Global brokerage Nomura has issued a positive outlook for several Indian non-banking financial companies (NBFCs), citing strong asset growth. While favoring Bajaj Finance over Cholamandalam Investment & Finance due to valuation trends, the firm sees potential upside for Shriram Finance, Tata Capital, and Mahindra & Mahindra Financial Services despite rising funding costs.
Nomura has released its latest research on the Indian non-banking financial company (NBFC) sector, highlighting a shift in preference toward Bajaj Finance while maintaining a more cautious stance on Cholamandalam Investment & Finance. This reassessment comes as the brokerage evaluates the sector's performance heading into the June quarter results.
Sector Growth and Margin Pressures
Nomura expects most diversified NBFCs, with the exception of HDB Financial Services, to record year-on-year growth in assets under management (AUM) exceeding 20% for the June quarter. While the demand for credit remains healthy, the sector faces a common hurdle: higher borrowing costs from banks. This increase in funding expenses is expected to put pressure on net interest margins, which represents the difference between the interest a lender earns on loans and the interest it pays for its own borrowings. Investors will likely look for companies that can maintain profitability despite these cost pressures.
Brokerage Views on Major Players
Bajaj Finance has been identified as a top pick, with Nomura projecting a 24% year-on-year increase in both AUM and net profit for the June quarter. The brokerage anticipates that the company will reach an AUM of ₹5.47 lakh crore. Despite the potential for profit margins to come under pressure from elevated borrowing costs, the brokerage expects asset quality to remain stable.
Shriram Finance and Mahindra & Mahindra Financial Services (MMFS) also hold a 'Buy' rating from the firm. Nomura expects Shriram Finance to leverage its earnings growth to counteract any slowdown in loan expansion, projecting a 38% rise in net profit. For MMFS, the brokerage points to improved disbursement trends and recent strategic management changes as key drivers, with a projected 35% growth in net profit for the June quarter.
Valuation and Peer Comparison
Nomura has maintained a 'Neutral' rating on Cholamandalam Investment & Finance. The brokerage suggests that recent rallies in the stock price have made its current valuation less attractive compared to peers. Nomura notes that the market is pricing in long-term growth for Cholamandalam that aligns closely with Bajaj Finance, even though the company trades at a smaller discount on price-to-book value multiples.
Other entities mentioned in the report include Aadhar Housing Finance and CA Grameen, both of which retain 'Buy' ratings. For Aadhar Housing Finance, the focus remains on loan growth and maintaining stable asset quality in its loans-against-property business. CA Grameen is seen as being in a recovery phase, with the brokerage highlighting improved growth and a reduction in stressed assets.
The upcoming June quarter results will provide clarity on how these companies managed the balance between aggressive asset growth and the pressure of rising interest costs. Investors may track commentary on net interest margins and credit costs to gauge the long-term impact on profitability.