The financials are leading the relief rally in today’s trade. Stocks like Shriram Finance are up sharply in trade today. However, analysts at Nomura believe that investors are currently exhibiting “nervous vibes” driven by the ongoing war in West Asia and its potential to disrupt the Indian supply chain. This geopolitical instability is keeping most investors cautious, particularly in NBFCs.
There are concerns about NBFCs with significant exposure to small business owners, traders, and vehicle fleet operators with exposure to West Asia. These segments are viewed as highly vulnerable to the war’s impact on fuel availability, fuel prices, and global trade flows.
Premium valuation leading to caution
Investor caution is more pronounced for NBFCs than for banks because many NBFCs still command premium valuations. While some long-only investors find the current valuations of major players like Bajaj Finance and Cholamandalam Investment & Finance Company attractive, they do not see any immediate positive catalysts to trigger a rally.
“Some investors expressed fewer concerns about gold financiers and the rural economy, but they were aware that continuation of the war for an extended period would eventually drag these segments as well,” said Nomura.
Mixed sentiment on “Challenger” NBFCs
Nomura recently initiated coverage with ‘Buy’ ratings on several newer NBFCs, which included Piramal Finance, L&T Finance, and Tata Capital. However, investors generally prefer Piramal over L&T Finance due to better valuation comfort and concerns that L&T Finance has high exposure (52%) to volatile segments like rural markets, tractors, and two-wheelers.
On Tata Capital, many investors found the valuations expensive, given that management has yet to prove its credibility on profitability. On HDB Financial Services, Nomura has a ‘Neutral’ rating. “Investors were broadly aligned with our view that a turnaround in the credit cost cycle and pickup in loan growth momentum are key triggers (for HDB Financial),” said the brokerage house.
Nomura on key investor strategy
According to Nomura, investors indicated that if and when global tensions ease, their first preference for reinvestment would likely be established leaders like Bajaj Finance and Cholamandalam Investment, primarily because these stocks have already undergone sharper price corrections.
Insurance sector – Note of caution
Apart from NBFCs, Nomura pointed out that institutional investors are cautious about the Indian life insurance sector as well, primarily due to concerns that sharp equity market corrections will dampen Ulip (unit-linked insurance plan) sales and cause “an economic variance hit” to embedded values in Q4 FY26.
While SBI Life Insurance Company and Max Financial Services remain preferred stocks, there is significant concern about the high sensitivity of attached values to market volatility and rising interest rates, especially for firms like SBI Life Insurance, which has a 62% dependence on Ulips.
Despite attractive valuations and specific growth highlights, unpredictable global events and individual stock concerns, like the potential Prudential exit from ICICI Prudential Life Insurance Company, continue to limit near-term positive catalysts for the industry.
Conclusion
Nomura analysis indicated that most long-only investors, they met, believe that “while many NBFCs and life insurers are now trading at attractive valuations, unpredictable global events limit any positive catalysts in the near term.”