After creating enormous wealth for investors over the past two decades, the banking and non-banking financial institutions (NBFCs) have come under tremendous pressure, owing to mounting non-performing assets (NPAs). Especially post RBI measures to disclose stressed assets and early recognition of NPAs, the growth in profitability of the banks (especially public sector) and NBFCs has become slower than the previous years.
However, amid this slowdown, a new investment theme is gaining ground, and if experts are to believed, it provides a good opportunity for investors to create wealth. Non-Lending Financial Institutions (NLFIs) have slowly and gradually grown in size and confidence in the market and is finally setting their entry into Indian capital markets, analysts at Centrum Wealth Research said in a recent report titled: “An emerging investment opportunity: “FSI”.
These new-age listed NLFIs, Centrum Wealth says, provides an opportunity to investors to participate in the growth arising out of changing face of Indian finance industry, sans worrying about side effects of NPAs, liquidity, ALMs and asset quality of lending players. NLFIs comprise credit rating companies, commodity and stock exchanges, life insurance companies, Depositories and asset management companies (AMCs).
Besides high NPAs resulting in higher slippages, the other factors ailing banking and NBFC industry include slower economic growth across states, impact of demonetisation and asset-liability mismatch (mainly in HFCs). In such a scenario, NLFIs stand as a better option to make money without getting subjected to inherent side-effects of lending sector, the brokerage says.
Here are the top five picks from the NLFIs space -
At CMP Rs 980, the stock trades at 15.8x its FY20E earnings. Being a leading player in an oligopolistic industry of credit ratings, CARE’s future growth prospects remain strong with improvement in revenue growth, high EBITDA (earnings before interest, tax, depreciation and amortisation) margins of over 60 per cent and RoE (return on equity) of over 25 per cent, Centrum Brokerage notes. However, slowdown in borrowings as a result of interest rate hikes by RBI; lower than expected volume growth and modest growth in BLR (bank loan rating) volume or margin pressure are some of the key risks to the stock.
Given the market volatility in the current scenario, the expected increase in equity and debt market trading and the resultant volume expansion, are expected to bode well for CDSL’s future growth. Post the 2019 general elections, the markets may stabilise thus providing a steady increase in volume. The company is expected to quote Rs 2.12 billion revenue for FY19 and Rs 2.44 billion in FY20. Net profit is likely to increase 7 per cent and 18 per cent in FY19 and FY20, respectively. Return on Equity is seen to grow at 17 per cent and nearly 19 per cent for FY19 and 20.
Over FY14-18, the company has strong fundamentals with total revenue witnessing a CAGR of 19.9 per cent to Rs 18.67 billion. The profit before tax and net profit grew at a pace of 19.4 per cent per annum and 19.2 per cent per annum, respectively, backed by stable cost-income ratio of around 43 per cent through the years. Also, the brokerage notes that the recent SEBI's decision to cap the maximum total expense ratio (TER), which is being viewed as a near-term hiccup in revenues for MF distributors, would actually result in a steady income through the year and encourage additional investment from clients.
HDFC Standard Life Insurance
At CMP of Rs 391, the stock trades at 3.7x its FY20E embedded value per share. Going ahead, the company is expected to benefit largely from financialisation of household investments, under-penetration of insurance in India, vast bancassurance and private agent network along with its extensive reach and market share. "We believe the company will be able to attract adequate investor interest on the basis of its robust fundamentals compared to peers and strong parentage," the brokerage notes.
ICICI Lombard General Insurance Company
The company has maintained strong financials, viz solvency, operating metrics, profitability and return ratios. It has maintained its Return on Equity (RoE) at above the 15 per cent-mark since FY15. As on 30 September, 2018, the RoE stood at 24.4 per cent (higher than 21.3 per cent in H1 last year and 20.8 per cent for FY18).
Also, with increasing awareness about insurance and rise in product offerings therein, the non-life insurance industry is expected to grow at a healthy pace going ahead. Also, ICICI Lombard being one of the leading companies in the segment, is likely to derive most benefit from the overall industry growth.