Favourable Industry Dynamics and Economic Revival Should Support Nahar Capital & Financial Services Ltd

Strong liquidity profile and revised allocation should act as principal growth enablers. Revival in economic and business activities and opening up of Indian economy should help Nahar Capital & Financial Services Limited’s revenues. The company does investment business with a long-term perspective that should help repress temporary challenges.

Overview of Nahar Capital & Financial Services Ltd

Nahar Capital & Financial Services Limited was incorporated on Mar 31, 2006 as public limited company. The company was incorporated under Companies Act, 1956 and has an objective of carrying investment business. Main activity of the company is carrying business of investment in shares, debentures, stock, bonds and securities of all kinds and several other businesses carried on by other investment companies. Nahar Capital & Financial Services Limited does investment activities and has long-term perspective. It is into trading business to avail benefits of short-term investment/financial opportunities in present market conditions. Because of good business opportunities present in real estate sector and because the company wanted to diversify its activities, it made a decision to undertake new line of business. This business is real estate business. The company is into lending activities to avail benefits of financial opportunities and to improve growth and profitability. The company usually lends against security of shares, government bonds and other assets.

Growth Enablers of Nahar Capital & Financial Services Ltd

• Strong Credit Profile Should Lend Some Support: Nahar Capital & Financial Services Limited has a good capitalisation level and comfortable liquidity profile. The company continues to get comfort from being a part of Nahar Group, which is categorised as one of largest and oldest textile groups in India. This group has an established track record of 6+ decades and good credit profile. The company’s investments spread across various financial instruments such as mutual funds, debentures and equity shares, real estate alternate investment funds etc. The company’s ability to check and make suitable decision on profitable investment opportunities in capital market segment, diversify revenue stream and scale up operations should continue to lend support. It has a market cap of ~INR2.68 billion and enterprise value of ~INR2.66 billion, exhibiting that Nahar Capital & Financial Services Limited has very low debt. Balance sheet of the company is principally equity funded. The company plans to keep borrowing base limited. The company should seek support from its low-level of borrowings and its healthy credit profile.

• Industry Overview: Strong banking and financial sector is responsible to activate economy and facilitate higher economic growth. Financial intermediaries like NBFIs have definite role in financial sector, principally in a developing economy like India. Role of NBFIs in both manufacturing and services sector is very important as they play a role of an intermediary. They facilitate flow of credit to end consumers principally in transportation, SMEs and other unorganized sectors. NBFCs account for 11.2% of assets of total financial system. Banking sector was highly regulated. Simplified sanction procedures, flexibility and timeliness in meeting credit needs and low-cost operations led NBFCs getting an edge over banks. NBFCs count on retail asset-backed lending, lending against securities, lending against gold, consumer product loans etc. and extend credit to retail customers present in under-served areas. Indian economy gets support from domestic consumption theory as growth in new sectors such as agriculture, education and communication led to higher demand for consumer goods, textiles and phone/mobile product and services. New trend of growing number of investors can be seen for financial products, giving new opportunities to financial sector. Indian capital market shows better strength and stability because of better systems brought in by government and administrative authorities, resulting into higher valuations and excellent investment opportunities to Nahar Capital & Financial Services Limited.

• Balanced Approach to Portfolio Management: Pandemic followed by lockdown announced by Indian Government impacted businesses and resulted in a sudden fall in valuation of securities. Stock exchanges and other financial markets were operational and in compliance with lockdown instructions. The company adjusted its investment activity and there was adoption of digital tools as permitted by financial institutions. Since the company principally does investment business with long-term perspective, temporary disruption in financial markets should not have a huge impact. Without significant capex, the company should be able to sustain normal growth. The company invests in primary and secondary market directly and through mutual funds and portfolio management services. During FY20, the company saw net revenue of INR1625.79 lakhs and earned a profit of INR1325.85 lakhs from investment/financial activities. Nahar Capital & Financial Services Limited is hopeful that effect of COVID-19 should be over soon and the company’s profitability should see a revival. This revival is likely to stem from the company’s balanced approach to portfolio management and continuous review. On standalone basis, the company earned operating/other income of INR2,059.84 lakhs in FY20 against INR2,516.77 lakhs in previous year. It saw a profit before tax of INR1,319.39 lakhs in comparison to INR1,494.07 lakhs in previous year.  

• Revised Allocation Should Result in Better Returns: Opening up of Indian economy, vaccination rate in India and cheap capital for Capex cycle are principal factors stemming recovery in economy. During FY20, Nahar Capital & Financial Services Limited changed style of funds’ allocation. Lower allocation was done in fixed maturity instruments, debt mutual funds, debentures etc. due to lower returns and because of higher defaults in repayments. Allocation was increased in domestic equity, international equity funds, top rated bond funds etc. The company also gave more lending to known business associates and group companies for safety and better returns. The company hopes that revised allocation should lead to better asset portfolio management to get better returns with safety. The company made investments in real estate alternate investment funds, increased allocation in equity through portfolio fund managers etc. to see better returns through diversified portfolio. Because of policy changes by government and RBI and because of fall in equity market, the company made a decision to increase investment in equity market to participate in future growth.  

• Interest and Dividend Income Should Continue to Contribute: The company saw revenue from operations of INR1,286.70 lakhs in FY20, exhibiting a ~16.17% growth on year-over-year basis. Out of total INR1,286.70 lakhs, INR604.60 lakhs were contributed by interest income which makes up ~46.99% of revenues from operations. Dividend income was INR541.08 lakhs, making up ~42.05% of revenue from operations. These two revenue components should continue to make up significant share of the company’s revenue from operations. Growth is likely to stem from improvement in economic and business activities. With removal of most of restriction on business activities, chances of defaults in repayments are likely to be less.   

• Strong Growth in Dividend Income Lent Support: The company’s total revenue from operations came in at INR3,674.91 lakhs in year ended Mar 31, 2022. This exhibits a growth from INR2,306.93 lakhs in previous year. Growth was principally led by higher dividend income and interest income. The company’s revenue from investment/financial activity should continue to be a primary contributor moving forward.

Conclusion

Non-banking financial companies play an important role to sustain consumption demand and capital formation in small and medium industrial segment. These companies are categorised as an important alternative channel of finance in bank-dominated financial sector of India. NBFCs supplement banks and they provide infrastructure so that excess resources can be allocated to individuals and companies. To meet needs of specific clients, NBFCs shape financial services. These companies offer multiple alternatives that focus on transforming economy's savings to capital investment.

Nahar Capital & Financial Services Limited continues to be categorized as “systemically important non-deposit taking NBFC” having an asset size of INR500+ crores. It is into trading and lending activities. It carries real estate activities for higher yields. Healthy liquidity profile of the company means that it focuses on maintaining lower leverage. In 4Q21, the company saw total revenue from operations of INR550.44 lakhs, with ~61.04% contribution flowing in from interest income and ~24.89% flowing in from dividend income. From total revenue of INR919.34 lakhs, investment/financial activity made contribution of INR834.81 lakhs and real estate activity contributed INR84.53 lakhs.

Nahar Capital & Financial Services Limited has a total market cap of ~INR68,156.90 lakhs and free float market cap of ~INR19,544.54 lakhs. Stock price of the company has seen a strong run up. Over past one year to May 27, 2022, the company’s stock has seen an increase of ~228.3%. Simply put, an investor would have seen capital grow to INR3,28,342.7 on May 27, 2022 if that investor invested INR1,00,000 a year ago.  

Stock of Nahar Capital & Financial Services Limited delivered better returns than Sensex. In same time horizon, Sensex delivered only ~7.37% return.  

Nahar Capital & Financial Services Limited should continue to deliver strong returns as economic activities are getting back to normal and Indian government continues to open up economy. As economic activities revive, the company should see its revenues improving. Investors can consider going long on this stock. 

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