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We expect Q4FY25 to be a better quarter in terms of growth, disbursement, and credit cost. The key expectations in Q4 results will be: 1) Despite some QoQ growth acceleration, AUM growth (YoY) is expected to remain moderate and settle at a lower level due to slower disbursements. 2) A marginal improvement in the cost of funds on a sequential basis should support NIM + Fees as a percentage of AUM is likely to remain stable or witness a slight improvement. 3) The Opex ratio should remain broadly stable as companies continue to invest in tech, branch expansion, and focus on collections. 4) The credit cost should see QoQ improvements on seasonal factors; however, MFI and small-ticket business loans would continue to experience elevated credit costs. Overall, FY25 is expected to remain modest in terms of growth, margins, and profitability. However, profitability in FY26 should be helped by stabilizing credit costs, moderating cost of borrowing driven by an RBI rate cut, and operating leverage playing out.

A better quarter sequentially

We expect Q4 to show sequential improvement with AUM and disbursement growth primarily driven by strong performance in the SME, mortgage, and housing loan segments. The farm segment is also likely to witness modest improvement, though growth in vehicles and unsecured loans is expected to remain relatively subdued. On the margin front, companies under our coverage are likely to maintain stability or see slight improvement, supported by the RBI’s rate cut and liability repricing, which should help offset some of the yield compression resulting from a shifting asset mix. Meanwhile, operating expenses should remain elevated for most players, reflecting continued investments in technology, manpower, and infrastructure — key strategic priorities aimed at sustaining long-term growth and operational efficiency.

Asset quality concerns settling down

The risk of stress in the MFI segments affecting used vehicles and small-ticket LAP appears to be easing with improving collection efficiency signaling a positive shift. Additionally, a strong kharif harvest is expected to boost rural cash flows, thus improving demand and repayment for used CV and farm equipment. As a result, credit costs should stabilize or improve, while asset quality should remain robust.

Minor slowdown in power financiers AUM growth already priced-in

Driven by some delays in the signing of Power Purchase Agreements (PPAs) owing to some technicalities and short-term logistics issues, the disbursements in Renewable Energy segment has been lower than expected. Added to that, some payback of loans by state utilities led to slower-than-expected growth for REC and PFC AuMs in FY25, where we expect the growth to be ~15% and ~11%, respectively. However, following the recent correction in PFC/REC shares, the minor slowdown in growth is already in the price and the shares look attractively valued (FY26E P/B of REC: 1.2x; PFC – core at 1.0x) for ~18-20% RoE as the asset quality continues to stay strong. Q4FY25 performance on the profitability front should be strong as the strong recoveries in KSK Mahanadi resolution should boost profitability.

Downgrade BAF, BJFIN (to ADD) and MMFS (to REDUCE); upgrade SHFL to BUY

To reflect the Q4 developments and growth and profitability outlook driven by business mix, we have changed our FY25-27 earnings estimates for our coverage NBFCs. After the strong outperformance in the last 2 quarters, we see BAF and BJFIN as fairly valued and with the scope for outperformance getting limited, we downgrade the stock to ADD from Buy with our revised Mar-26E TP of Rs9,200/2,100, respectively (from Dec-25E Rs 8,800/2,000 respectively). With muted growth outlook for PV looking to weigh on growth in FY26, the growth and profitability outlook for MMFS is weak, and despite the valuation remaining favorable, we see the stock to be underperforming in the near-to-medium term. We downgrade the stock to REDUCE from Buy with our revised Mar-26E TP of Rs280 (vs Rs360 Dec-25E). A modest Q4 and a positive outlook on the growth and funding cost front in FY26 provide comfort. We maintain our BUY on AB Cap, REC, PFC and ADD rating on SHFL, PIEL, and CIFC.

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