Nomura has projected a significant impact on the earnings per share (EPS) for non-banking financial companies (NBFCs) for fiscal years 2027 and 2028. The foreign brokerage anticipates a 1-12% reduction in EPS, primarily driven by the rising cost of funds as bond rates increase following the Reserve Bank of India's hawkish stance.
Rising Costs and Regulatory Concerns
Nomura's analysis assumes that a 50-60 basis point hike in funding costs will largely materialize in October 2026, affecting NBFCs' cost of funds from the third quarter. While NBFCs are expected to pass these increased costs onto end-customers, this is not projected to happen until FY28, creating a temporary squeeze on profitability.
Despite these challenges, Nomura believes that the structural strengths of NBFCs remain intact even in a rising rate environment. However, recent regulatory developments have emerged as a more pressing concern for the sector. These include reforms in insurance distribution impacting credit life insurance policies and regulatory hesitation regarding flexi-loans offered by NBFCs.
Outlook and Share Price Targets
For FY27, Nomura's scenario analysis indicates a 1-8% hit to EPS for covered NBFCs. As lending rate-hikes begin from FY28, the brokerage expects EPS cuts to show a declining trend through FY28-29. Crucially, Nomura notes that the structural EPS compounding rate (FY27-29F CAGR) is projected to remain healthy at approximately 16-28%.
The firm attributes this resilience to many diversified NBFCs holding a healthy mix of floating-rate assets. Those with fixed-rate loans typically have shorter tenures, which should help maintain profitability over the FY27-29 period.
Updated 12-Month Target Prices:
- Bajaj Finance: Rs 1,270
- Aadhar Housing Finance: Rs 615
- Shriram Housing Finance Ltd (SHFL): Rs 1,235
- Tata Capital: Rs 415 (maintained)
- L&T Finance: Rs 370
Among diversified lenders, Nomura prefers Bajaj Finance Ltd, Tata Capital Ltd, and L&T Finance. For vehicle financiers, Shriram Finance is highlighted. Housing financiers like Aadhar Housing Finance are also considered well-placed in a rising rate environment, with a 'Buy' rating suggested.