Morgan Stanley sees good risk-reward opportunity in select midcap non-banking financial companies amid improved liquidity. In a recent report, the global brokerage noted that despite outperforming Bankex and Sensex in general, many midcap NBFCs’ valuations remain attractive and below past cycle lows despite the recent run-up.
The outperformance has come on the back of improving balance sheets at NBFCs/HFCs, pickup in economic activity, and better liquidity conditions. The risk-reward remains good should these NBFC firms sustain better collections and support from the RBI.
Valuations were extremely depressed as these stocks hit new all-time lows. The low starting point coupled with the narrowing of valuation divergence between large-cap and small / mid-cap stocks also helped drive up stocks, added the brokerage.
MS remains overweight on select mid-cap NBFCs like Aditya Birla Finance, M&M Financial, PNB Housing, Shriram City Union Finance and Shriram Transport Finance.
Currently, the valuations are attractive and present a good entry opportunity as they are still below past cycle lows and imply low sustainable ROE, it noted. MS added that upside over 12-24 months could also be much higher and raised price targets for M&M Financial, PNB Housing, and Shriram City Union Finance.
"We remain constructive and raise price targets by 6-32 percent further driven by a combination of higher EPS forecasts and rolling forward our price target period to September 2021 from March 2021 previously," MS report said.
Nevertheless, the brokerage also reiterated the need to be selective.
"Our preference for mid-caps is driven by parentage and/or vintage, access to liquidity, capital position, management strength and a business model that is viable long term. Hence, while many NBFC stocks have bounced from very depressed valuations, we would still be very selective," Morgan Stanley clarified.
It is underweight on stocks like Indiabulls Housing Finance, IndoStar, LIC Housing Finance and IDFC First Bank.