Three NBFCs to watch out for

SKS Microfinance, Can Fin Homes & PTC India Financial Services poised to post strong earnings over the next 2 years

With most banks struggling with rising asset quality stress and slow credit off-take, higher provisioning is affecting their net profits. While private-sector banks are relatively better off compared to their public sector peers, there are some non-banking financial companies (NBFCs), which have posted a resilient show on most parameters in recent times. The difference is due to the different growth potential sections (self-employed, largely semi-urban/rural and renewable energy) that these NBFCs cater to where most banks have a relatively small presence. The second is that NBFCs recognise an account as a non-performing asset (NPA) if customers don’t service for 150 days, versus 90 days for banks. While this regulation is being aligned with that for banks, the strong growth in NBFCs businesses should take care of any pressure on their profits.

Analysts say they have partly taken into account the impending regulatory change to arrive at their earnings estimates for NBFCs. In this scenario and with very little asset quality issues, they suggest one can look at NBFCs likely to post strong earnings growth over the next couple of years. Among the NBFCs from S&P BSE 500 universe, SKS Microfinance, Can Fin Homes and PTC India Financial Services (PFS) stand out. Not only have they reported consistent financial performance so far, but they are estimated to post 20 per cent earnings annually over FY15-18.

According to Bloomberg consensus estimates, SKS' earnings is seen growing at a compounded annual rate of 30 per cent in this period and that of Can Fin Homes and PFS at 28 per cent and 23 per cent, respectively.

Strong growth in non-housing book (loan against property) will drive future growth for Can Fin Homes, which gets most of its income from the housing finance segment. The non-housing segment is expected to contribute 24 per cent of the company's assets by FY18 against 11 per cent currently, enabling the company to diversify the revenue mix. Higher proportion of low-cost funding from non-convertible debentures and public deposits, among others, will aid its margins going forward. Analysts at IIFL expect the company's loan book to grow at 30 per cent over the next two years (FY17 and FY18) on the back of strong capital adequacy ratio, growing distribution and continued traction in non-home loan portfolio. Focus on non-housing segments, though, might put some pressure on its asset quality.

PTC India Financial Services is a focused play on the renewable energy space which forms 45 per cent of its loan book. Notably, this segment has grown at a compounded annual growth rate (CAGR) of 87 per cent over FY10-15 for the company. Given the government's focus, the future of companies such as PTC India that cater to renewable energy segment looks promising. "We believe PTC India Financial Services is poised to leverage the strong financing opportunity arising from the government’s focus in the renewable energy space, which is likely to post 29 per cent CAGR over FY15–F18," says Kaitav Shah, financials analyst at SBICap Securities. Thermal energy, which forms 30 per cent of its loan book, stands to gain from any power sector reforms.

Notably, this segment's asset quality is under stress leading to high non-performing assets estimated at 3.6 per cent for FY16. However, the rising share of renewable energy and ongoing reforms in the power sector should help lower this number to 3.1 per cent in FY18, say analysts.

SKS Microfinance has bounced back strongly after dealing with the Andhra Pradesh crisis. The continued focus on increasing average ticket size and the tenures of its loans along with healthy addition of new customers are the key catalysts for the company's future growth. SKS also aims to expand its cross-selling (financing of sewing machines, solar lamps, mobiles, etc) earnings from 7-9 per cent to about 20 per cent going forward. Healthy profit growth is likely to push its return on equity to 28 per cent in FY18 from about 25 per cent in FY15, estimate analysts. While valuations are not cheap at four times FY17 estimated book value, analysts believe they are sustainable and could improve on the back of the company's all-round growth.