NEW DELHI: If you are looking for a niche sector to invest in, one that can potentially give you up to 50 per cent return in the next one to two years, look no further. Pure-play vehicle financiers can be one solid option. Morgan Stanley believes these stocks are on the cusp of a multi-year upcycle.
The brokerage said an improving overall economy, supportive liquidity conditions and lower cost of capital, besides a multi-year cyclical recovery in the auto industry and rural demand pickup are some of the key factors that will drive up the stocks from this sector.
Shriram Transport Finance and M&M Financial Services should deliver strong multi-year returns, the brokerage said. “The economy is picking up, liquidity and interest rates are benign, and the auto industry is entering a multiyear upcycle. NBFC sectoral concerns are abating – and these stocks are unloved and are at significant discount to historical average valuations,” a group of analysts at Morgan Stanley led by Subramanian Iyer said in a note.
They see up to 44 per cent upside in these stocks from current levels in a 12-month time, under their base case scenario. In the bull case scenario, the rally may deliver up to 110 per cent gains. However, the less likely bear case analysis projects a downside of up to 35 per cent.
“Shriram Transport Finance has a strong and profitable franchise in used CV financing with more than 25% market share. Collections have been very strong in December 2020 at 104 per cent of the monthly billing. Total provisioning coverage ratio on Stage 3 loans is high, at 95 per cent, and hence, we expect credit costs to drop sharply,” Morgan Stanley said.
With a price target of Rs 2,000, the brokerage values the stock at a FY23 expected P/B of 1.7 times, almost at a five-year mean valuation of 1.6 per cent. From March lows, the scrip has more than tripled. On Tuesday, it traded flat at Rs 1,420.
M&M Financial Services has also seen a superb rally in the last 10 months, with over 130 per cent gain. The business outlook for the firm has also improved significantly.
“M&M Financial Services screens well on parentage, balance sheet, liquidity and capital. The rebound in the economy in F22, a recovery in the auto cycle and high rural orientation position it well for F22. The management is confident that both stressed loans and provisioning have peaked. We expect new NPL formation to decline sharply, and credit costs to normalise,” Iyer said.
Valuing it at FY23 core P/B of 1.5 per cent, he projects the stock to hit Rs 255 in a year. The scrip traded half a per cent down at Rs 182 on Monday.
Among major risks to both companies are further deterioration in rural economic conditions, weaker growth, a sharp rise in bad loans and liquidity tightening again.
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