Morgan Stanley prefers mid-cap NBFC stocks over larger peers

Mumbai: Morgan Stanley said shares of some mid-cap non-banking finance companies (NBFCs) offer the most compelling risk-reward over the next two years. The brokerage’s top picks in the NBFC sector are Mahindra and Mahindra Financial, Shriram Transport Finance, Shriram City Union Finance, Aditya Birla Capital and PNB Housing Finance. It expects these stocks to advance 30-55 per cent in the next one year.

Morgan Stanley said this recommendation is for investors looking for ‘deep value’ and ‘mis-priced’ stocks whose valuations have hit new life lows after two challenging years for the sector.

“Given risk aversion, we see too much inconsistency in the disparate assumptions implied by valuations for large cap and mid-cap lenders,” said Morgan Stanley’s analysts Subramanian Iyer, Sumeet Kariwala, Himanshu Khona, Rahul Gupta in a client note. “Pre-Covid-19 2020 highs imply 95-190 per cent upside for the mid-caps vs 22-77 per cent for the large caps.”

The brokerage said various NBFCs continue to face risks on account of the economic disruptions from Covid-19 and weakness in sectors like real estate. But, these stocks may be better positioned because of strong parents, access to capital and liquidity and strong business model, it said.

Morgan Stanley said the extent of dent on NBFCs will start showing in the third quarter results after NPA recognition restarts in September.

“There is no denying that FY21 is likely going to be tougher year with significantly higher bad loans and lower growth,” the analysts said.