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Auto Finance Stocks Show Strong Momentum in FY26
Indian auto finance companies have witnessed an impressive double-digit rally in their shares during Fiscal Year 2026. Analysts are optimistic about the sector, believing that the favorable risk-reward scenario offers further potential for growth. However, they caution investors to be selective, as valuations are not uniformly attractive across all companies.
The Core Issue
The outlook for vehicle financiers appears mildly positive at this juncture. This optimism is underpinned by expanding margins, a gradual revival in vehicle demand, and consistently stable asset quality. While credit costs remain a critical factor to monitor, alongside somewhat elevated valuations, the sector presents an incrementally favorable near-term risk-reward profile for investors.
Market Performance
Major non-bank finance companies (NBFCs) specializing in vehicle financing have posted significant double-digit gains in FY26. Shriram Finance shares, for example, have surged by 29.14% as of December 11. M&M Financial Services, Cholamandalam Investment and Finance, and Bajaj Finance have seen their share prices climb between 12.50% and 23.58%. In comparison, the broader Nifty50 index has gained 10.12%, and the Nifty Financial Services index has risen 9.92% during the same period.
Valuation metrics show some expansion. Shriram Finance currently trades at a price-to-earnings (P/E) multiple of 14.6x, which is higher than its 5-year average of approximately 10.3x. M&M Finance trades at 14.7x compared to its 5-year average of 12x, and Cholamandalam Investment is at 23.6x versus its 5-year average of 22.4x.
Drivers of Growth
Several factors are propelling the demand for auto financing. Analysts point to tax rationalization, rising disposable incomes, a growing preference for personal mobility, and the significant under-penetration of vehicles across India. With the Gross Domestic Product (GDP) projected to grow at a healthy rate of around 6.7% in the next financial year, vehicle sales are expected to rise, further bolstering the vehicle finance market, according to CRISIL Ratings.
CRISIL estimates that the Assets Under Management (AUM) for vehicle loans held by NBFCs will grow annually by 16-17%, reaching ₹11 trillion by March 31, 2027. Within segments, car and utility vehicle (UV) financing is projected to grow at 23% annually over the current and next fiscal. Commercial vehicle (CV) financing is expected to grow at 11%, two- and three-wheeler financing at 17%, and tractor financing at 12% during the same timeframe.
Analyst Outlook and Recommendations
Major auto financiers have indicated guidance for AUM growth between 17-19% for FY26. They also anticipate an expansion in Net Interest Margins (NIMs) by 15-30 basis points. This robust growth outlook, combined with a potential fall in credit costs, is expected to significantly enhance the profitability of well-managed companies, noted Vaqar Javed Khan, senior fundamental analyst at Angel One.
In light of these factors, analysts suggest investors can take selective exposure to auto financiers at current levels and consider increasing their allocation during market dips. PL Capital has upgraded M&M Financial Services to 'Accumulate' with a target price of ₹375, citing strong tractor volume growth and positive prospects for higher passenger vehicle (PV) volumes and rural demand.
ICICI Securities maintains a 'Hold' rating on Bajaj Finance with a target price of ₹1,050. Axis Direct has issued a 'Buy' rating on Shriram Finance, setting a target of ₹860. Axis Direct expressed confidence in Shriram Finance's ability to achieve healthy AUM, Net Interest Income (NII), and earnings growth of 16% Compound Annual Growth Rate (CAGR) each over FY26-28E, driven by consistent AUM expansion, improving NIMs, and controlled credit costs.
Impact
This positive trend in the auto finance sector is likely to benefit investors through potential stock price appreciation and dividends. For NBFCs, it signifies a period of strong growth and improved profitability. The sector's expansion also supports the broader automotive industry by facilitating vehicle purchases, contributing to economic activity. The news suggests continued positive momentum for these financial entities.
Impact Rating: 8/10
Difficult Terms Explained
- FY26: Fiscal Year 2025-2026.
- NBFCs: Non-Banking Financial Companies, which provide financial services but do not hold a banking license.
- AUM: Assets Under Management, representing the total market value of investments or loans managed by a financial institution.
- NIMs: Net Interest Margins, the difference between the interest income generated by a financial institution and the interest paid out to its lenders, relative to the amount of interest-earning assets.
- P/E multiple: Price-to-Earnings ratio, a valuation metric used to compare a company's current share price to its per-share earnings.
- CAGR: Compound Annual Growth Rate, the mean annual growth rate of an investment over a specified period longer than one year.
- Q2FY26: The second quarter of the Fiscal Year 2025-2026.
- YoY: Year-on-Year, a comparison of data from one period to the same period in the previous year.
- H2FY26: The second half of the Fiscal Year 2025-2026.
- PV: Passenger Vehicle.
- UV: Utility Vehicle.
- CV: Commercial Vehicle.
- EPS: Earnings Per Share, a company's net profit divided by the number of outstanding shares.
- NII: Net Interest Income, the difference between interest income and interest expense for a financial institution.