Investors growing bullish on NBFC stocks given their strong growth trajectory

For long, institutional investors have shown a higher preference for private sector banking stocks in India. Out of the total FII holding of Rs 12,6500 crore in Nifty 50 companies, 17% is concentrated in just five private banks – ICICI, Axis, Yes, IndusInd and HDFC Bank.

But now nonbanking finance companies (NBFCs) could be the emerging theme. NBFCs have been taking market share away from the banks across categories. According to various estimates, the market share of NBFCs in total credit has increased to 13% in 2015 from 10% in 2005, while that of Banks have fallen.

Within certain categories, such as housing finance, the increase in market share has been even higher. According to a Crisil report, share of NBCFs in the housing finance industry has increased from 26% to 38%, thus shrinking the share of banks from 74% to 62%.

The growth trajectory looks strong given that the penetration of NBFC credit in India is lower as compared to the total credit penetration. Also, NBFC credit-to-GDP ratio in Indian when compared with other emerging countries is much lower.

According to a BCG report, credit as a percentage of Indian GDP is only 97% compared with 127% in countries like Thailand and Malaysia, and 165% in China. NBFC credit as a percentage of GDP is only 13% in India compared with 26-27% in Malaysia and Thailand, and 33% in China.

In addition to growth, return on equity for NBFCs has also been better than banks and non- performing assets in NBFCs have been lower than banks. Among NBFCs, there are various categories which include home financing, consumer financing, vehicle financing, and rural financing.

In Home financing there are companies such as HDFC, LIC Housing Finance, Dewan Housing, Indiabulls Housing Finance and smaller companies such as Repco, Gruh and Can Fin Homes.

In consumer financing, Bajaj Finance, Cholamandalam and Capital First have a good presence. SKS Microfinance and Muthoot Finance are major players in rural financing. Niche players in vehicle financing include Shriram Transport, M&M Financial Services, Bajaj Finserv and Cholamandalam. Shares of most of these companies have done better than banks over the last one year.