In a recent report, IIFL Securities, a domestic brokerage firm, highlighted the evolving landscape of Indian Non-Banking Financial Companies (NBFCs). The brokerage points out that NBFCs have become a prominent player in the Indian credit landscape, representing 25% and 21% of total and retail + SME credit (excluding HDFC Ltd., which has merged into HDFC Bank), respectively.
In FY19, NBFCs' credit market share peaked at 27%, thereafter declining to 25% as access to wholesale funding dried up after the IL&FS and DHFL crisis, leading NBFCs to rely more on banks. This has increased the share of bank borrowings for NBFCs to 38% from 24% in FY17, the brokerage noted.
The credit crunch in the aftermath of the IL&FS and DHFL crisis underscored the significance of NBFCs in credit delivery, as well as their interconnectedness with banks and the broader financial system.
This prompted the Reserve Bank of India (RBI) to revamp regulations for NBFCs with the objective of strengthening supervision and regulations for large NBFCs, manifesting in the form of the RBI taking over as the regulator for HFCs (from the National Housing Bank) and introducing bank-like regulations for NBFCs and HFCs, the brokerage added.
The RBI has classified large NBFCs as 'Upper Layer,' subjecting them to regulations similar to those applied to banks. These regulations encompass aspects such as capital adequacy, liquidity management, governance, and operational standards.
At the same time, credit bureaus have also evolved to provide rich data sets with predictive models, enabling lenders to build multi-dimensional underwriting models, it said.
In response to these transformations, large NBFCs are pivoting away from being single-line or niche lenders. They are embracing diversification and transitioning into multiproduct financial institutions. This shift is significant, as these new segments they are entering boast substantial market sizes, ranging from $200 billion to $450 billion, presenting a secular growth runway, as highlighted by the brokerage.
As a result, IIFL Securities anticipates that large NBFCs will exhibit accelerated growth, even at a considerable scale. It projected a 26% AUM CAGR over FY23–26, compared to the 16% CAGR over the last decade.
It stated that NBFCs have devised unique strategies to expand into new segments, leveraging their existing strengths, including physical distribution networks, knowledge of specific customer segments, and geographical expertise.
In light of these developments, the brokerage has initiated coverage on Bajaj Finance, Shriram Finance, Fusion Micro Finance, L&T Finance Holdings and M&M Financial Services.
The brokerage has assigned a 'buy' rating to Bajaj Finance and set a target price of ₹9,200 per share. The brokerage expects Bajaj Finance to achieve a 30% 3-year AUM CAGR. This growth, as per the brokerage, is expected to be driven by the company's entry into new segments with a market size of $450 billion, expansion of distribution for existing products, maturing branch vintage, and an increase in AUM per customer.
For Shriram Finance, the brokerage has given a 'buy' rating with a target price of ₹2,250 apiece. It notes that the stock is trading at undemanding valuations, with a price-to-book ratio of 1.4x for a 15% return on equity (ROE) and earnings growth of 14% CAGR.
It anticipates that Shriram Finance will excel in terms of net interest margins (NIMs), asset quality stability, and profitability while offering a comfortable valuation.
Fusion Micro finance is rated as a 'buy' by the brokerage and has a target price of ₹800 per share. The brokerage foresees Fusion Microfinance maintaining a robust 26% 3-year AUM CAGR.
L&T Finance Holdings has been accorded an 'add' rating by the brokerage with a target price of ₹135 per share. In contrast, the brokerage has assigned a 'sell' rating to M&M Financial Services, with a target price of ₹260 per share.
The brokerage expresses concern over MMFS's strategy of diversifying into product and customer segments that have lower asset quality (AQ) issues, which is expected to be NIM dilutive (around 130 basis points). This dilution is not likely to be entirely offset by lower operating expenses and credit costs, it said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before making any investment decisions.
