The Bharat Financial Inclusion Ltd stock has staged perhaps the most impressive recovery in the financial sector space with a 67% rise since demonetisation, a reflection not entirely of its balance sheet. It took a warning from, ironically, the management of the company, to make investors take a reality check on their valuations.
On Monday, the Bharat Financial management warned that close to 4.5% of its loan book may turn non-performing and the recovery of dues will take three-four months as against the earlier indication of March-end. But, the lender’s shares ended nearly 2% up after falling nearly 6% during the day. What makes investors so hopeful despite many analysts worried about the effects of demonetisation on the microlender as well as the whole sector?
Analysts at Kotak Securities Ltd warn that write-offs could escalate in the fourth quarter but the higher loan growth momentum could act as a cushion. But those at UBS Securities India Pvt. Ltd said that loan growth recovery is faster. “We believe that higher credit costs are one-off (driven by demonetisation) and expect core profitability to improve sharply from H2FY18,” the firm said in a note.
But is this enough to warrant current valuations?
Bharat Financial’s gross loan portfolio grew 38% year-on-year in the third quarter despite demonetisation taking a chunk off disbursals and bringing collections to a grinding halt. It also had an enviable bad loan ratio of 0.06% of its loan book. And a profit growth of 80% makes a convincing argument for the 67% recovery in the stock price since demonetisation.
Also, Bharat Financial’s shares gained 41% between 26 December (when they hit their low in the wake of demonetisation) and 24 January when the company announced its quarterly results. The sharp gains were vindicated as the quarterly numbers seem to allay the fears of the lender being hard hit by the currency purge.
But a large part of its valuations also reflect the hope of Bharat Financial getting acquired by another lender, which sprang from news reports of IndusInd Bank Ltd reviving talks of buying a majority stake in the company. Mainstream private banks are increasingly finding it difficult to grow their loan book in the traditional corporate and retail segments and therefore, microfinance is an attractive opportunity. The obvious choice to gain market share is to acquire an existing microfinance firm as setting up shop would be a costly affair for banks.
So, the hope of a suitor has been keeping shares of not just BFIL but also other listed microfinance firms in play even though enough anecdotal evidence shows demonetisation is hurting their business.
After the Bharat Financial management’s warning on Monday, several analysts cut their ratings. Analysts at Motilal Oswal Securities Ltd and Kotak Securities have a “neutral” rating on the company, while Religare Securities Ltd has a “sell” rating.
The microlender’s stock now trades at a multiple of 3.4 times its estimated book value for 2017-18. That seems to be pricing in most of the positives.