The recent run up in shares of non-banking finance companies (NBFCs), led by hopes of some of them getting banking licences, is losing steam, as investors focus again on the impact of rising interest rates on their profitability. Fund managers and analysts said upsides in NBFC shares appear capped in the near term, which may result in investors switching to bank shares.
“We are booking profits in NBFC shares now, as there will be pressure on these companies’ profits in the short term, “said Suhas Samant, fund manager, Fundamental PMS at Mumbai-based Sharekhan.
LIC Housing Finance, Gruh Finance, Mahindra & Mahindra Financial, HDFC, Shriram Transport Finance, among others, have gained between 10-30% against a 3% rise in the Sensex in the past three months. Finance Minister Pranab Mukherjee’s proposal in his Union Budget speech late February that new banking licences would be extended to private banks and NBFCs, sparked optimism in these shares. An upgrade to a bank will enable them to accept deposits at lower rates. Analysts said that most NBFCs have not been able to raise lending rates to the corresponding rise in deposit or borrowing rates, which weigh down margins.
“The short-term borrowing rates for most of the NBFCs have already gone up by 100-150 basis points and not all of them can pass this on to customers. So, it will definitely have an impact on the margins,” said Apurva Shah, VP & head of research-institutional equities, Prabhudas Lilladher.
Sharekhan’s Samant is optimistic about select shares of NBFCs such as Bajaj Finserve, which, according to him, will surprise investors positively. LIC Housing Finance has also found favour among investors, following its strong first quarter results.
Some fund managers remain optimistic on NBFCs depending on their area of lending. Sadanand Shetty, fund manager, Tauras Mutual Fund said, “We continue to remain bullish on players in the infrastructure space and in the commercial vehicles space, where the business demand seems to be so strong that they will be able to adjust to the changing dynamics easily.”