NBFCs stare at 30-70% fall in FY21 earnings due to coronavirus pandemic

Back in 2018, when the IL&FS fiasco happened, non-banking financial companies (NBFCs) as a measure of prudence decided to conserve capital and go slow on lending. What followed was economic weakness. But, just when the sector was neatly shoring up their liabilities profile, which positioned NBFCs stronger than earlier, the economic halt because of the coronavirus outbreak may have changed the narrative again. 

According to an Edelweiss report, Rs 1-trillion non-convertible dentures (NCDs) and Rs 1.2 -trillion commercial papers (CPs) are due for maturity in May and June. Clearly, Rs 50,000 crore set aside as targeted long-term repo operation (TLTRO) may be inadequate to absorb these maturities. A report by CARE says that with Rs 41,300 crore worth of equity infusion into NBFCs from September 2018 to March 2020, companies have better liquidity buffer than before. “In case of a sharp drop in collections from assets or inability to borrow/refinance, NBFCs and housing finance companies (HFCs) have enough buffer to service debt obligations over a certain period in the future, until the situation normalises,” the report spells out.

 

 

But here’s the catch. Without loan growth and cash inflows, will the liquidity buffer be adequate to support repayments and a possible asset quality deterioration, both of which will impact NBFCs’ net profit and balance sheet? Shweta Daptardar of Prabhudas Lilladher feels provisioning cost as a percentage of operating profit may increase from 20-57 per cent in FY20 to 28-86 per cent in FY21. This indicates that after pruning the non-performing assets (NPA) numbers in FY20, the ratios may once again jump in the ongoing financial year.

Analysts at UBS, in a report issued on Monday, said that despite the sharp share price corrections, a slower-than-expected recovery could drive further 20-40 per cent downside. “Recent uncertainty about a moratorium would also result in a cautious approach to lending in the next 3-6 months as NBFCs would be focusing on liability management rather than growth,” the report adds. UBS, which has reduced its earnings estimates for NBFCs by 11 - 65 per cent for FY21-FY22, believes that the likely disruption due to lockdown may not fully reflect in the share price of companies. 

Under these conditions, the liquidity crisis can test the solvency of NBFCs, say analysts at JP Morgan. “Liquidity issues threaten to morph into a solvency problem, and this should be reflected in higher traded spreads for NBFCs,” they caution. “Liquidity constraints and higher funding costs should continue to act as a deterrent to growth, and most NBFCs will remain in an asset wind-down/sell-down mode,” they add. According to the brokerage, such a tight liquidity position may compel NBFCs to sell down assets at a discount to banks, which will likely imply hits and even potential losses at the time of securitisation/assignment sales. 

While securitisation and assignment became the order of the day for most NBFCs since 2018, they haven’t opted for these structures at a discount yet.  In this context, investors’ appetite for NBFC stocks is coming off quite fast, except for a couple such as HDFC.