Bajaj Finance, L&T Finance, PNB Housing, Five-Star Finance: NBFC stocks to buy

MOFSL in a fresh note on Friday said NBFCs continue to offer an attractive combination of healthy growth, improving asset quality, and resilient profitability. Within the sector, the domestic brokerage prefers lenders that combine strong liability franchises, diversified portfolios, disciplined underwriting, and superior execution.

Such franchises, MOFSL said, may deliver industry-leading growth while sustaining healthy return ratios, thereby supporting further earnings upgrades and valuation rerating over the course of ongoing financial year.

Rerating in past 3 months

The sector has witnessed a meaningful rerating over the past three months as earnings upgrades have reinforced investor confidence in the sustainability of growth and profitability. Our top picks are Bajaj Finance, L&T Finance, PNB Housing, and Five-Star Finance," MOFSL said.

New cyclical recovery
MOFSL said June quarter earnings season has strongly validated its thesis that NBFCs are entering a new cyclical recovery, adding that operating performance has improved meaningfully across the sector, with healthy loan growth, broad-based asset-quality normalization, resilient margins, and improving operating leverage driving earnings beyond expectations.

"More importantly, the strength and breadth of the recovery have already translated into meaningful upward revisions to FY27/FY28 earnings estimates across our NBFC coverage universe – earlier than would typically be expected at this stage of the financial year," MOFSL said.

Earnings upgrades fundametally different 
It said the current earnings recovery is fundamentally different from periods when earnings upgrades were driven primarily by lower-than-expected credit costs. This time, multiple earnings levers are moving favorably and the current earnings trajectory is more sustainable than a recovery driven by provisioning normalisation alone, MOFSL.

Collection efficiencies improve
Following nearly two years of stress across microfinance, unsecured personal/business loans, and select secured retail segments, collection efficiencies have improved, and fresh slippage has moderated, MOFSL said.

"Tighter underwriting, stronger collection infrastructure, lower borrower leverage, and a greater emphasis on secured lending have structurally improved portfolio quality. Consequently, credit costs have surprised positively across several lenders, providing greater confidence that the sector has moved beyond the peak of the asset quality cycle," MOFSL said.

Credit growth strong
Credit growth remains healthy across most retail lending segments, supported by strong underlying demand and continued formalization of credit. Vehicle financiers have benefited from strong growth post-GST cuts, steady CV replacement demand, and improving used vehicle financing. HFCs continue to see healthy disbursements across affordable and mid-income housing. Gold financiers continue to benefit from strong demand for secured credit, while growth is also recovering across MSME, personal loans, and digital lending. Importantly, management commentary points to a clear shift toward profitable, return-accretive growth rather than market-share maximization.

4 NBFC stocks to buy
On Five Star, MOFSL said the NBFC appears on track to regain its mojo with a healthy pick-up in disbursement volumes and AUM growth. Early-stage delinquencies improved meaningfully, while slippages and credit costs remained broadly stable sequentially.

With the business now on a stronger footing, the company is well-positioned to build from here, MOFSL said.

On Bajaj Finance, MOFSL said the NBFC has moved beyond the earnings normalisation phase and is entering a period of structurally higher earnings growth. The combination of broad-based loan growth,
resilient margins, improving asset quality, and declining credit costs is driving a meaningful acceleration in profitability, it said.

Within the diversified NBFCs, "Bajaj Finance and L&T Finance remain our preferred picks. The key near-term risks remain the proposed RBI restrictions on revolving/Flexi credit and potential changes (or capping) to credit life insurance commissions," MOFSL said. PNB Housing is another stock that MOFSL likes.