Licence for a New Drive

Rahul Oberoi/Money Today | Print Edition: March 2013

Non-banking finance companies, or NBFCs, did exceptionally well in 2012. While stocks of nearly 20 NBFCs more than doubled during the year, more than 30 NBFC stocks listed on the Bombay Stock Exchange, or BSE, beat the Sensex, which rose 25 per cent during the year.

The top performers were Shree Nath Commercial Finance, which rose 744 per cent, followed by Indus Finance Corporation (284 per cent to Rs 113), Premier Capital Services (280 per cent to Rs 261), GFL Financial Services (274 per cent to Rs 78), Esaar (India) (236 per cent to Rs 58) and Kwality Credit & Leasing (140.6 per cent to Rs 94).

The reasons for the rally were the buzz that some NBFCs may get bank licences and proposal to increase the cap on loans NBFCs can give against pledged gold.

"NBFCs, especially with retail focus, have been reporting healthy profits with steady asset quality. Valuations have also been boosted by clearance to the banking Bill, which paves the way for new bank licences that some NBFCs expect to get," says Dinesh Shukla, senior research analyst, Sharekhan.

Experts say this year will also be positive for those who invest in NBFCs due to the expected easing of regulations and fall in interest rates.

"The year should be good for NBFCs due to revival of credit demand, lowering of funding cost leading to better margins and easing of regulatory overhang," says Bhavesh Kanani, analyst (financials), Centrum Broking.

India Ratings says falling interest rates and uptick in economic growth will ease cyclical pressures. However, the continued harsh environment around some asset classes, including heavy and medium commercial vehicles and construction equipment, and building pressure points in the fast-growing light commercial vehicles will keep the asset quality under pressure.


The list of contenders for bank licences includes LIC Housing Finance, L&T Finance Holdings, Mahindra & Mahindra Financial Services, Shriram City Union Finance, Bajaj Finserv, Aditya Birla Nuvo and Reliance Capital.

Stocks of NBFCs that are expected to apply for bank licences rose in the last quarter of 2012 after Parliament passed the banking Bill. These were L&T Finance Holdings (84 per cent to Rs 89) Mahindra & Mahindra Financial Services Ltd (23 per cent to Rs 1,104), Shriram City Union Finance (28 per cent to Rs 98.65) and Reliance Capital (11.27 per cent to Rs 479.8).


The year 2013 should be good for NBFCs due to revival of credit demand, lowering of funding cost and easing of regulations.

Bhavesh Kanani

Analyst (Financials), Centrum Broking

Then, on January 2, a committee appointed by the Reserve Bank of India, or RBI, on gold-loan companies proposed an increase in the loan-to-value, or LTV, ratio for gold loans offered by NBFCs from 60 per cent to 75 per cent. The ratio measures how much loan the lender can give compared to the value of the pledged asset. This boosted shares of NBFCs that give gold loans. Muthoot Finance and Manappuram Finance stocks rose 8 per cent and 29 per cent to Rs 227 and Rs 43, respectively, in the first five trading days of 2013.

A Kotak Institutional Equities report says the LTV move is positive for gold-loan companies. However, the cap on lending rates and restrictions on issuing nonconvertible debentures will affect profitability, it says.

An Edelweiss Securities report in January said the Muthoot Finance stock could touch Rs 255 in the next few quarters. It was at Rs 216.60 on January 25.


IDFC: The stock rose 86 per cent to Rs 171 in 2012. "It can touch Rs 240 by the end of December 2013," says Deven Choksey, managing director, KR Choksey Securities.


NBFCs have been reporting healthy profits with steady asset quality. Valuations have been boosted by clearance to the Banking Bill.

Dinesh Shukla

Senior Research Analyst, Sharekhan

According to Motilal Oswal, the stock can touch Rs 210 in the next few quarters. The company's core operations continue to do well. Loan growth has also been healthy for the last few quarters.

On January 8, the stock was trading at a price-toearnings (P/E) ratio of 17.19 as against the industry average of 9.13. PE is the valuation ratio of a company's share price compared to its earning per share. The company posted a net profit of Rs 845 crore in the first half of 2012-13, down 1.59 per cent from Rs 858 crore in the corresponding period a year ago.

Manappuram Finance:

The company has gold loan assets of Rs 10,700 crore. According to an Ambit Capital Capital report, the restrictions on opening branches is not negative for the company, as it already has 3,200 branches, which are sufficient for 20 per cent a year growth for the next three-four years. In 2012, the stock fell 26 per cent from Rs 46 to Rs 33. However, experts are bullish for 2013. An Edelweiss Securities report says the stock can touch Rs 48 and return 21.3 per cent in 2012-13 and 20.4 per cent in 2013-14.

LIC Housing Finance:

The company plans to raise Rs 700-1,000 crore through external commercial borrowings or ECBs. This is after the RBI in December allowed real estate and housing finance companies to raise up to $1 billion through ECBs this financial year to promote low-cost housing projects.

"The ECB issue will be 1.6 per cent of the company's total interest-bearing liabilities, and considering the interest rate differential with domestic loans, the benefit at the 2013-14 estimated profit before tax level will be nearly 3 per cent. The stock is trading at two times 2013-14 book value. We recommend the stock with a target of Rs 328," says an Angel Broking report. It was at Rs 282.45 on January 25.

Rakesh Mehta, assistant research manager, Fullerton Securities & Wealth Advisors, says, "LIC Housing Finance's focus on growing middle-income housing and an enabling parent agency (LIC) network provide a bright growth outlook."

Pankaj Pandey, research head, ICICI Securities, says the stock can touch Rs 340 in the next 12 months.

L&T Finance Holdings:

Alex Mathews, head of research, Geojit BNP Paribas Financial Services, says, "The company is among the list of strong contenders for banking licences and has been posting healthy numbers. Also, the large presence in rural areas differentiates it from the competitors. There are chances that the stock can touch Rs 113 in the next few quarters." It was 85.55 on January 25.

"The company is well-diversified with a strong brand name, experienced management and high corporate governance standards. It lends across verticals," says Mehta of Fullerton Securities.

In quarter ended September 2012, it posted a consolidated net profit of Rs 143.74 crore, up 16 per cent from Rs 124 crore in the corresponding quarter a year ago.

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