NBFC Sector Update : At the crossroads By Emkay Global Financial Services Ltd
Over the past 4-5 weeks, we had around 75 investor meetings across Mumbai, Singapore, and Hong Kong. Discussions mainly focused on takeaways from our China trip and its implications for Indian metals & mining equities, and recent developments in the steel sector. We also engaged with several physical commodity traders in Asia to assess near-term on-the-ground movements in supply-demand balances and prices. Our key takeaway is that sentiment around metals & mining equities is improving. There are likely to be episodes of tariff escalations and de-escalations that would keep commodity markets volatile, though we believe there could be a soft-landing of the trade war through bilateral deals. Meanwhile, China is likely to maintain its export focus, keeping steel demand steady. Overall, this provides a favorable backdrop to selectively add weight to the sector, in our view.Time to be selective
Q4 results miss puts a brake on large NBFCs share outperformance
Driven by repo rate cut hopes and better AuM growth and asset quality outcomes in Q4FY25, the large NBFCs (BAF, CIFC, etc) materially outperformed the broader market during the market correction phase of Dec ’24-Mar ’25. However, an atypical Q4FY25, when AuM growth pick-up and asset quality improvement were largely missing, led to these NBFC shares materially underperforming during the market recovery phase of MarMay ’25. The outperformers in the last three months have been ABCAP, POONAWALLA, LTF, and PIEL. The outperformance of ABCAP and PIEL shares is driven by favorable valuation and improving business outlook, along with completion (or near-completion) of corporate structure simplification to comply with RBI upper layer NBFC requirements. LTF share outperformance has been more on microfinance cyclical recovery hopes, while POONAWALLA’s share performance is likely an outcome of supernormal growth commentary, new product launches, and news flow on a large equity raise.
Rate cut benefits offset by moderating growth and asset quality outcomes
A 50-75bps repo rate cut in FY26 with a likely 25bps cut on Friday, 6-Jun-25, bodes well for NBFCs, especially the ones with higher bank borrowing and fixed rate asset book (CIFC), in terms of meaningful improvement in borrowing costs and NIMs in H2FY26 and FY27. However, the optimism over AuM growth and credit cost seems to be evasive so far, resulting in some moderation in the management guidance as well as investor expectations. Against this backdrop, shares of NBFCs appear to have a balanced riskreward, with growth still being higher than that of large private banks; however, the higher growth is also reflected in the richer valuations. From a risk-reward perspective, we prefer ABCAP – not a beneficiary of the repo rate cut but of re-risking of the balance sheet leading to NIM expansion, REC – valued reasonably for ~18-19% RoE, 11-12% growth, and ~5% dividend yield, and SHFL – valuation already capturing the concerns.
Home loan and vehicle loan growth in slow zone; LAP and gold doing well
Our channel checks and interactions with several stakeholders in the NBFC lending ecosystem indicate that growth in Q1 is slower than expected, with the home loan (including affordable home loan) and vehicle finance segments seeing slower growth. LAP and gold loans are doing well in terms of growth.
Collections and asset quality showing more normalized behavior
Collection efficiency and asset quality seeing some deterioration in Q1 is typical. However, since Q4 did not see any material improvement on this count and Q1 last year was significantly weak owing to the extreme heatwave and the elections, Q1FY26 will perform much better on YoY basis and will be less softer QoQ. Our interactions so far suggest that Q1 performance is a mixed bag.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
