Pep talk fails to lift mood, NBFC stocks crack more

MUMBAI: Shares of financial companies continue to fall amid concerns over tightening liquidity and asset-liability mismatches. Positive statements by the LIC chairman assuring support to the troubled IL&FS and successful cash-raising by Indiabulls Housing haven’t reversed the tide.

Borrowing short term to finance long-term assets creates asset liability management (ALM) mismatch and in such a scenario, NBFCs with favorable asset liability management maturity profiles, such as Bajaj Finance, HDFC, & M&M Financial, will do well, said analysts.

Dewan Housing Finance plunged 51 per cent in the last five trading sessions, while Reliance Capital, Indiabulls Housing Finance, Can Fin Homes and Reliance Home Finance fell more than a fifth. The yield on 10-year G-Sec bond has risen above 8 per cent, leading to an increase in the cost of funds for finance companies.

“NBFCs with a higher share of short-term borrowing will see a hit in a rising interest-rate scenario,” said Hemang Jani, head - advisory, Sharekhan. “HFCs have adverse ALM liability where liabilities are maturing faster than assets. As liabilities get re-priced faster than assets, many of these NBFCs would face pressure on their interest margins or NIM.”

Sundaram Finance Holding, Srei Infrastructure Finance, GIC Housing, Reliance Capital, Motilal Oswal Finance Services and Reliance Home Finance are currently trading more than 50 per cent below their 52-week highs.

“While we assign a low probability to a full-fledged liquidity crisis, the pressure in the NBFC debt space may continue for some time with the consequent hardening of short-term rates,” said Suvodeep Rakshit, analyst, Kotak Securities. “Borrowing costs in general have been adverse over the past few quarters as the debt markets have been pricing in concerns on systemic liquidity, fiscal slippages, and policy rate hikes by the RBI.”

Some analysts attribute the pace of declines to the meteoric rise in these shares. “From a valuation perception, HFCs had run up very sharply until the middle of 2017. Although there was a correction after this period, the valuations were still looking stretched,” said Yuvraj Choudhary, research analyst, Anand Rathi. “The recent correction gives a good opportunity to enter quality stocks in this segment.”