Foreign optimism, domestic pessimism

Mid-cap stocks are again catching investors' fancy. After declining by more than 15 per cent from its peak last year, the S&P BSE Midcap index has turned green. Mutual funds (MFs) made a net investment of around Rs 13,000 crore in the mid-cap space during the last two quarters (July-Dec), whereas the foreign portfolio investors (FIIs/FPIs) were net sellers with around Rs 8,000 crore.

We looked at mid-cap stocks in which foreign investors increased their holding by more than two per cent but MFs took an opposite view and reduced their stake by an equal amount. Two companies figured on top in the list. Besides, ZEE Entertainment's FPI/FII holding rose the most by 20 per cent, as its promoters sold the stake in the company to reduce promoter-level debt. On the other hand, NIIT Technology's MF holding decreased the most by 7.5 per cent.

Aavas Financiers
Increase by FPIs/FIIs: 7.9 per cent
Decrease by MFs: 5.3 per cent

Involved in financing affordable housing, the company primarily provides loans to low- and middle-income self-employed (65 per cent of AUM as of December 2019) and salaried borrowers (35 per cent) in semi-urban and rural India. The company operates through 216 branches in nine states. Since its listing in 2018, the company backed by the Kedaara capital, an India based private equity firm, has more than doubled stock price.

As of December 2019, the company had a total loan book of Rs 7,195 crore of which, around 74 per cent were home loans. Aavas has long-term borrowing sources like term loans (44 per cent of total borrowing as of December 2019), with an average borrowing time period of 11.4 years and no presence in short term borrowing instruments like commercial paper.

Since housing loans have a long duration, it is important that housing finance companies have their borrowings also of long term. This helps companies in avoiding an asset-liability mismatch.

In India, the size of the housing finance market is Rs 19.1 trn, with banks having around 64 per cent market share and the rest with HFCs and NBFCs. Although the mortgage penetration in the country has increased from 7.8 per cent to 10.3 per cent in the last five years, the liquidity crisis following the IL&FS event led to a substantial increase in the borrowing costs for NBFCs and HFCs. Companies relying on short-term borrowings bore the brunt. However, the government has taken additional steps to increase liquidity in the financial system, while the RBI has increased its oversight of HFCs.

In the nine months ending of FY20, the company's net interest margin decreased to 8.7 per cent from 9.4 per cent in the year-ago period, owing to increasing borrowings costs and slowing disbursements. However, it maintained its gross non-performing asset at less than one per cent in December 2019. More importantly, the company has managed to weather the liquidity crisis quite well, with a debt to equity of two as of March 2019 and a capital adequacy ratio of 58 per cent (against the required 15 per cent). A high concentration of AUM from Rajasthan (44.4 per cent as of March 2019) and a borrower profile that is vulnerable to economic slowdown remain some key challenges. Currently, the stock trades at an all-time high price to book of around 7.5, compared to one year median of 6.6.

Shriram Transport Finance:
Increase by FPIs/FIIs: 2.2 per cent
Decrease by MFs: 2.8 per cent

This non-banking finance company focuses on financing pre-owned commercial vehicles (CVs). It lends under three business segments: 1) New CV financing (10 per cent of September 2019 AUM) 2) Used CV financing (84 per cent) and 3) Others (six per cent) comprising construction equipment, passenger vehicle and tractor financing.

The company provides finance mainly for 1) heavy CVs (45 per cent of September 2019 AUM) 2) medium and light CVs (23 per cent) and 3) passenger vehicles (22.6 per cent) and others. Shriram Transport has an extensive network of 1,669 branch offices and more than 28,000 employees.

Even amid the NBFC crisis, it, as of FY19, maintained a healthy borrowing mix of long-term funding (87.2 per cent of the total borrowing), which included sources of long-term capital like banks and institutions. Recently, the company has made a fourth successful USD bond issuance of $500 million (approximately Rs 3,556 crore). Also, as of March 2019, it did not have any asset-liability mismatch, signifying that it was able to match its borrowing and lending better.

The company is currently targeting the second-hand trucks market, which is still an under-penetrated market. Around 55-60 per cent of this market is occupied by private financiers/money lenders, etc., which charge high rates. This market is expected to benefit from stricter rules against higher tonnage vehicles and stricter emission norms, coupled with a ban of over 15-year-old vehicles.

In terms of financials, the company's net interest margin (NIM), an indicator of profitability generated through lending, decreased from 7.5 per cent in the first half of FY18 to 7.2 per cent in the first half of FY20. This decrease in NIM was attributed to rising borrowing costs following the NBFC crisis, coupled with a slowing economy. In recent years, the company's non-performing assets have shot up because of the enforcement of the early recognition of bad loans to 90 days past due, leading to a Gross NPA 8.3 per cent in FY19. Despite this, Shriram Transport Finance maintained a healthy coverage ratio with provisions for non-performing assets of ~70 per cent in FY19. The stock currently trades at a price to book (P/B) of 1.4 as against its five-year median P/B of 2.

Disclosure: The companies mentioned above are not our recommendations. If you intend to invest in any of them, do thorough research.