Non-Banking Financial Companies (NBFCs) are experiencing a significant resurgence, with a leading brokerage firm identifying several top stocks poised for continued growth. According to MOFSL, the sector has undergone a meaningful rerating over the past three months, driven by robust earnings upgrades that have bolstered investor confidence in sustained profitability and growth.
NBFCs Enter New Cyclical Recovery
MOFSL's analysis, following the June quarter earnings season, strongly validates its thesis that NBFCs are entering a new cyclical recovery. The brokerage highlights an improved operating performance across the sector, characterized by healthy loan growth, broad-based asset-quality normalization, resilient margins, and enhanced operating leverage. These factors are collectively driving earnings beyond initial expectations.
Crucially, the strength and breadth of this recovery have already led to significant upward revisions in FY27/FY28 earnings estimates across MOFSL's NBFC coverage universe, occurring earlier than typically anticipated in the financial year.
Fundamentally Different Earnings Upgrades
Unlike previous periods where earnings upgrades were primarily fueled by lower-than-expected credit costs, the current recovery is fundamentally different. MOFSL notes that multiple earnings levers are moving favorably, making the current earnings trajectory more sustainable than one driven solely by provisioning normalization.
Collection efficiencies have notably improved after nearly two years of stress in segments like microfinance, unsecured personal/business loans, and select secured retail segments. Fresh slippages have also moderated. Tighter underwriting, stronger collection infrastructure, reduced borrower leverage, and a greater emphasis on secured lending have structurally enhanced portfolio quality. Consequently, credit costs have positively surprised several lenders, confirming that the sector has moved past the peak of its asset quality cycle.
Strong Credit Growth Across Segments
Credit growth remains healthy across most retail lending segments, supported by strong underlying demand and ongoing formalization of credit. Vehicle financiers have benefited from robust growth post-GST cuts, steady commercial vehicle replacement demand, and improving used vehicle financing. Housing Finance Companies (HFCs) continue to report healthy disbursements in affordable and mid-income housing. Gold financiers are seeing strong demand for secured credit, while growth is also recovering in MSME, personal loans, and digital lending. Management commentary indicates a clear shift towards profitable, return-accretive growth rather than mere market-share maximization.
Top NBFC Stocks to Consider Buying
MOFSL has identified several key NBFC stocks as top picks:
- Bajaj Finance: The company has moved beyond its earnings normalization phase and is entering a period of structurally higher earnings growth. A combination of broad-based loan growth, resilient margins, improving asset quality, and declining credit costs is driving a significant acceleration in profitability.
- L&T Finance: Alongside Bajaj Finance, L&T Finance remains a preferred pick among diversified NBFCs.
- PNB Housing: This housing finance major is another stock that MOFSL favors.
- Five-Star Finance: The NBFC appears on track to regain momentum with a healthy pick-up in disbursement volumes and Assets Under Management (AUM) growth. Early-stage delinquencies have improved, while slippages and credit costs remained broadly stable sequentially, positioning the business for strong future growth.
Potential near-term risks include proposed RBI restrictions on revolving/Flexi credit and possible changes or capping to credit life insurance commissions.