NBFC stocks: Valuations turn attractive, says Emkay Global; likes Bajaj Finance, Shriram Finance, L&T Finance

The Non-Banking Finance Companies (NBFC) reported decent earnings during the fourth quarter of FY24 with strong asset under management (SUM) growth, improvement in asset quality and profitability. This growth momentum is expected to continue going ahead in FY25 with better net interest margins (NIM) amid moderating cost of funds (CoFs), analysts said.

Strong AUM growth in Q4FY24 for NBFCs was primarily driven by strong demand for used vehicles and passenger vehicles (PV) in the vehicle segment, robust disbursement in MSME segment and Mortgage loan.

Avinash Singh, Senior Research Analyst at Emkay Global Financial Services noted that following the regulatory move to increase risk-weight on unsecured personal loans, the NBFC players slowed growth in this segment, especially in the lower ticket and fintech distribution-led growth.

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“We expect the AUM growth trend to continue in FY25, registering 16-27% for most players, though we expect some impact of elections on overall disbursement in segments like Commercial Vehicles (CV) and CE leading to a softer Q1FY25. However, a good monsoon and increased infra spend by the government would result in strong rural & urban demand across segments like Vehicle, MSME, and Mortgage,” Singh said in a note.

However, margins remained under pressure for most NBFC on account of repricing of lower-rate borrowings.

To counter the increasing CoFs, most of the players have diversified their source of borrowing and have been lowering their dependency on banks, while improving their asset mix by increasing their share of high-yielding assets like lending to MSMEs or increasing their share of used vehicle lending, Singh added.

He expects NIMs to improve by 10-90 bps owing to improving asset mix and moderating CoFs.

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Moreover, asset quality for all the players continued to improve sequentially, led by superior customer selection and tightening of credit underwriting policy. The brokerage firm expects the overall asset quality to remain stable, while it sees some players’ credit cost reducing on account of superior customer selection and improving product mix.

“With the growth outlook for our coverage NBFCs remaining robust, the asset quality is expected to remain stable with the burden of past legacy reducing for some. The overall financial health remains strong and improving for our coverage universe. Against the backdrop of recent corrections, the valuations have turned attractive,” Singh said.

Among NBFCs, he prefers Bajaj Finance, Shriram Finance, L&T Finance, and Cholamandalam Investment and Finance Company on favorable risk-reward.

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