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We expect the overall NBFC sector to track a slower growth mode in Q1, amid weak vehicle sales that led to weaker growth in vehicle finance and a slower housing finance segment. The 100bps rate cut by the RBI from Feb to Jun-25 might drive a small moderation in cost of borrowings in Q1, while the full impact on NIMs will start reflecting in H2FY26, in our view. On the credit cost front, the Q1FY26 show will be typically weaker vs Q4FY25; we believe YoY credit cost too will be elevated. However, there will be some minor improvement on account of reduced stress in the unsecured personal loan segment; asset quality, however, could see some deterioration from Q4 on account of lower collection efficiencies, except for MFI. Despite such short-term challenges, the industry is likely to report a relatively stable quarter. With the front loaded 100bps rate cut by the RBI, some early signs of rural growth rebounding, impressive temporal and spatial performance of monsoons, and policymakers’ focus on growth amid the easing regulatory environment shall drive a growth and profitability rebound in H2. Overall, FY26 is anticipated to demonstrate modest margin improvement and profitability growth, underpinned by declining credit costs, lower funding costs, and higher operational efficiency. CY25 has seen the material re-rating of NBFC stocks limiting any further upside, though favorable external environment-led visibility on growth and profitability should support share prices. We continue to favor ABCAP, HDBFS, SHFL, and REC.

Modest start to the year; rate cut benefits to have limited role in Q1

With Q1 being a seasonally weak quarter and factoring in the spillover of stress around small ticket unsecured loans, overleveraged borrowers, and slowdown in CV sales, we expect disbursements growth to be muted across the NBFC pack. On the margin front, NIMs would see some benefit of rate cut in Feb and April in this quarter, owing to repricing of existing/new liabilities at higher rates, though the full impact of the cut would be more evident in H2FY26. This would thus improve NIMs and overall profitability. We however expect opex to remain elevated for most players, on account of their continued investment in tech and capability expansion.

Asset quality and credit cost to display the typical Q4-to-Q1 seasonality

The seasonal slight worsening of asset quality and inching up of Q4-to-Q1 credit cost would play out in Q1FY26 as expected, except in the MFI segment, where easing stress would lead to improvement in asset quality and credit cost. We expect MMFS and CIFC to see higher YoY and QoQ credit costs in Q1. Going forward, an improving rural economy supported by various GoI initiatives and boosted by good temporal and spatial distribution of the monsoons should help collection efficiencies and asset quality for rural focused lenders, especially in the vehicle and farm segments.

Slower growth weighing on power financiers’ stocks

Despite players lowering their growth guidance and given lingering issues around the signing of power purchase agreements (PPAs)—though showing some improvement recently, Q1FY26 profitability is expected to be strong, driven by recoveries from resolved stressed assets. Disbursements in the power sector are likely to remain soft, partly due to loan repayments by state utilities, which have led to slower-than-expected AUM growth for REC and PFC. However, the recent correction in their share price appears to have been already accounted for in this minor growth slowdown. At current valuations (FY27E P/B: REC at 1x; PFC core at 0.9x), both stocks look attractive, supported by strong asset quality and expected RoE of ~16-18%.

Improving macro-driven profitable growth to support valuations

Notwithstanding the minor blips in Q1, the outlook remains stable for the NBFC sector. With the interest rate-cut benefit to fully reflect in H2FY26, the RBI’s supportive policy, and the improved macroeconomic environment, we anticipate that overall NIM expansion led by moderating CoFs and a stable asset quality-led benign credit cost should lead to profitable growth in FY26E. The financial health of our coverage companies remains strong and is improving, supported by robust capital adequacy, healthy asset quality, and adequate provision coverage. We retain our positive view on the sector. We prefer ABCAP, HDBFS, SHFL, and REC, on risk-reward basis.

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