Investors' Perspective Buy Finance Companies

By Atmaram Ghimire

There 47 Finance Companies permitted by Nepal Rastra Bank (NRB). Out of them 28 are listed at Nepal Stock Exchange. Despite many circulars from NRB, the other have not yet made any initiative to issue the shares to the public. Prominent among them are Shree Finance, Gorkha Finance, Nepal Sri Lanka Merchant Bank & Finance and Union Finance. Though two other companies (namely Elpic Everest Finance and Nepal Bangladesh Leasing and Finance) have already distributed shares to the public, they are in the process of certificate distribution. Then they will be listing at stock exchange making the number of listed finance companies 30. What is bad in this sector from stock perspective is that none of the 47 companies are sensitive the stock movement of their prices.

Finance companies, in general, have provided better return to the investors by way of dividend, bonus share and right share. Comparatively, it is much cheaper to invest in finance companies than in banks in relative prices and cheaper than Insurance companies in terms of return on investment. Capital gain is not that much impressive in finance company stocks in comparison to banking sector. In weekly trading, finance sector is second to banking sector with an average of 6 per cent of total transaction, which itself is indication to their underprivileged status which does not match to their performance.

The article has selected 10 finance companies for brief performance analysis. The selection had to be based on the investor’s perception of good finance companies and measuring rod may be the financial performance, return on investment to shareholders, trading interval/regularity at stock exchange and investor’s image towards that company. But here they are selected on the basis of data availability and for comparison purpose. The selected companies are, National Finance Company (NFC), Ace Finance Company (AFC), Nepal Merchant Banking and Finance Company (NMBFC), Mahalaxmi Finance Company (MFC), Narayani Finance (NF), NIDC Capital Markets (NCM), Goodwill Finance Company (GFC), Lumbini Finance and Leasing Company (LFLC), Nepal Finance and Saving Company (NFSC) and Kathmandu Finance Company Limited (KAFL).

#1. National Finance Company:

Among the Finance companies, it is the best. It has enough reserves (4.18 crore), decreasing bad loan portfolio, increasing profits, better return to shareholders, timely annual meetings and instant dividend payment. It still has lower capital base (only 3 core), meaning there is a probability of bonus share this year. The only negative thing about the company is conservative management. Buy this share for lower or equal to Rs. 600 and you may hold it for long term. Good company for long-term investment.

#2. Ace Finance Company:

This is probably the number one company in terms of professional management. The company has provided right shares and regular dividend to its shareholders. It had proposed another right issue to make the capital base of Rs. 9 crore (in terms of paid up capital), but the approval has not been received from the authorities. The company had made good progress in the past, but currently the share price prevailing in the market seems quite high. If you can get at mean price it will be good for the long term.

#3. NMBL:

This is another professionally managed company. Biggest capital base (of Rs. 20 crore) among finance companies. Currently 50 per cent paid up and obviously highest deposit (85.52 crore). Rs. 81.07 in loan and investment. Currently the market price is high and will not yield profit for short-term investors and traders. But sizeable investment will not be possible in lower prices as most of the public allotted shares have allotted already been captured by long-term investors. Good for long-term investors.

#4. Mahalaxmi Finance Company (Birganj):

This company is outside Kathmandu. Financially this has been the number one performer in 2058 BS. Its PE is lowest at 6.4. EPS is second highest after National Finance. But its management and characteristics of loan portfolio are not known. But at current market price, this is the best buy for holding and earning capital gain, right share and dividend.

#5. NIDC Capital Market:

This is another company with good future prospects provided that it’s management is pro-active and does not operate as government owned finance company like Nepal Bank in banking sector. It has been providing 15 per cent dividend for last two years and right share issue at the ratio of 1:2 has already been decided. But it is very slow in business in comparison to its potential and capacity. The current price is stagnant one, may be good only for long term investors provided that the management is specially improved.

#6. Narayani Finance Company (Narayangarh):

This company does not belong to Kathmandu valley, but it has performed much better than other finance companies in terms of continuous dividend distribution, bonus share and right share. Currently, due to the distribution of all kinds of benefit, the PE is high and therefore is not good for trading purpose. When price is little low, it looks good for long terms.

All other finance companies may look good in terms of financial data but may not be reliable investment for longer term. Most of the promoters in other finance companies are looking for short term benefits like selling their share for three, four or five times the face value than nurturing their finance companies that are still babies. Lumbini Finance is one such company in which promoter’s shares worth one director’s seat were sold for Rs. 255 per share. Kathmandu Finance and Nefinsco are good only for short term. Both of these companies have more than 85% holding by promoters and are one-man shows rather than professionally managed ones. Lumbini had some prospect, but lately its loan loss amount and the fact that promoter’s shares were transferred within short period of public subscription have raised questions in the minds of investors and have continuously lost the price in market, though its PE is attractive. Goodwill Finance too is following the footsteps of other finance companies - i.e. promoters trying to sell their shares, price higher than justified by performance and PE ratio the 4th highest among 10 companies.

The table summarizes the financial performances of these companies. All the data are based on the un-audited financial reports of respective company, except for Kathmandu Finance, which has already held the annual general meeting and passed the financial reports. For investors, they should buy those shares in which the current price is lower or equal to share price based on lowest PE. They should sell those shares immediately in which the current price is higher than the price based on highest PE. I would recommend investors to be confident on the investment in the stock of those finance companies, future of which as analysed above, looks sound. The companies which have low paid up capital, lack professionalism in management, has limited shareholding, have low reserve, cannot sustain the competitive market in the long run and they are bound to fail.

Lastly, on current share prices at the stock exchange, investors specially from Indian origin have lost the confidence in the market and they are selling shares at the price they get. Do not pay high. Try to bargain for as less a price possible. Share prices are coming to attractive range for those who believe that even Maoist need to have an economy running.

Performance of Financial Companies

Particulars

Nat. Finance

Ace Fin.

NMBL

NIDC Cap.

Narayani

Mahalaxmi

Goodwill

Lumbini

Nefinsco

Kafl

Paid up Capital

300

450

1000

200

251.5

250

213

360

200

General Reserve

209

92.45

228

32.3

68.5

32.7

94.6

64.9

Other reserve

209

3.7

6.13

Provision for loan loss

267

194

92.7

179

49.2

67.3

74.95

188

60.8

Retained Earnings

34.5

25.44

13.96

0.3

17.87

56.48

20.2

Total Deposit

5868

5553

8552

2022

3042

2437

4292

1950

Total Credit+ INV

4774

6690

8107

2014

3122

2833

2445

2034

Operating Profit

325.5

243

496

104

86.88

180.5

151

233

154

103

Estimated net profit

211.6

170.1

322.4

67.6

56.5

117.3

98.2

151.5

92.4

85.0

Earning per share

70.5

37.8

16.1

33.8

18.8

46.9

32.7

25.2

46.2

42.5

Current Market price

600

500

225

550

225

300

325

210

300

310

PE Ratio

8.5

13.2

14.0

16.2

12.0

6.4

9.9

8.3

6.5

7.3

Share Price based on discount factor of highest PE Fin. Comp

987.7

529.4

225.8

476.1

263.6

657.3

458.2

353.5

647.1

595.2

Share Price based on discount factor of lowest

PE Fin. Comp

452.08

242.31

103.33

216.67

120.67

300.83

209.72

161.81

296.15

272.44

Mean Share Price

620.3

332.5

141.8

299.1

165.6

412.8

287.7

222.0

406.3

373.8

Note:

1. EPS and PEs are indicators for financial health. But they do not guarantee the soundness of investment.

2. Buy those shares which have market price lower than mean share price and sell those in which the market price is much higher than the mean share price. Also sell those which have negative value.

3. Even in this bearish market, hold and/or buy the shares which have PE 8.5 or less and sell those in which PE value is higher than 11. This is for short term benefit.

4. NIDC is the only company evaluated which had not published financial report for fiscal year 2000/01 when this article was being prepared.

(Ghimire is a stock analyst. The advices presented here are based on expert judgement, but the writer or New Business Age cannot be held responsible for any deviation that may occur in the actual market situations).

Share Prices in Nepal Stock Exchange

(Closing Price Only)

Company	31-May	15-Jun	2-July	16-July	31 July	15-Aug	17-Sep
Nepal Bank Ltd.	405		375	500		360	300
Nabil Ltd.	1501	1450	1480	1500		1050	850
Nepal Indoduez Bank							1700
Standard Chartered Bank Nepal Ltd.	2075	2010	1975		1925	2000	1150
Himalayan Bank	1430				1390	1490
Nepal SBI Bank	1520	1500	1460	1500		1525	950
Nepal B'desh Bank	1000		995	1130	951	1020	615
Everest Bank	718	670	650		640	685	373
Bank of Kathmandu	835	761	805	850	581	446	330
NIC Bank Ltd.	426	391	401	409	387	389
Taragaon Regency	108				84	85
Necon Air	129				110	110
Sagarmatha Insurance	213		216	236	203
HISEF Finance	231		211	280		275
Annapurna Finance	440		440	535	445	460	450
Lalitpur Finance			460	495
Lumbini Finance	205		215	202		220	201
Amount Transacted	3062090	3612082	3129530	1327680	3916535	5489810	3248405
Market Capitalization (Rs. In million)	44640.01	43563.5	43529.71	46858.09	44162.39	44001.12	38124.28
NB : Blank cells indicate that the respective scrips were not traded on that day or were not available

Movement in Nepse Index
(Base: February 12, 1994=100) wpe1.jpg (33777 bytes)

Send your feedback to the editor: bizline@mos.com.np 1999 � Mercantile Communications Pvt. Ltd. P.O. Box 876, Durbar Marg, Kathmandu, NEPAL. Tel : 977 1 220 773, 243 566 . Fax: 977 1 225 407. Reproduction in any form is prohibited without prior permission. No part of the articles which appear in the internet version on NEW BUSINESSAGE may be reproduced without the permission of Mercantile Communications Pvt. Ltd. For reprinting rights, please write to us. Send us your feedback:contact us . This site is best viewed at : 800 X 600 resolution