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Slowdown persists; NIM improvement visible

Slowdown in industrial production, weak capacity utilisation and disruption due to excess rain is likely to hamper growth for auto financiers in Q2. However, with the festive season kicking in, we expect an uptick in volumes in H2 due to the relief from GST cuts. Incremental CoF has already started to taper off and we expect the movement to continue in Q2. Prefer diversified auto-financiers (CIFC and SHFL). BAF reported an AUM growth of 24% YoY- commentary around NIM improvement and pick-up in growth in H2 could be key positives. We remain wary of asset quality trends for MMFS/ SHFL.

* Sluggish growth in auto; diversified players better off: Weak industrial production, disruption due to excess rain and wait-and-watch approach by buyers, awaiting lower GST rates likely to impact vehicle sales in Q2. Expect volumes to see a pick-up as the festive season kicks in, with lower GST rates. Prefer diversified players (CIFC and Shriram Finance) over pure-play auto financiers. Disbursement/ AUM growth for MMFS remains weak- at 3%/ 13% YoY respectively due to high competition. BAF reported a 24% YoY growth in AUM to Rs 4,622.5 bn. New loans booked grew 26% YoY to 12.2 mn and company added 4.1 mn new customers in the quarter, taking the total number of customers to 110.6 mn.

* Expect NIM to improve in Q2 with lower CoF: Expect the benefit of accelerated repo rate cuts to be visible in Q2 with a lower cost of borrowing. ~50% of CIFC’s bank borrowings are linked to EBLR which are expected to reprice in Q2. SHFL expects ~20 bps reduction in CoF in FY26 as incremental CoF has started to come down. However, negative carry on excess liquidity to offset the benefit. We expect NIM to improve for MMFS aided by lower incremental CoF and positive growth in fee income. For BAF, given a lower interest rate environment, we build an improvement in NIM by ~10 bps in FY26.

* Opex spends to remain high: We expect opex costs to remain elevated as players invest in digital transformation (BAF) and new business verticals (CIFC, BAF, SHFL).

* Credit cost to remain range-bound in Q2: We expect credit cost to remain range-bound for CIFC in Q2, factoring in stress in the MSME segment. Expect improvement in H2 with lower delinquencies in VF, run-down of the CSEL portfolio and reversals from SARFAESI. Expect credit cost for BAF to range between 1.85%- 1.95% for FY26 as stress persists in the MSME portfolio. MMFS has already reported a sequential increase of ~10-20 bps in Stage 3 (3.9%- 4.0% in Q2 vs. 3.8% in Q1FY26) and we build a credit cost of 1.7% for the quarter. We remain cautious of the asset quality trends for SHFL and factor a credit cost of 2.1% for Q2.

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