NBFC Sector Shows Mixed Growth; AB Capital, Chola Finance Top Picks
Overview
India's NBFC sector navigates a complex phase of loan growth, with some segments like gold and vehicle financiers surging while others lag. Despite varied demand, declining funding costs and stable asset quality are bolstering earnings. Motilal Oswal highlights Aditya Birla Capital and Cholamandalam Investment and Finance Company as favored investments, citing their strategic positioning and growth potential.
NBFC Sector Navigates Divergent Growth
The non-banking financial company (NBFC) sector is experiencing a bifurcated loan growth environment. Aggregate lending is projected to hit approximately 15% year-on-year by December, driven by pockets of demand rather than a broad market upswing. Easing funding costs and resilient asset quality, however, continue to underpin earnings.
Segment Performance Varies Wildly
Gold financiers are leading the pack with significant asset under management expansion. Vehicle financiers report a rebound in disbursements, supported by pent-up demand and policy measures like GST rate cuts. Diversified lenders are also seeing renewed traction in unsecured loans. Conversely, microfinance institutions grapple with subdued growth, prioritizing asset quality amid high rejection rates. Housing finance companies face softer trends due to intense competition from banks and seasonal factors.
Profitability Boosted by Lower Funding Costs
Borrowing expenses are trending downward across the NBFC universe, providing a structural tailwind. While net interest margins (NIMs) show segment-specific performance, vehicle and affordable housing lenders are poised for margin expansion. Larger housing finance players may see some compression due to market competition.
Asset Quality Remains Stable
Overall asset quality has held firm. Seasonal improvements are evident in vehicle finance, and housing lenders report minimal new stress. Credit costs in microfinance are moderating but full normalization will take time. Diversified and infrastructure financiers have maintained strong balance sheets without significant deterioration.
Earnings Momentum Strong
Sector-wide profit after tax is forecast to grow robustly, fueled by steady net interest income, controlled operating expenses, and declining credit costs outside microfinance. Excluding microfinance, earnings growth highlights the sector's underlying financial strength.
Outlook and Top Picks
Structurally, the sector is shifting towards diversified portfolios and tighter underwriting. Motilal Oswal Financial Services names Aditya Birla Capital and Cholamandalam Investment and Finance Company as top picks. Aditya Birla Capital is favored for its expanding franchise, improving asset quality, and cross-selling opportunities, with projected ROE of 16% by FY28. Cholamandalam Investment and Finance Company benefits from improving visibility in vehicle financing, with management guiding for 20-25% AUM growth in FY26 and expected PAT CAGR of 25% over FY25-28.
Aditya Birla Capital (AB Capital)
Aditya Birla Capital is well-positioned for sustained growth, driven by its expanding lending operations, better asset quality, and growing scale in insurance and asset management. The company's focus on cross-selling and digital initiatives aims to boost operating efficiency, targeting a 16% return on equity by FY28.
Cholamandalam Investment and Finance Company (Chola Finance)
Early signs of a cyclical upturn in vehicle financing are emerging for Chola Finance, with improved disbursement momentum. Management reiterated guidance for 20-25% AUM growth in FY26, supported by steady recovery in vehicle demand. Expected margin expansion and easing credit costs are set to drive earnings.
