Positive play! Long ignored by market, Bajaj Housing Finance IPO could trigger a rerating for NBFCs

The IPO of Bajaj Housing Finance might have a spillover effect on the overall NBFC sector with the anticipated interest rate cuts going forward and valuations remaining attractive.

Bajaj Housing Finance raised Rs 6,500 crore through its IPO and received overwhelming market response with bids exceeding Rs 3 lakh crore. This strong interest was driven by factors such as strong parentage, reasonable valuations, and the current IPO euphoria.

Analysts said the Bajaj Housing IPO could trigger a sector-wide rerating for NBFCs as despite delivering healthy growth and maintaining robust asset quality, they have been overlooked by the market for the past three years.

Listing gains could soar up to 113% as Street awaits debut of Bajaj Housing Finance, 2 other IPOs

"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," said Krishna Appala, Sr Research Analyst, Capitalmind Research.

For the sector, retail loans, particularly in personal, auto, and mortgage, continue 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," said Appala.

NBFC stocks have rallied about 3-11% in the past fortnight on account of increased market anticipation of a policy rate cut.

However, global brokerage Nomura expects the impact of a rate cut cycle on the NBFCs to be uneven, largely due to differences in their asset and liability structures.

"While a policy rate cut is positive for NBFCs, we will have to juxtapose the NIM dynamics with growth and assets," it said.

Amidst rising stress and low provisioning levels, the brokerage sees high probability of an increase in FY24 credit cost guidance across most NBFCs in the upcoming second quarter results.

It has a buy rating of Shriram Finance, Five Star and Aadhar Housing Finance among the NBFCs under its coverage.