Bajaj Finance, Can Fin Homes, SBI Card & Cholamandalam shares are Jefferies top NBFC picks

Jefferies has stayed positive on non-banking finance companies (NBFCs),  as it believes the rate cycle is peaking out. In a report on consumer finance companies, the foreign brokerage said loan growth should stay strong and drag on profit growth due to net interest margin (NIM) compression seen in FY23 should fade. NIMs are nearing a bottom for most NBFCs, the brokerage said while picking Bajaj Finance Ltd, Cholamandalam Investment and Finance Company Ltd, SBI Card and Can Fin Homes are it top picks. Jefferies also sees scope for further re-rating at Shriram Finance.

It finds Bajaj Finance worth Rs 8,830, SBI Card worth Rs 1,100, Cholamandalam Rs 1,350 and Can Fin Homes Rs 970. It maintained a ‘Buy’ on Shriram Finance with a target of Rs 2,200.

Jefferies said the aggregate profit of its covered NBFC universe grew 19 per cent YoY in the June quarter, which was in line with its estimates. This is even as trends were mixed across companies.

"Earnings at LIC Housing Finance, Can Fin and SBI Card surprised positively, while earnings at Piramal Enterprises, Cholamandalam, Aavas and Aptus missed our estimates. Within our coverage, MMFS, LIC Housing and Home First reported strongest profit growth on a YoY basis, though a low base helped MMFS. At auto NBFCs, strong loan growth aided strong profit growth across our covered companies despite some pressure on margins. In contrast, stronger NIM drove a positive earnings surprise at large HFCs like LIC Housing and Can Fin, even as loan growth was relatively subdued," Jefferies said.

In terms of asset quality, Jefferies said most NBFCs reported a slight increase in stage 3 assets, reflecting usual seasonal trends seen pre-Covid. LICH Housing saw rise in retail gross NPA in 1Q. Its management attributed this to technical glitches related to new platform roll out. Asset quality environment stays broadly benign though Bajaj Finance and Cholamandalam flagged some risks in rural personal loan segment and select micro markets, it said.

"Impact of floods/ excess rains on collection efficiency has been limited per most mgmt. SBI Cards continued to see stress from legacy cohort, but the management expects provisions to fall in 2H," Jefferies said.

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