NBFCs in focus; Five Star, M&M Finance, CreditAccess rally up to 10%

Shares of non-banking financial companies (NBFCs) and microfinance institutions (MFIs) were in focus on Monday as they rallied up to 10 per cent on the BSE in the intra-day trade in an otherwise subdued market. Volumes surged across counters on hopes of healthy business outlook.

Five-Star Business Finance, CreditAccess Grameen, Fusion Micro Finance, Mahindra & Mahindra Financial Services, and Shriram Finance rallied in the range of 4 per cent to 10 per cent. In comparison, the S&P BSE Sensex was down 0.24 per cent at 63,231 at 12:54 PM.

According to Incred Research Services, their interactions with various MFI branches and experts indicate consistency in disbursement growth, primarily led by a surge in new customer acquisition.

The Reserve Bank of India (RBI’s) guidelines for MFIs, published last year, have been a game-changer. Revising the family income criteria to Rs 0.3 million against Rs 0.12 million, allowing MFIs to become the third lender to the same customer, etc. opened a large target customer segment for all MFIs.

The new customer acquisitions account for around 60 per cent of incremental disbursement (the remaining 40 per cent comprise existing customers) against around 40 per cent pre-Covid levels, the brokerage firm said in a NBFC report.

The competition from small finance banks or SFBs remains limited as they are more focused on relatively large-ticket size loans (Rs 0.5-1 million). CreditAccess Grameen remains the market leader in many geographies. Bharat Financial Inclusion has also started witnessing momentum, after a lull last year, while Fusion Micro Finance remains aggressive, Indcred Research said.

Meanwhile, analyst at HDFC Securities expect the Base case fair value of Five Star Business Finance to be Rs 658 (3.25x Mar-25E ABVPS) and the Bull case fair value at Rs 709 (3.5x Mar-25E ABVPS) over the next 2-3 quarters.

Five Star has a strong track record of growth and profitability in the highly underpenetrated small business lending segment with a potential market opportunity of Rs 22 trillion (as per a research conducted by CRISIL). "We reckon the company could deliver a NII CAGR of 25.5 per cent, PAT CAGR of 21.4 per cent and advances CAGR of 29 per cent over FY23-25E, with its RoA sustaining at the best-in-class level of 7.8 per cent by FY25E," the brokerage firm said in stock update.

As per a research report published by CRISIL, the total addressable market of these loans is Rs 107 trillion as of FY22 but only Rs 21 trillion of formal MSME loans have been extended. This credit gap shows a huge under penetration of Rs 85 trillion. The potential demand is evident from historical figures like a 25 per cent CAGR in small business loan segment between FY2017-22, the share of small business loans has reached around  8.9 per cent in FY22 from 4.3 per cent in FY17.

NBFCs have a total of 44 per cent share in small business loans market in India as of FY22. This share of MSME loans to this segment is likely to grow in the future as there is an absence of income and cash flow related documents with the borrowers, which restricts them from obtaining loans from traditional finance institutions. Hence, only 31 per cent of the total MSME credits have been extended by public and private sector banks as of FY22.

Further, its report also mentions that the share of loans advanced to New-To-Credit customers has increased from 9 per cent in FY17 to around 40 per cent in FY22. Five Star Business Finance has a 2.7 per cent market share in the small business lending segment as of FY22, HDFC Securities said.