The non-banking financial company (NBFC) sector is in focus. Domestic brokerage house Motilal Oswal expects that the NBFC sector to enter a stronger earnings cycle, with improving loan growth, better asset quality and stable margins creating room for further gains.
Its top four picks are Bajaj Finance, L&T Finance, PNB Housing Finance and Five-Star Business Finance.
The brokerage believes the recovery seen in the Q1FY27 could be more than a short-term improvement. It sees the possibility of higher earnings estimates and another round of valuation rerating.
Motilal Oswal’s 4 NBFC picks
Bajaj Finance is among the preferred diversified lenders. The company stands to benefit from improving credit demand and a recovery in consumer lending.
L&T Finance is another preferred name as the brokerage favours lenders with diversified portfolios, disciplined underwriting and improving operating performance.
In housing finance, PNB Housing Finance is one of the brokerage’s picks. Motilal Oswal believes relatively under-owned housing finance companies could attract more investor attention as the recovery broadens.
Five-Star Business Finance was stock in the brokerage list, giving investors exposure to lending to small businesses and self-employed borrowers.
Motilal Oswal said, “Our top picks are Bajaj Finance, L&T Finance, PNB Housing, and Five-Star Finance.”
What has changed for NBFCs?
Loan growth has remained healthy across secured and unsecured lending. At the same time, credit costs have normalised faster than expected. Meanwhile, funding costs could moderate from the levels seen in Q1.
As per Motilal Oswal report, earnings are improving through several channels at the same time.
Loan growth is holding up, asset quality is improving, margins remain resilient and operating leverage is beginning to support profitability.
Asset quality: Is the worst behind?
This could be one of the biggest changes for the sector.
NBFCs had faced stress across microfinance, unsecured personal loans and some secured retail portfolios over the past two years. However, collection efficiency has improved and fresh loan slippages have moderated.
The brokerage said, “Asset quality emerges as the most notable surprise.”
Why is loan growth recovering?
Demand is improving across several lending categories. Vehicle financiers are seeing stronger demand following Goods and Services Tax (GST) cuts, along with steady commercial vehicle replacement demand.
Housing finance companies continue to report healthy disbursements. Similarly, gold financiers are benefiting from demand for secured loans.
Growth is also recovering across micro, small and medium enterprises (MSME), personal loans and digital lending.
Importantly, management commentary suggests lenders are becoming more selective.
The brokerage noted, “Growth recovers without a deterioration in risk discipline.”
Could NBFC stocks see another rerating?
The brokerage house believes investors are gradually moving beyond the question of whether the recovery will happen. The focus is now shifting towards how long earnings and return ratios can continue improving.
Several NBFC stocks have already performed well. However, Motilal Oswal pointed out that many companies still trade below the valuation peaks seen during the previous upcycle.
NBFC sector: What are the risks?
As per Motilal Oswal report, a prolonged West Asia crisis could push crude oil prices higher and delay monetary easing.
A weak or uneven monsoon could affect rural incomes and credit demand. Higher interest rates could also increase funding costs and pressure margins.
Regulatory changes by the Reserve Bank of India (RBI) remain another monitorable.
The brokerage said, “NBFCs continue to offer an attractive combination of healthy growth, improving asset quality, and resilient profitability.”
Disclaimer: This article is based on research reports from one or more brokerage firms and is for informational purposes only. The views, target prices, and recommendations expressed are those of the respective brokerage firms and do not reflect the official policy or position of Financial Express. This should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor before making any investment decisions.