Investors must be selective while buying shares of non-banking finance companies (NBFCs) as valuations no longer appear inexpensive while risks of asset quality deterioration persist due to weak macro-economic environment.
"Frontline NBFCs are not cheap anymore. Most NBFCs have shown strong stock performance and valuations on some names are getting demanding now," Adarsh Parasrampuria and Parul Gulati, analysts with brokerage Prabhudas Lilladher, said in their note to clients on Monday.
The brokerage has downgraded its ratings on IDFC and Housing Development Finance Corporation (HDFC) to 'accumulate' from 'buy' as their current share price do not leave room for further upside. It considers Shriram Transport Finance's valuation reasonable but advised caution as the commercial vehicle cycle and freight rate movements do not appear encouraging.
While the recent run-up in Mahindra Finance's share is likely to restrict near-term stock performance, it remains the preferred investment option for Prabhudas Lilladher in the NBFC space. It expects the company to surprise investors with superior margin and higher growth.
In commercial vehicles, while the asset quality has remained stable latest freight rate data and feedbacks indicate that rates have corrected by 4-5% post the festive season. Freight availability has also come off, the brokerage noted.
Car pool collections continue to remain strong and the collection rates for microfinance pools securitised are running at 99.9%.