Is this the right time to enter NBFCs?

Over the past few years NBFCs have clocked a growth rate of ~21% over FY12-16, beating the banking growth rate of ~18%. NBFCs have a very diverse exposure to segments like housing, LAP, capital goods & transport, finance and other financial services. All these segments have their segment leaders, like, ShriRam Transport Finance is leader in financing for heavy vehicles, PNB Housing is the fastest growing NBFC in housing finance segment, SREI is leading financer for infrastructure and equipment and Muthoot finance leads in gold loan segment.

Recent steps undertaken by the honourable Prime Minister of demonetising higher denomination SBNs to curb black money and paralyse the parallel economy of India have partially slowed down the economy due to a cash crunch. This has affected almost all the sectors in some or the other way. NBFCs are no different as most of the loan repayment in rural areas and some urban areas was being done in cash (~30% of total) uptil now. 

Post one month, many of the loans which were paid in cash have been defaulted, and this has temporarily increased the Non-Performing Assets(NPAs) of many firms. Moreover, demand for personal loans and LAPs has also decreased as there is ~17% decline in loan enquiries.

Post demonetisation we analysed 110 Finance stocks from top 20 companies (by marketcap), and amongst them only Tata Investment Corp., has given a positive return of 4.9%. While rest of them have plunged down in the range of 2.4% (Motilal Oswal Financial Services) to 28.2% (Manappuram Finance).

The effect of this Black Swan event is expected to last not more than 1-2 quarters as things are getting normalised speedily. Moreover, this can be used as an advantage by the investors as we have seen a major price drop in stocks as the fundamentals of the stocks have not significantly changed.