NBFCs Expected to Post Strong Q4 Earnings

Motilal Oswal expects a strong finish to the fiscal year for the Non-Banking Financial Company (NBFC) sector. The brokerage forecasts around 15% year-on-year growth in net interest income and 16% in pre-provision operating profit for NBFCs in the fourth quarter of fiscal year 2026. Profit after tax (PAT) is expected to surge by nearly 30% year-on-year for the NBFC sector overall. Excluding NBFC-Microfinance Institutions (MFIs), PAT growth is estimated closer to 26% year-on-year, pointing to solid performance fueled by higher lending volumes and stable margins for many. Shriram Finance, a major player in retail asset financing, reported strong revenue growth of 15.90% in FY25 and earnings up 29.69%. Aditya Birla Capital, a diversified financial services group, has grown profits by 28.8% annually (CAGR) over the past five years.

Global Tensions Fuel Inflation and Oil Prices

However, global events are creating significant external challenges. Escalating geopolitical conflicts, particularly in the Middle East, have propelled crude oil prices to levels exceeding $110 per barrel, a sharp increase from earlier in the year. This surge directly impacts India, which imports approximately 85% of its crude oil. The higher import bill, estimated at $12-15 billion annually for every $10 crude price increase, poses a considerable risk to India's budget and economic growth. Analysts warn of a higher risk of stagflation, with inflation potentially climbing above 6-7% soon due to rising input and commodity costs. The Indian Rupee also faces depreciation pressure, as higher dollar demand for oil imports can spur capital outflows. This presents a complex challenge for the Reserve Bank of India, which must balance inflation control with supporting economic growth.

Vehicle Finance Vulnerability

The vehicle financing segment is especially vulnerable to these macro pressures. Increased crude oil prices translate directly to higher fuel and logistics costs for commercial vehicle operators. Higher costs are squeezing cash flows for operators, prompting fleet owners to delay new vehicle purchases and slowing credit demand for commercial vehicle (CV) loans. Smaller operators face squeezed earnings and weakening repayment capacity, a situation that could lead to increased loan defaults. The Nifty Auto index has already seen a decline of approximately 11% from the onset of recent conflicts. Auto manufacturers also face potential margin compression of 80 to 100 basis points in Q4 FY26 due to rising raw material costs.

Motilal Oswal Prefers Diversified Lenders

Given the uncertain macro environment, Motilal Oswal prefers diversified lenders. These companies are better positioned to handle sector downturns due to their varied income sources. The brokerage's top picks include Shriram Finance Ltd., Aditya Birla Capital Ltd., L&T Financial Services Ltd., and PNB Housing Finance Ltd. Shriram Finance, with a market cap of ₹1.89 lakh crore and a P/E of 20.43, has a strong presence in retail asset financing. Aditya Birla Capital, with a market cap of ₹78,130 crore and a P/E of 22.0, offers a broad range of financial services. L&T Financial Services, valued at ₹68,047 crore with a P/E of 24.27, has a diverse portfolio. PNB Housing Finance, valued at ₹20,438 crore with a P/E of 9.10, operates in the housing finance segment. While the sector is expected to see overall Assets Under Management (AUM) growth of 12-18% in FY26, the performance will likely be uneven.

Other NBFC Segments Face Challenges

Beyond vehicle financiers, other segments within the NBFC sector face their own challenges. Asset quality concerns remain, especially in microfinance and unsecured business loans, leading some analysts to rate NBFC-MFIs as 'Negative'. While overall NBFC AUM growth is projected at a robust 15-17%, stricter lending standards and selective funding could slow this growth in FY26. The current climate requires close monitoring of capital adequacy and funding costs, which central bank actions on inflation and geopolitical shocks could impact.

Persistent Risks for NBFCs

While the Q4 FY26 outlook suggests growth, underlying structural issues and current macro risks call for caution. PNB Housing Finance, for instance, has underperformed its peers and the broader market over the past year, with a negative one-year return of -16.32%. Its sales growth over the last five years has been a poor -2.03%, and its return on equity (ROE) around 11.6% shows limited profitability leverage. Shriram Finance, despite strong earnings, shows a 'Weak' price trend, indicating potential short-term downside and a low interest coverage ratio. L&T Financial Services has shown poor sales growth of 2.46% over five years, alongside a low three-year ROE of 7.23%. Aditya Birla Capital's lack of dividends and low interest coverage ratio raise questions about its immediate financial flexibility, despite strong historical profit growth. Reliance on wholesale funding could prove a vulnerability if interest rates rise sharply or liquidity tightens due to global capital flows shifting amid geopolitical events. Continued geopolitical instability affecting crude oil prices and inflation could lead the RBI to keep interest rates higher for longer. This would increase borrowing costs across the financial system and potentially test the asset quality of even well-diversified lenders.