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In 3QFY24, we expect our NBFC coverage universe to report 28% YoY earnings growth led by 21% YoY NII growth and 23% YoY PPOP growth and lower credit costs being the critical driver for earnings performance. Impact of CoFs on margins to be a key monitorable and we build mild compression across the coverage universe. As indicated earlier, growth is likely to be well rounded across most companies with commentary on unsecured loans (in aftermath of RBI recent changes) to be watched out for. Key driving parameters to watch out for: i) commentary on unsecured pricing/growth for diversified NBFCs, ii) growth outlook for vehicle financiers, and iii) collection efficiencies for NBFC-MFIs. Our preferred plays are BAF, Poonawalla, SHFL, HFFC, Fusion and Five-Star.

* Diversified NBFCs – strong growth trend continues: Among diversified NBFCs under coverage, BAF and Poonawalla reported a strong sequential AUM growth of 7.1% and 8.1% respectively. LTFH too reported a healthy sequential growth of 7.6% in its retail book supported by 7.4% QoQ disbursements growth. With defocused book cleaned up, overall loan growth of LTFH turned positive at 4.3% QoQ after prolonged muted AUM trajectory. We expect moderation of ~20bps in NIMs for BAF and ABFL on account of increase in cost of funds. However, Poonawalla is expected to see largely steady NIMs (- 10bps QoQ) as the cost benefit from housing sub sale which came in previous quarter would continue to offer tailwinds. Asset quality is likely to remain steady and we do not expect any negative surprises in credit costs during the quarter. The new RBI risk-weight revision would affect CRAR of the diversified NBFCs, though no major impact is expected on earnings. We expect earnings growth of ~29% YoY for our diversified financials coverage universe driven by 25% YoY NII growth and 26% YoY PPoP growth.

* Vehicle Financiers – Growth trajectory a key monitorable: Vehicle financiers are expected to show healthy sequential growth backed by festive demand. We forecast 6% QoQ growth for CIFC and 5% QoQ growth for SHFL (on account of higher base) while MMFS recorded a growth of 3.3% QoQ in its provisional update. VFs have seen more compression than other NBFCs FYTD, we believe the NIMs compression could be approaching its fag end. Also, repricing of the asset mix upward should offset the CoFs pressure.

* Affordable HFCs momentum to sustain: Affordable HFCs in our coverage universe would continue to outperform prime HFCs on the back of lower base and robust demand (for INR <2mn ATS). We expect healthy disbursements for AHFCs to result in strong AUM growth of 7.5%/5.0%/6.5% QoQ for HFFC/Aavas/Aptus. We estimate an earnings growth of 29% YoY for AHFCs driven by 25% YoY growth in NII and 30% YoY growth in PPoP. Among prime HFCs, PNBHF is expected to report strong growth of 5% QoQ as the book shifts towards affordable housing loans while ABHFL is also expected to grow 5% QoQ due to lower base. LICHF to continue its moderate growth of 2.5% QoQ as corporate book run-down continues. We expect earnings to grow 95% YoY for prime HFCs led by 21% YoY growth in NII and 30% YoY growth in PPoP.

* NBFC-MFIs – collection efficiencies key watchout: NBFC-MFIs are expected to continue their solid performance in 3QFY24 on the back of tailwinds from sector growth revival, robust asset quality parameters and healthy operating profitability from strong margins. We believe the robust growth trend would continue during the quarter and estimate ~6% QoQ GLP growth. We expect margins to remain in a narrow band. Asset quality pain seems to be behind with most of the MFIs in our coverage to report stable trends. We expect an earnings growth of 67% YoY for 3QFY24E backed by 44% YoY growth in NII and 52% YoY growth in PPoP.

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