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It looks like we are making a second move into the NBFC theme. In the first phase, everyone (companies and stock investor) made money as liquidity was easily available and lofty valuations (3-8x BV) were assigned to these companies by analysts. Risk was perceived to be low.
Then triggers like IL&FS default and DHFL collapse caused sudden change in the tide last year. As liquidity got tightened, many NBFCs running poor ALM faced roll over and default risks.
Almost all NBFCs except Bajaj Duo (Disc : No positions) faced sharp earning downgrades as spreads shrank and credit costs rose. Positions were thrown down the garbage sink and market participants were forced to liquidate many of these stock positions.
A common theme mostly by optimists (and some by opportunists) was that NBFCs provide liquidity needs where banks cannot reach. This is true up to a certain extent but ONLY those can provide which can survive. That survival and growth of these companies were in serious question.
Since then we have seen a large number of smaller and weaker players getting eliminated, midsized players decimated and large efficient players downsized. Of course, those who will survive will make merry in the next cycle but not without major restructuring in their operations.
We have already seen in DHFL (Disc : No positions) saga that MF and Aadhar housing finance business have been sold off. Bringing in external investors is on the cards as per information available in the public domain. But this is only the start of the trend.
As NBFC further face liquidity and solvency pressure and as rollovers becoming expensive, more and more non-core businesses will be sold off. I see many M&A opportunities coming way. Bankers are an excited bunch these days as discussion in the boardroom is reaching higher levels.
Non-core business like (a) Insurance - both general and life (b) Mutual funds (c) Research & investment advisory desks are on the block. For certain Mid-sized private banks, such deals can be value accretive. Even Private funds and family offices are keenly looking for such deals
As stock market investors, this provide plenty of opportunities to invest where risk/reward can be favorable with relatively shorter investment time frame (probably 12-24 months to play the whole M&A cycle).
