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Stocks of non-banking finance companies (NBFCs) such as L&T Finance Holdings, Srei Infrastructure and JM Financial slumped on Thursday, after they failed to make the cut at the race for new banking licences.
Shares of L&T Finance Holdings, Srei Infrastructure, JM Financial, Magna Fincorp and Reliance Capital, which were in the race for new banking licences, fell by more than four per cent each.
The Reserve Bank of India (RBI) on Wednesday issued banking licences to IDFC and Kolkata-based Bandhan Financial Services.
More than 25 entities had applied for a new banking licence.
“We saw a lot of profit-booking in these stocks and creation of fresh short positions. These stocks were holding up mainly on the expectation of new banking licences,” said Alex Mathew, head of research, Geojit BNP Paribas Financial Services.
“We expect to see some more sell-off going forward,” said Mathew.
L&T Finance Holdings, Srei Infrastructure, Reliance Capital, LIC Housing Finance were perceived to be the frontrunners for new licences by the markets. In the run-up to the banking licence announcement, shares of most aspirants had a run-up as much as 60 per cent.
The RBI first published the names of the 25 aspirants in July last year.
For instance, shares of L&T Finance Holdings had seen a huge spike of almost 58 per cent. Srei Infrastructure had moved up about 61 per cent, while LIC Housing Finance had gained 54 per cent.
Stocks like J M Financial and Reliance Capital had risen 60 per cent and 32 per cent, respectively.
However, analysts said the entire rally could not be attributed to the banking licence announcement alone, as the markets have also done well during that period. The BSE Sensex has gained about 26 per cent, while the banking index gained about 47 per cent.
But analysts remain convinced that the downside for these stocks is limited, as their primary businesses continue to remain robust.
“These stocks have already corrected quite a bit after the RBI news on Wednesday. No doubt the downside risk is limited from hereon, as their core business is doing well,” Sunil Jain, VP - equity research, Nirmal Bang Securities. According to analysts, these stocks could see further decline of about three-to-five per cent. Any dip beyond that would be an opportunity to buy into these stocks, they said.
Besides, markets have already started factoring in the possibility of these companies re-applying for banking licences within the next three to six months' time, said analysts.
