Bajaj Finance, Shriram Finance, Fusion Micro Finance among NBFC stocks to buy for up to 30% upside
- IIFL Securities 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.
The large non-banking finance companies (NBFCs) in India are set to reform with the new bank-like regulations and as they pivot from being mono-line and niche lenders into becoming multiproduct, diversified lenders, analysts said.
The shadow lenders have become a prominent player in the Indian credit landscape, representing 25% and 21% of total and retail + SME credit (excluding 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.
Bajaj Finance | Buy | TP: ₹9,200
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 segments will have ~10 bps ROA impact. We expect Bajaj Finance’s investments in new tech to deliver non-liner growth (200 bps lower C/I). Leadership transition at Bajaj Finance should be smooth and gradual with Rajeev continuing to be at the helm,” IIFL Securities said.
The brokerage firm has a Buy rating on the stock with a target price of ₹9,200 per share, implying an upside of nearly 22% from Monday’s closing price.
Also Read: HDFC Bank may face margin, net worth hit
Shriram Finance | Buy | TP: ₹2,250
The brokerage has a ‘Buy’ rating on Shriram Finance as it believes the NBFC’s growth rate accelerates to 17% 3-year Cagr (from 10-12% pre-merger) as it cross-sells Shriram City Union Finance loans from branches and sustains margins in this rising COF environment.
The brokerage has a target price of ₹2,250 on Shriram Finance shares, expecting an increase of over 17%.
Fusion Micro Finance | Buy | TP: ₹800
IIFL Securities has initiated coverage on Fusion Micro Finance with a ‘Buy’ call and a TP of ₹800 per share, implying a 30% upside from Monday’s closing price.
In the last 3 years, Fusion has added 1.7 million customers (highest vs peers). With ATS being 47% lower than CreditAccess Grameen and lower customer and branch vintage, we believe Fusion is well placed to deliver above-industry AUM growth of 26% Cagr. Its geographic concentration is lowest vs peers with room for penetration growth in its largest markets: UP and MP, the brokerage said.
Also Read: IIFL Finance share price rises over a per cent in a weak market; HSBC sees 35% upside in stock
L&T Finance Holdings | Add | TP: ₹135
L&T Finance Holdings is fast executing its retailisation strategy to transform into a fully retail lender. However, high retail profitability should manifest in higher overall return ratios only by FY26. In the meantime, medium-term ROEs should likely be subdued (13.4% by FY26) due to excess capitalisation, IIFL Securities said.
It has a Buy rating on the stock with a target price of ₹135 per share.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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