NBFC stocks with attractive valuations and promising growth prospects for FY25. Learn about their strong Q4FY24 performance, AUM growth, improved asset quality, and strategic adaptations in a dynamic financial landscape.
Emkay Global Highlights Key NBFCs: Bajaj Finance, Shriram Finance, L&T Finance
Non-Banking Finance Companies (NBFCs) have demonstrated strong performance in the fourth quarter of FY24, marked by notable growth in assets under management (AUM), improved asset quality, and increased profitability. Analysts predict that this growth trend will continue into FY25, supported by better net interest margins (NIM) and moderating cost of funds (CoFs). Emkay Global Financial Services has identified Bajaj Finance, Shriram Finance, L&T Finance, and Cholamandalam Investment and Finance Company as particularly attractive investment options in the NBFC sector.
Strong AUM Growth in Q4FY24
NBFCs reported significant AUM growth in Q4FY24, driven by high demand for used vehicles and passenger vehicles (PV) in the vehicle segment, as well as robust disbursements in the MSME segment and mortgage loans.
Avinash Singh, Senior Research Analyst at Emkay Global, noted that the regulatory decision to increase the risk weight on unsecured personal loans led to a slowdown in this segment’s growth. However, NBFCs adapted by focusing more on secured lending, particularly in high-demand areas such as vehicles and MSMEs.
FY25 Growth Projections and Potential Election Impact
Emkay Global projects AUM growth of 16-27% for most NBFCs in FY25. However, Singh cautioned that the upcoming elections might impact disbursement in certain segments, such as Commercial Vehicles (CV) and Construction Equipment (CE), leading to a softer Q1FY25. Despite this, a favorable monsoon and increased infrastructure spending by the government are expected to boost rural and urban demand across various segments.
Margin Pressures and Strategies to Counter Increasing CoFs
Many NBFCs faced margin pressures due to the repricing of lower-rate borrowings. To mitigate rising CoFs, these companies have diversified their borrowing sources and reduced their dependency on banks. They have also improved their asset mix by increasing the share of high-yielding assets, such as loans to MSMEs and used vehicle lending.
Singh anticipates NIMs to improve by 10-90 basis points (bps) due to the enhanced asset mix and moderating CoFs. This strategic shift towards high-yield assets is expected to support profitability in the coming quarters.
Improving Asset Quality and Stable Outlook
The asset quality of NBFCs has shown continuous improvement, driven by better customer selection and stringent credit underwriting policies. Emkay Global expects overall asset quality to remain stable, with some players likely to see reduced credit costs due to superior customer selection and an improved product mix.
“The growth outlook for our coverage NBFCs remains robust, with asset quality expected to remain stable and the burden of past legacy issues reducing for some. The overall financial health of our coverage universe is strong and improving. Recent corrections have made valuations attractive,” Singh noted.
Top Picks in the NBFC Sector
Among the NBFCs, Emkay Global favors Bajaj Finance, Shriram Finance, L&T Finance, and Cholamandalam Investment and Finance Company. These companies are well-positioned in terms of risk-reward, offering promising growth prospects and stable financial health.
Bajaj Finance: Known for its diversified lending portfolio and strong risk management practices, Bajaj Finance continues to deliver robust growth and profitability. Its focus on digital transformation and customer-centric approach positions it well for future growth.
Shriram Finance: With a strong foothold in the commercial vehicle and MSME segments, Shriram Finance has shown resilience and consistent performance. Its extensive network and deep understanding of the customer base contribute to its competitive edge.
L&T Finance: L&T Finance has a diversified portfolio with a significant presence in the rural finance and housing segments. Its strategic focus on high-yield segments and improving asset quality makes it an attractive investment.
Cholamandalam Investment and Finance Company: Known for its strong presence in vehicle finance and home loans, Cholamandalam has demonstrated solid growth and asset quality improvement. Its prudent risk management and focus on high-growth segments position it well for future expansion.
Conclusion
The NBFC sector’s strong performance in Q4FY24 and positive growth outlook for FY25 highlight the resilience and adaptability of these companies. With strategic shifts towards high-yield assets, diversified borrowing sources, and improved asset quality, NBFCs are well-positioned to navigate challenges and capitalize on growth opportunities. Emkay Global’s preference for Bajaj Finance, Shriram Finance, L&T Finance, and Cholamandalam Investment and Finance Company underscores the attractive valuations and promising risk-reward profiles of these companies.
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