Use correction in financials to buy for the long term: CLSA's Chris Wood

The recent sharp correction in the stock prices of financial stocks should be used as an opportunity to buy for the long term, says Christopher Wood, managing director and equity strategist at CLSA in his weekly note to investors, GREED & fear.

“There have been some fun and games in India’s financial stocks over the past week partly driven by Reserve Bank of India (RBI) announcements, and partly driven by the market discounting higher wholesale funding costs for non-bank financial companies. This setback should be viewed as a long-term buying opportunity. Still portfolios with such exposures need to hedge the higher oil price risk,” Wood wrote.

He has replaced the investment in Maruti Suzuki in his Asia ex-Japan long-only portfolio with by a 4 percentage point (ppt) investment in Reliance Industries (RIL), which Wood says, is really India’s only 'large-cap' quoted internet play.

 

Shares of non-banking financial companies (NBFC) including housing finance companies (HFCs) have been under pressure over the past few sessions, with most of these stocks hitting at their 52-week low.

Among individual stocks, DHFL has been the worst hit with its stock plummeting over 56 per cent thus far in September. SREI Infrastructure, Edelweiss Financial, PNB Housing Finance, Can Fin Homes, Indiabulls Housing Finance and Bajaj Finance have slipped 22 per cent to 48 per cent during this period, ACE Equity data show. In comparison, the S&P BSE Sensex has lost 6 per cent. 

Analysts see no respite for NBFCs at the bourses in the near-term, given that the sentiment has turned sour given liquidity issues at IL&FS. On a fundamental basis, analysts argue that tighter liquidity conditions can translate into lower growth and margins going ahead.

The lending reluctance toward NBFCs, analysts say, is expected to continue considering the uncertainty prevailing among capital market lenders towards credibility of rating agencies and credit profile of NBFCs. 

“With such reluctance continuing, the source of easy money for NBFCs is limited. Though we expect a switch from capital market borrowings to bank borrowings would be rapid, however, considering overall cap limits over sector-specific exposure, even banks would be pricing the debt accordingly. Though we see low probability for default, margin compression is inevitable for most NBFCs in the market,” wrote Jignesh Shial, Kushan Parikh and Himanshu Taluja of Emkay Global in a recent co-authored report.

Analysts at Edelweiss Securities agree and prefer HDFC Bank and ICICI Bank instead as they, too, expect the funding to become costlier for players such as Dewan Housing, Repco and Manappuram. That apart, they expect the risk appetite of investors to wane amid moderating growth of NBFCs. 

“We prefer players with strong balance sheets, prudent risk management practices, well-matched ALM and limited vulnerability to earnings – HDFC (upgrade to BUY) or players with adequate pricing power – Shriram Transport. Dewan Housing given the sharp correction is a high-risk, high-return play. Meanwhile, we are downgrading Repco to ‘HOLD’ from ‘BUY’ considering adverse ALM,” said Kunal Shah, an analyst tracking the sector at Edelweiss.