Realty stimulus: Investors must not bet on NBFCs just yet, say experts

The Rs 25,000-crore real estate package announced by the finance minister on Wednesday, after close of trading, revived investor sentiment in stocks of non-banking financial companies (NBFCs; including housing financiers). 

Aided by the overall positive market sentiment (the Sensex was up 0.5 per cent), NBFC stocks gained up to 9 per cent on Thursday. While the government’s move is in the right direction, many experts have advised investors to be patient and selective, as it would be too early to say that NBFCs are out of the woods. 

“The pace of execution and operational details regarding (real estate project) eligibility, etc, are key. Therefore, we believe it is premature to expect a broad-brush benefit to the NBFC sector, and we continue to be selective,” says Lalitabh Srivastava, AVP at Sharekhan.

Yet, one cannot ignore the likely benefits to shadow banks, as NBFCs are called, if the package for the real estate sector is executed well. According to India Ratings’ estimates, close to 40 per cent of the outstanding real estate construction loans were provided by NBFCs. This indicates the degree of impact for NBFCs, if things improve for the sector. 

First, it will help prop up asset quality, which will also increase capital available for growth, given that cash flows improve after completion of stalled projects. 

Many non-banking housing financiers have, over the past few months, witnessed deterioration in their wholesale real-estate asset loan book, warranting higher provisioning and thereby limiting growth capital. 

However, the caveat here is that the exact impact would vary depending on the exposure of each NBFC to stressed real estate developers with positive net worth.

Some experts also believe that the development will also help expedite viable realty projects, which are currently with the National Company Law Tribunal. 

If executed well, the government’s move could also have a positive rub-off on stock valuations, which have taken a beating over the past one year. Following the IL&FS default in September last year, most NBFCs lost investor support. 

Current valuations of key stocks such as Indiabulls Housing Finance, LIC Housing, and PNB Housing, among others are at a 48-80 per cent discount to their respective medium-term historical average valuation.

Investors are recommended to be very selective till clarity emerges on the operational details front.