Bajaj Housing Finance's Stellar Debut Can Boost NBFC Stocks

The shares of Bajaj Housing Finance debuted on the exchanges with a premium of 114 percent on Monday. The stock listed at Rs 150 on both BSE and NSE against an issue price of Rs 70. Ahead of the listing, the company’s shares commanded a grey market premium (GMP) of 120 percent to the issue price.

The Rs 6,560 crore public issue of Bajaj Housing Finance is the largest of the year so far, and it was subscribed nearly 67 times the shares on offer. Analysts said the massive interest is driven by factors such as strong parentage, reasonable valuations and the current IPO euphoria.

Bajaj Finance-backed Bajaj Housing Finance is the largest non-banking housing finance company (HFC) with an Asset Under Management (AUM) of Rs 97,100 crore as of Q1 FY25. From FY22 to FY24, AUM increased by 31 percent while profit grew by 56 percent.

Analysts Project Potential Sector-Wide Re-Rating for NBFCs

According to analysts, the Bajaj Housing IPO could trigger a sector-wide re-rating for NBFCs as despite delivering healthy growth and maintaining robust asset quality, the sector has been overlooked by the market for the past three years.

The Nifty Financial Services Index, which tracks the performance of the Indian financial market, has given 17 percent growth in the last one year, underperforming the benchmark Nifty 50 Index with 26 percent growth. In the last five years, the index has posted 86 percent returns compared to 125 percent returns given by the Nifty 50 index.

Krishna Appala, Sr research analyst at Capitalmind Research, says the sector faced margin pressures due to rising capital costs. However, with interest rate cuts anticipated and valuations remaining attractive, NBFCs now present a better risk-reward ratio.

In the April-June quarter of FY25, 37 non-banking financial companies (NBFCs) in the BSE 500 index posted a 22.2 percent year-on-year growth in aggregate revenue from Rs 154,482.58 crore in June 2023 quarter to Rs 188,829.51 crore in June 2024 quarter.

Aggregate profit after tax (PAT) increased by 17.25 per cent from Rs 31,361.14 crore in the June 2023 quarter to Rs 36,771.23 crore in the year-ago period.

On the growth front, retail loan growth, particularly in personal, auto and mortgage loans, continues to be strong, while MSME and business banking portfolios are also expanding robustly.

“Though challenges like rising funding costs and heightened competition in corporate lending persist, the overall credit quality of the sector remains solid. NBFCs are optimistic, focusing on a balanced approach while seizing opportunities in MSME, housing and consumer loans," Appala said.

Jignesh Shial, director – research & head of BFSI Sector at InCred Capital, says NBFC stocks can see some momentum in the near term, but the re-rating will be driven by loan growth improvement, asset quality trends, and better profitability in the mid-to-long term horizon.

Rate Cut Expectations to Support NIMs of NBFCs

In the June 2024 quarter, the disbursement growth for NBFCs slowed down owing to seasonality. However, AUM growth continued to remain healthy. Margins exhibited a negative bias for most lenders.

According to analysts, collection efficiency was impacted due to the heat wave, the impact of general assembly elections, and seasonality. Asset quality followed seasonal trends for most lenders, showing marginal upticks QoQ. However, concerns around the asset quality of microfinanciers and credit card issuers continued to escalate.

Dnyanada Vaidya, research analyst (BFSI) at Axis Securities, says we could see some light at the end of the tunnel in terms of NIMs across lenders after over a year-long contraction. However, we believe that vehicle financiers stand a better chance of seeing margin improvement than other lenders.

“With the expectation of a rate cut, we believe NIMs of NBFCs are likely to find some support. Headwinds on growth do not appear currently, and we expect healthy AUM growth momentum to continue. Similar to banks, the asset quality of select NBFCs, primarily microfinanciers and credit card issuers, would remain key monitorables,” Vaidya said.

Bajaj Housing Finance IPO Could Trigger Wave of Listings in NBFCs

The Bajaj Housing Finance IPO has just initiated a wave of listings in non-banking finance companies. Some other prominent NBFCs are also expected to launch their IPOs within a year to comply with the Reserve Bank of India’s (RBI) mandatory listing requirements. Tata Capital Financial Services, Piramal Capital and Housing Finance, HDB Financial Services and Aditya Birla Finance are required to list within the year due to their status as 'upper layer' NBFCs under RBI guidelines.