NBFCs likely to face more downgrades in December quarter, say experts

The recent commentary from the Reserve Bank of India suggested that non-banking financial companies (NBFCs) aren’t scrounging for capital. In other words, the regulator believes that liquidity isn’t as much a crisis as it was thought to be. Yet, experts say with the system bracing for lower asset growth, the sector could be in for more trouble. 

Consequently, NBFCs stocks are faced with the sharpest earnings cut in many years. Earnings measured as earnings per share or EPS have seen a reduction of 5 per cent to 35 per cent across the board over the last three months. While relatively smaller names such as Aditya Birla Capital, Gruh Finance and Shriram City Union have witnessed 14 per cent-33 per cent reduction in FY20 EPS estimates since September, some of the relatively stronger mid-cap names such as PNB Housing, Cholamandalam Investments and Finance, Shriram Transport Finance and M&M Finance haven’t been spared either. They are faced with earnings downgrade of 7 per cent–25 per cent. Earnings estimates of the two most battered-down NBFC stocks since September — Indiabulls Housing Finance and Dewan Housing — too came under hammer despite the September quarter (Q2) numbers not divulging as much pain anticipated by the Street. The stocks saw their EPS expectations getting reduced by about 10 per cent for FY20. Even the stronger names — HDFC, LIC Housing and Bajaj Finance —have seen analysts rework their earnings estimates (see table). 

Even as investors are just about digesting the current round of earnings cuts, experts say there could be more on the anvil. “Upgrade or downgrade cycle depends on earnings visibility. While the Street has factored in some increase in the cost of funds and margins compression, we need more clarity on AUM (assets under management) growth,” says Vineeta Sharma, head of research, Narnolia Securities. She explains that to conserve capital, shrinkage in loan growth is anticipated. “To what extent they will resort to capital preservation needs to be seen,” Sharma adds. 

In addition, Siddarth Purohit of SMC Capital points out that with NBFCs repricing their liabilities, they may not lend as much, given the entire pass-through of cost could be tough. The impact of this is expected to be felt in the December and the March quarter numbers. 

Meanwhile, opinion is mixed in terms of estimating the pain ahead for investors of NBFC stocks. Purohit is confident that a major correction like the one that lasted till mid-October is unlikely. “While housing financiers could see some correction based on how their wholesale loans behave, asset financiers seem relatively safe,” he explains. 

Sharma, however, has a different view. She says with banks becoming more competitive, it may leave little slack for NBFCs. “It could take 12-18 months for the cycle to turn favourable for NBFCs. Once the balance sheet changes its contours, it’s tough to get back on track easily,” she warns. 

Therefore, until normalcy returns, analysts advise investors against taking fresh exposure to NBFC stocks. Top brokerages such as Nomura, Morgan Stanley, Citi and CLSA have, in fact, expressed their shift from NBFC stocks to corporate-facing banks, which are increasingly reckoned as safer options.