Bajaj Finance, Shriram Finance, Fusion Micro Finance among NBFC stocks to buy for up to 30% upside
HDFC Ltd). Categorised as Upper Layer by the Reserve Bank of India (RBI) large NBFCs are now subject to bank-like regulations for capital, liquidity, governance and operational requirements. Also, lenders are building multi-dimensional underwriting models by embedding credit score, predictive bureau insights and customer’s alternative data from other sources facilitated by government digital public infrastructure According to IIFL Securities, these new segments are large, enabling large NBFCs to grow faster even at scale of 23% FY23-26 AUM Cagr versus 16% 10 year Cagr.
The brokerage firm expects NBFCs’ cost of funds (COF) to rise 5-25 bps from Q1FY24 levels and expects rate cuts only in FY25. “Our analysis indicates that a 25 bps rate cut in FY25 would result in 0-10 bps reduction in the COF in FY25. M&M Financial Services and Bajaj Finance will have 55-60 bps margin compression on higher COF and 130/70 bps lower yields on new businesses.
Whereas, we expect 20 bps and 90 bps margin expansion for Fusion Micro Finance and L&T Finance Holdings on a greater mix of higher rate and retail loans. Shriram Finance should sustain margins (adj. for tapering of merger benefits)," said IIFL Securities’ analyst Viral Shah in a report.
The brokerage firm has initiated coverage on Bajaj Finance, Shriram Finance and Fusion Micro Finance with a ‘Buy’ rating; L&T Finance Holdings with ‘Add’ and Mahindra & Mahindra Financial Services with a ‘Sell’ call. IIFL Securities expects Bajaj Finance to deliver 30% 3-year AUM Cagr led by entry into new segments, distribution expansion for existing products, maturing branch vintage and increase in AUM/customer. “Bajaj Finance’s ROEs would expand by ~200 bps to 25% as it levers up even as its new
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