Dalal Street Investment Journal — July 10-23, 2017

56 DALAL STREET INVESTMENT JOURNAL I JULY 10 - 23 , 2017 DSIJ.in^

Cover Story

leveraged optimally by the NBFC players

to reach out to their prospective

consumers.

CONCLUSION :

Looking at the NBFC sector’s competitive

nature, it will be important for investors

to identify those NBFCs which have hit

the right customer segments and right

product mix. Right product mix is

extremely crucial for NBFCs to maintain

high growth rates without sacrificing

profitability.

Those NBFCs which have got the

customer segmentation right along with

the right product mix and enjoy wide

geographical spread are the ones that

may keep investors delighted going

forward. However, the checklist on

NBFCs should also include their digital

capabilities. NBFCs that have embraced

digitisation will have a definite edge over

their competitors. Also, investors

looking at NBFCs for investing should

not forget that NBFCs are proxy plays on

infra-affordable housing segment, which

is the growth engine for many of the real

estate players.

The growth in middle class and

improvement in per capita income will

spur demand for consumption and

commercial finance. This segment

will drive credit demand. Those NBFCs

that are focused on this segment can

expect to benefit from the development

of this huge market over the coming

years.

NBFCs have outperformed banks on

‘Return on Equity (RoE)’ parameter over

the past several years, despite the

perception of being at a disadvantage due

to higher cost of funds.

It is by now clear that NBFCs are able to

create massive value owing to higher

profitability and higher growth. The

unique business model of NBFCs help

them deliver consistently. Higher yield,

operational efficiency and credit cost

allows NBFCs to deliver higher RoA.

The business model that allows NBFCs to

focus on customer-oriented product

segments proves to be an asset in the

long run and hence makes a strong

case for investors to include and hold on

to quality NBFC stocks in their

portfolios.

Have MFs been piling up NBFC

stocks?

Financial stocks are typically the largest

sector exposure in a manager’s portfolio,

by the virtue of these stocks having the

largest weightage in the indices. But, over

the past few years, fund managers have

turned even more bullish towards

financial stocks and have been steadily

increasing exposure on an aggregate basis.

While banks constitute a large allocation

Kaustubh Belapurkar

Director - Fund Research, Morningstar Investment Adviser

in fund’s portfolios, the allocation towards

NBFCs stocks has also significantly shot

up. In May 2014, investment in banks

constituted 21.1 per cent of the overall

equity portfolios and NBFCs constituted

5.5 per cent. This allocation now stands at

22 per cent in banks and 7.8 per cent

NBFCs as of May 2017. Manager’s top

NBFC holdings include stocks like

HDFC, Bajaj Finance, Max Financial

Services, Bajaj Finserv and

Cholamandalam Investment and Finance.

How much money have NBFCs

attracted in the past one year

as compared to banks (both

private and PSBs)?

Over the last year, managers have been

increasingly investing in financial stocks.

While banking stocks have been

witnessing large buying, there has been

ever increasing focus towards NBFC

stocks, especially in the housing finance

space. The aggregate investments in banks

has gone up from `89,000 crore to

`144,000 crore. At the same time,

manager investments in NBFC stocks

have gone up from `28,000 crore to

`51,000 crore.

Is there any thematic mutual

fund scheme that invests

primarily in NBFC stocks?

Investors who are looking to take NBFC

exposure can look at investing in banking

and financial services funds. While there

is a larger allocation in these funds

towards banking stocks, many funds also

take a sizeable NBFC exposure in these

funds, with the typical exposure in NBFC

stocks ranging from 10-40 per cent.

Consolidation within the NBFC

sector continued during 2015-

16, resulting in a reduction in

the number of both NBFCs-D

and NBFCs-ND-SI. Their assets

continued to register

substantial growth. The

accelerated growth in credit

deployment by NBFCs was due

to their ability to contain risks

and tap demand in niche

markets. The profitability of

NBFCs was significantly higher

as compared to commercial

banks.

• RBI Publication