Kotak Equities said auto lending to NBFCs is expected to perform well.Cholamandalam upgrades Shriram Finance to 'buy'

Non-banking financial companies (NBFCs) that provide vehicle financing have performed well and net interest income growth in FY2025 is expected to be driven by strong revenue and product diversification, analysts said.

Analysts at Kotak Institutional Equities said this growth for NII will come despite auto sales volumes remaining subdued and borrowing costs still likely to rise, and trends in credit costs. It added that while there are mixed possibilities, there are no red flags regarding the quality of the assets. .

“A combination of product diversification, focus on yields and fees, and a benign credit cycle are likely to support strong performance for auto finance NBFCs. Financing growth will be subdued from current high levels (2025 17-24% in FYE) reduces the risk of overheating and bodes well for all stakeholders,” the brokerage said in a report.

It expects core sector growth in 2025 to be 200-1,200 basis points (bp) lower than current levels, while auto sales growth will moderate to 3-9%. Furthermore, he is expected to keep his credit cost down to 1.1% to 2.1% among all players.

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While there is a lot of street angst over the Reserve Bank of India's (RBI) crackdown on NBFCs, Kotak Equities is adamant about prioritizing vintage NBFCs that have experienced multiple cycles and regulatory headwinds.

Kotak Equities has upgraded Cholamandalam Investment and Finance Company and Shriram Finance, but continues to keep a close eye on Mahindra Finance.

Cholamandalam Investment Finance Company | Purchase | TP: INR1,019

The securities firm has upgraded Cholamandalam Investment Finance Company to “buy” and has a target price of INRper share as the company is a multi-product NBFC model and we believe that stable performance across cycles and an unblemished track record post-DBS exit (2009) offers rich valuations. Acquire 1,019 shares.

“Chola continues to experience strong growth (moderately decelerating from 40% in FY24 to 24% in FY25) while switching product classes. The decline and increase in non-performing loans had minimal impact on the overall financial performance in September 2024. Chola expects to achieve a CAGR of 23% in loan balances and profits by FY2025-27. “This corresponds to an ROE of 19%,” the brokerage firm said.

Also read: Rise in PSU stocks is flawed, says Kotak, will book profit

Shriram Finance | Purchase | TP: INR2,850

Kotak Equities upgrades Shriram Finance to 'buy' and targets price. INRStarting from 2,850 yen per share INRGiven the growth rate and ROE forecast in the mid-teens at the time of the merger, the company believes it has exceeded expectations and has set the initial number of 2,500 companies.

“We appear to be benefiting from the merger and strong underlying economics in the operations of the former Shriram City Union Finance. The company reported 20% growth in loans in September 2024. In our view, the mid-teens growth rate guidance may be conservative. The company has managed margins wisely by changing its product mix,'' the brokerage said.

ECL coverage for September 2024 is high at 6.2%, providing a tailwind for the company's credit costs.

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M&M Financial Services | Add | INR310

Mahindra & Mahindra Financial Services expects loan volumes to grow by 23% in FY24 and 20% in the next two years. Changes in the product mix that prioritize low-risk (low-yield) loans are putting pressure on profitability. According to Kotak Equities, ROE is likely to remain within the range of 12-14%.

The company has guidance for full-year credit costs of 1.7%, which will depend on strong collection performance in March 2024. The ECL coverage ratio (down to 3.8% from a peak of 4.5-7.2% in FY2020-22) has low scope for reduction, especially for the following reasons: There are also seasonal fluctuations in GNPL, the brokerage added.

The company reiterated its rating on the stock as “Add” and set a target price. INR310 shares per share, up from 305 shares previously.

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Disclaimer: The views and recommendations above are those of individual analysts or brokerages and not of Mint. We recommend checking with a certified professional before making any investment decisions.