Analysts predict that significant non-banking finance firms (NBFC stocks) in India would reform in response to new bank-like requirements and as they transition from being monoline and specialty lenders to multiproduct, diversified lenders.
Shadow lenders have emerged as a significant player in the Indian credit environment, accounting for 25% and 21% of total and retail + SME lending, respectively (excluding HDFC Ltd).
Large NBFC stocks, classified as Upper Layer by the Reserve Bank of India (RBI), are now subject to bank-like capital, liquidity, governance, and operating standards.
Lenders are also developing multidimensional underwriting models by embedding credit scores, predictive bureau insights, and alternative customer data from other sources, which is made possible by government digital public infrastructure.
These new divisions are big, according to IIFL Securities, allowing large NBFC stocks to develop quicker even at a size of 23% FY23-26 AUM Cagr versus 16% 10-year Cagr.
The brokerage firm anticipates a 5 to 25 bps increase in the cost of funds (COF) for NBFCs from Q1 FY24 levels and only expects rate reductions in FY25.
According to our study, a 25 basis point rate drop in FY25 would lead to a 0 to 10 basis point decrease in the COF. On higher COF and 130/70 bps lower yields on new operations, M&M Financial Services and Bajaj Finance will experience margin compression of 55–60 bps respectively. On a greater mix of higher rate and retail loans, we anticipate 20 bps and 90 bps margin expansion for Fusion Micro Finance and L&T Finance Holdings, respectively. According to research by IIFL Securities analyst Viral Shah, Shriram Finance should maintain margins (adj. for tapering of merger benefits).
The brokerage company has begun covering Bajaj Finance, Shriram Finance, and Fusion Micro Finance with a “Buy” recommendation; L&T Finance Holdings has an “Add” rating, and Mahindra & Mahindra Financial Services has a “Sell” call.
NBFC stocks, Buy | TP: 9,200 | Bajaj Finance
IIFL Securities anticipates Bajaj Finance to achieve a 30% 3-year AUM Cagr, driven by the company’s development into new markets, rise in AUM/customer, and distribution of current products.
While its new sectors will have a 10 bps ROA impact, Bajaj Finance’s ROEs will increase by 200 bps to 25% as it leverages up. We anticipate non-linear growth (a 200 bps lower C/I) from Bajaj Finance’s investments in cutting-edge technology. The change in leadership at Bajaj Finance should go smoothly.
The brokerage company has given the stock a Buy rating and set a target price of $9,200 per share, which denotes a potential gain of close to 22% from Monday’s closing price.
NBFC stocks, TP: 2,250 | Shriram Finance | Buy
The firm has a “Buy” recommendation on Shriram Finance because it thinks that by cross-selling Shriram City Union Finance loans from branches and maintaining margins in this context of rising COF, the NBFC’s growth rate will accelerate to 17% 3-year Cagr (from 10-12% pre-merger).
The firm expects a rise of more than 17% and has set a target price of 2,250 for Shriram Finance shares.
TP: 800 Fusion Micro Finance | Buy
With a ‘Buy’ call and a TP of 800 per share, IIFL Securities has begun coverage on Fusion Micro Finance, representing a 30% increase from Monday’s closing price.
Fusion attracted 1.7 million customers in the last three years, the most compared to its competitors. We think Fusion is in a good position to produce above-industry AUM growth of 26% Cagr because its ATS is 47% less than CreditAccess Grameen’s and it has younger customers and branches. According to the brokerage, it has the lowest geographic concentration among its peers and has space to improve its penetration in its two major areas, UP and MP.
TP: 135 L&T Finance Holdings | Add
L&T Finance Holdings is moving quickly to implement its retailization strategy in order to become a completely retail lender. High retail profitability, however, won’t be seen in better overall return ratios until FY26. Due to excessive capitalization, medium-term ROEs should likely be muted in the interim (13.4% by FY26), according to IIFL Securities.
The stock has a Buy rating and a target price of $135 per share.
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