Muthoot Finance, SBI Card, LIC Housing Finance — what do analysts say on NBFC stocks

The Reserve Bank of India (RBI) hiked the repo rate or the rate at which the central bank lends funds to banks by 250 basis points (bps) cumulatively since May 2022 in the current rate hike cycle to 6.5 percent to manage inflation.

The yield on the benchmark 10-year government security (G-sec) increased about 150 bps from the lows in 2022 but moderated 30-40 bps in the past 3-4 months. T-Bill rates have risen 250-30 bps from the lows, while banks have increased MCLR (Marginal Cost of Funds-based Lending Rate) by 150-170 bps since then.

Looking at companies only from the lens of cost of funds, the winner in a rate-cut environment would be SBI Card as 65 percent of its loans are at floating rates and at short repricing tenures. The asset book is at fixed rates.

On the other hand, CLSA said the most negatively impacted NBFC in a rate-cut cycle is LIC Housing. This is because 60-65 percent of its borrowings are at fixed rates while 95 percent of assets are at floating rates.

CLSA added that its stock recommendations and top picks are based on a number of factors and not cost of funds alone.

Analysts said that smaller NBFCs typically rely on bank borrowings for funding, as they are unable to access debt capital markets, due to lack of a strong credit rating. But as companies grow and achieve strong credit ratings, they typically diversify into capital market borrowings as those are usually cheaper than bank borrowings.

The global brokerage said that the share of floating rate borrowings is highest for microfinance institutions (MFIs), gold financiers and SBI Card.

CLSA noted that most large NBFCs typically have 35-50 percent share of borrowings from NCDs. "Our analysis of the maturity pattern of these NCDs suggests that around 40 percent of the outstanding NCDs will mature in the next two years. For some players, it would be as higher at 55-60 percent," the note stated.

Simply put, refinancing these NCD borrowings by other NCD borrowings will result in a higher refinancing cost, the brokerage said.

According to CLSA, Bajaj Finance, SBI Card and LIC Housing Finance will see NCDs with sub-7 percent coupon rate maturing in FY24.

CLSA also said that banks borrowing cost will likely fall but with a lag. The brokerage said large NBFCs such as Bajaj Finance, LIC Housing Finance, Mahindra & Mahindra Financial Services and Shriram have less than 40 per cent share of bank borrowings. The only large NBFCs that have a high share of bank borrowings are SBI Card, Muthoot Finance and Cholamandalam Investment.