NBFC, HFC hit by cash crunch! But you could buy these 3 stocks

Stock prices of Housing Finance and NBFC companies have witnessed heavy pressure from investors. The reason behind such panic was the news that DSP MF was allegedly forced to sell commercial papers of DHFL (in the range of Rs 200-300 crore) in the secondary market at a higher yield. Further, investors also raised concerns over tightness in money market amid continuing financial crisis at IL&FS. Almost every HFC or NBFC has touched a new low in last two trading sessions. It has been revealed that, borrowing costs for NBFCs are expected to rise and they could face challenges in raising funds. Coming to today's trading session, major HFCs have continued to tumble. 

Today, within just a few hours of opening, DHFL extended its losses by tumbling over 22.30% with an intraday low of Rs 305.35 per piece on BSE. However, at around 11.08 hours, it was trading at 333.60, down by Rs 59.40 or 15.11%. 

Other companies that were trading in negative note were - Indiabulls Housing Finance at Rs 912.25 per piece down by 7.06%, Can Fin Home at Rs 252.55 per piece below 7.05%,IFCI at Rs 13.45 per piece lower by 5.28% and Gruh Finance at Rs 303.35 per piece. 

Following the above declines, one may be cautious while trading under HFC or NBFC stocks as liquidity instability is haunting them. 

Emkay in its research report said, “The lending reluctance for NBFCs is expected to continue. Though we expect low probability for default (due to timely RBI intervention), we would continue to prefer NBFCs with favorable ALM maturity.” 

Analysts at Emkay added, “With reluctance towards funding NBFCs/HFCs continuing, the switch from capital market borrowings to bank borrowings would be rapid. However banks also has to maintain sector exposure limits which would restrict their overall funding towards NBFCs.” 

However, in these midst, Kotak Institutional Equities listed out few NBFC or HFC stocks which are worth investing ahead. 

Nischint Chawathe, M B Mahesh and Dipanjan Ghosh analyst at Kotak said, “The recent correction on the back of debt market liquidity concerns prompts us to review a few strong NBFCs. Several factors including business tailwinds, robust operating models catering to the retail segment and parental support provide comfort to banks/debt markets and ensure that liquidity remains strong; stress, if any, remains only to near-term NIM.”

The trio added, “Post recent events in debt markets, mutual funds and other debt market players may likely take a more measured and cautious stand on NBFCs. However, we believe that well-run NBFCs with proven business models across cycles and/or those focusing on the retail segment that have generally lower credit and concentration risks may be less affected.” 

Hence, here’s a list of stocks in which Kotak has raised a Buy call. 

LIC Housing

LICHF has the highest dependence on bond market at 87% of total borrowings. However, comfort in its strong parentage ensures steady funding availability for the company. In fact, PSU banks prefer lending to LIC over other private NBFCs during period of crises.

However, marginal spreads are currently thin and the company will need to raise home loan rates over the next few weeks. We build NIM compression into our estimates (EPS down 3-5%) but don’t rule out further nearterm downside risk. 

The company’s stock has been upgraded to Buy with a target price of Rs 580 ahead. 

Magma Fincorp

Kotak continues to believe that recent operational changes under the new management will boost the profitability of Magma over the next two years, even as loan growth may remain muted in the near term.

Analysts at Kotak said, “We expect the company to deliver medium-term RoE of about 15%. Our revision in TP to Rs 165 from Rs 200 reflects a higher cost of equity. Being a smaller NBFC, the company is a bit more vulnerable to vagaries in debt market but a lower bond market exposure (23% of total) provides comfort.”

Shriram Transport Finance

The company trades at 1.6X book FY2020E. We expect the company to deliver 17-18% medium-term RoE. Kotak said, “We expect CV sales to moderate hereon, though we note that loan growth will remain strong at 17-18% during FY2019-21E on the back of strong business in used CVs.”