Non-banking finance companies (NBFCs) research report by Motilal Oswal
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Non-banking finance companies (NBFCs) – niche financiers – are a perfect play on thegrowing penetration of organized retail finance in India. Post the significant capital that they have raised over the last 12-18 months, they are well equipped to seize the growth opportunity. Given the high growth visibility and superior return ratios that the top-performing NBFCs offer, we believe that their current valuations offer significant upside potential.
Growth visibility – very high
A buoyant economy has been fuelling growth in the demand for credit – be it frominfrastructure, agriculture, industry or households. While banks have been the major beneficiaries, NBFCs too have been witnessing robust business. The larger players that we have covered in this report have seen their loan books growing at 32% CAGR during FY02-05. Following the significant capital that they have raised over the last 12-18 months, these NBFCs are well equipped for further growth. We believe that their loan books will continue to grow at 25-30% CAGR for the next three years, as well.
Return ratios – attractive
Despite the fact that NBFCs do not have access to low cost savings and current account (CASA) deposits, they typically enjoy higher spreads than banks. This is because specialization enables them to charge higher rates and unlike banks they can choose to concentrate on segments offering higher yields. While their niche presence and lower regulatory hurdles help to keep operating costs low, NBFCs are also seeing considerable increase in their fee incomes. Higher yields, lower operating costs and increasing fee income together result in attractive return ratios.
Valuations – significant upside
Given the high growth visibility and superior return ratios, we believe that current valuations of well-run NBFCs leave scope for substantial upsides. Our top picks are Shriram Transport Finance (used truck financing), Mahindra & Mahindra Financial Services (UV and tractor financing), Bajaj Auto Finance (two-wheeler and personal loans) and SREI Infrastructure Finance (infrastructure financing). We continue to be positive on HDFC (housing finance).
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