Rising Bank NPAs May Aid Infrastructure Term Lenders' Growth | CORPORATE ETHOS

Rising Bank NPAs May Aid Infrastructure Term Lenders’ Growth

By: | October 5, 2017
fin1

Companies require long-term finance for growth, but banks saddled with high non-performing assets (NPAs) are unable to provide any support. The total non-performing loans have risen to Rs 6.5 lakh cr which represents 8.6% of the total credit extended. The loans extended to corporate sector in 2016-17 fell 5.2% over the previous year compared to 2.8% growth seen in 2015-16.

sreekumar-photoTherefore, infrastructure term lending institutions are expected to fill the gap and provide the much- needed support for the industry. Industrial term lending institutions were set up the government immediately after independence taking into consideration the huge requirement of funds for industrial development. Despite the rapid growth seen in infrastructure term lending business, they lost out to banks as they had to increase their lending rates as banking reforms restricted their access to low cost funds.

Now with mounting NPAs and banks unable to provide long term finance, term lending institutions may be back in the reckoning. Here is a look at the prospects of a few of them-

IFCI Ltd (BSE: 500 106, NSE: IFCI) Category: Mid Cap

Industrial Finance Corporation of India (IFCI) was set up in 1948 as a development finance institution (DFI) in 1948 and extended long term credit to industry. Post-liberalisation, it was registered under Companies Act in 1993 as IFCI Ltd to enable access to funds from stock market.

The company has played a leading role in supporting entrepreneurs in various sectors – agro-based industry (textiles, paper, sugar), service industry (hotels, hospitals), iron & steel, fertilisers, basic chemicals.

In the June quarter, the company reported a net loss of Rs 276.90 cr, while sales fell 44.47% to Rs 453.20 cr. In FY 2016-17, the company reported a loss of Rs 458 cr due to a sharp decline in operational income due to increase in fresh NPAs. In view of that more provisions had to be made for loans and investments from Rs 895 cr in 2015-16 to Rs 1192 cr. The balance sheet and net worth were greatly reduced. It recently sold 24% of its stake in Tourism Finance Corporation of India (TFCI) for Rs 290.63 cr.

On a returns perspective, IFCI fares poorly compared to peers on monthly, quarterly and half-yearly basis, while financial ratios are also not commendable. Cash flow is better compared to return on equity, assets, liquidity and coverage ratios. Promoters hold 55.53% stake.

On technical charts, Relative Strength Index (RSI) of 39.18 is bearish, while average directional index (ADX) of 12.86 suggests range bound trading while MACD has witnessed a cross over. Stochastic indicator also shows bearishness. Prices are trending below the 50 DMA of Rs 24.10.

Target: 28    Duration: 6 weeks    Strategy:  Sell/Hold

Housing and Urban Development Corp Ltd (BSE:540530 NSE: HUDCO) Category: Large Cap

HUDCO is a government-owned company set up in 1970 to provide financing for houses, urban development programmes, to set up new or satellite towns, to fund industrial enterprises for building material, to provide venture financing and providing consultancy services.

HUDCO has reported a net profit of Rs 210.85 cr in the June quarter on sales of Rs 899.09 cr. On a returns perspective, 23.2% quarterly appears good enough. It does well on financial ratios. Return on equity at 9.18%, on assets 2.16%, net profit margin of 24.05% and cash flow ratios are positive while liquidity seems quite tight. Promoters hold 89.81% stake.

The company has seen better financial performance in the past two financials- net worth witnessed a growth of 8.5%, total assets grew by 9.6%, profit after tax grew by 7.4% to Rs 842 cr, sanctions rose by 3.5% and disbursements rose by 10.3%.

The gross loans sanctioned in the past two years have sharply fallen from Rs 21095.54 cr in 2014-15 to Rs 30774 cr in 2015-16 and Rs 31862 cr in 2016-17. Net NPA’s are also at a low level of 1.15%.

It is trading at a Price Earnings Multiple (PE) of 15 which indicates a moderate pricing by the market. On technical charts, RSI of 48 is neutral to bearish, while MACD has witnessed a bearish cross over while ADX of 19.27 indicates range bound trading. Stochastic indicator is in oversold territory.

Target: 90   Duration: 3 weeks   Strategy: Hold/Buy

 IDFC Ltd (BSE: 532659, NSE: IDFC) Category: Mid Cap

IDFC Ltd was established in 1997 with the mandate to provide financial intermediation for infrastructure projects and services. The company has stated that it aims to support good companies that can ensure best return on investments and has emerged as a leading player in infrastructure finance in the country.

From October 1, 2015, the company is operating as NBFC- investment company, mainly holding investment in IDFC Financial Holding Company Ltd. IDFC bank was demerged from the company IN 2016.

IDFC has reported a net profit of Rs 299.40 cr in June quarter showing an annualised growth of 65.22% while sales rose 29.87% to Rs 3057.55 cr. Earnings per share has risen to Rs 1.88. The company reported net profit of Rs 55.75 cr in 2016-17 as against a loss of Rs 1,162.14 cr in the previous year. Net worth increased from Rs 9589 cr to Rs 9650 cr.

On a returns perspective, 7.95% on quarterly basis is above peer average while financial indicators are lower compared to peers-return on equity at 6.46%, assets 1.05%, net profit margin 6.68%, while cash ratio and debt-equity ratio are better. Foreign institutions hold 31.88% stake while public holding is 19.02%.

On technical charts, RSI of 48.83 is neutral to bearish, while ADX of 18.54 is indicative of range bound trading while stochastic indicator of 25 shows bearishness. MACD has crossed signal line and not showing any clear trend.

Target: Nil

Summary

fin2With the rising NPAs in banks due to stressed assets, banks are unable to provide long-term financing, and hence, term lenders have again come into reckoning and relatively their NPAs are lower. However, the impact of demonetisation and Goods and Services Tax (GST) rollout was felt by these companies too.

Considering the industry requirement for long term finance, venture funding and technical support, the infrastructure term lenders are better poised to provide assistance even as fall in lending rates may have impacted their business.

Presently, we have generic and some lending institutions catering to certain sectors such as housing, infrastructure, tourism among others. But the need of the hour is more specialised lending institutions with the mandate of providing long term finance. Reflecting the general economic conditions and bearish market, it may take a while for the term lending firms to be on bull track again.