentiator among non-banks. The need of the hour is to demonstrate resilience by maintaining sound liquidity policies to navigate business cycles," says ratings agency CRISIL in its half-yearly report on credit quality.
This just goes on to show that since NBFCs don't have access to funds, they can neither roll over debt, nor can they lend further and grow business.
CRISIL said the growth for NBFCs in the second half of FY 2019 was around half of that in the first half. The strong growth in the first half led to growth of 15 per cent in overall non-bank credit in 2018/19, with assets under management reaching Rs 23.7 lakh crore as of March 2019. "However, growth is expected to be subdued in 2019/20, with overall AUM expected to increase 12-13 per cent and growth in off-book AUM being higher," it added.
Umesh Mehta, Head of Research, Samco Securities, says finance is all about trust and the moment trust vanishes, lending as business becomes tough. "So the current state of affairs is similar to what the US had during 2009 sub-prime crisis which took around 18 months to two years to subside. In India too, by budget 2020 things will stabilise, given the time the financial sector needs to heal itself."
The fall in valuations has, however, largely been limited to NBFCs in the housing finance and vehicle loans space. Those offering gold loans such as Muthoot Finance and Mannapuram Finance have, in fact, witnessed a rise in valuations. The value of promoter's stake in Muthoot is up 63 percent over March 2018 to Rs 19597 crore while the number for Mannapuram has risen 23 percent to Rs 3933 crore in September 2019.
"The biggest issue is tightening of liquidity. As a result, timely access to funding remains a challenge for NBFCs, impacting further growth of business," Chokkalingam says.
Moreover, the economic slowdown has impacted sales of vehicles as well as consumer durables. "The decrease in demand for passenger and commercial vehicles as well as consumer durables has also impacted the business of NBFCs," he adds. Car sales in India were down for the tenth straight month, falling 32 percent to 19,6524 units. Over 60 per cent of auto financing in India is done by NBFCs.
Chokkalingam also points out that in the last 25 years, the NBFCs have faced headwinds every three to four years. "I believe the NBFC theme has already played out this time around and is ending now, though with multiple problems. And I don't expect any upgrade in valuations in the near future."
Mehta says while many companies may get caught in this tornado, eventually, a company with sound management and integrity will be able to pull the things correctly and move ahead. "But those who can't, will sink," he adds.