Top stock picks: Prabhudas Lilladher is bullish on these 3 NBFC stocks

The research analysts of the broking firm Prabhudas Lilladher said in a note that “We expect NBFCs under our coverage universe to report mixed earnings, given 1) strong AUM growth of ~4.25% QoQ led by vehicle financiers (CV upcycle) & retail loans and 2) slight moderation in margins due to rising cost of funds. However, as a whole we expect NBFC’s under our coverage universe to report margins ~10.19% (vs 10.20% in Q2), as strong disbursements and yield transmission cushions rising cost of funds. We expect better asset quality and flat credit cost QoQ, as collections have reached pre-covid levels for most companies. We expect vehicle financiers like SHTF and CIFC to maintain their momentum (as shown in the last quarter), given strong CV demand. BAF is expected to report robust 5.7% QoQ AUM growth along with pristine asset quality, as their omni channel strategy is paying rich dividends towards customer acquisition (3.1mn new customers in Q3). We rate Bajaj Finance (BAF), Cholamandalam Investment & Finance Corporation(CIF) and Manappuram Finance Ltd (MGFL) as our top picks in the NBFC space.”

They further added that “With strong AUM growth, we expect Q3’23 to be strong for NBFCs across board. Although rate hikes at a faster pace and another wave of covid can play spoilsport and affect credit demand, yet NBFCs aggregate earnings are expected to inch higher on QoQ basis for better loan growth. We like BAF, CIFC and MGFL from coverage universe and rate them as top picks.”

“As per the company’s business update, AUM growth in Q3’23 was strong at 5.7% QoQ (marginally below our expectation of 6.5%). Customer franchise as of 31stDec-22 was 66.0mn (+19.1% YoY/+4.9% QoQ). New customers for Q3’23 stood at 3.1mn (+19.2% QoQ). Both these parameters have continued to show strength and company has managed to better the run rate achieved in Q2’23. Deposit momentum was also strong and showed a 9.1% QoQ growth, at a time when there is intense competition for deposits between Banks and NBFCs. The omni-channel platform will provide a fully-integrated, seamless experience for customers to navigate between online and offline channels in a smooth manner and enable BAF to be preferred interface for users. Full roll-out of omni channel platform by FY23 will provide a fully-integrated, seamless experience for customers with improved UI/UX platform, upgraded web experience and increased penetration of Super App. Bajaj Finance has seen good traction in the non-captive two wheeler financing business launched in July. We recommend ‘BUY’ on BAF at TP of ₹8,953 (TP unchanged),” they said in a note.

“CIFC is expected to post strong QoQ AUM growth of 5% on the back of strong M&LCV, used vehicles and consumer/SME loans. Truck utilization levels have improved and fuel prices stabilizing have led to increase in profitability for operators. New business (consumer and MSME segments) disbursements saw strong traction in Q2’23 and we expect it to continue in Q3’23. We can see margin protected sequentially on the back of strong growth in higher yield portfolio. Recommend ‘BUY’ at TP of ₹792(TP unchanged),” said the research analysts of the broking firm Prabhudas Lilladher.

“Manappuram Finance has seen a steep correction and is 30% off its 52- week high price and trades at an attractive valuation of 1.0x/0.9x FY24/FY25 P/ABV. Margins to see improvement as we expect yields to continue with their uptick and rise to 22.1% levels from 21.9% in Q2’23. Manappuram’s microfinance business and non-gold business(combined> 35% of AUM) should see strong performance with strong disbursements and asset quality, although gold AUM to remain flattish. The benefits of new RBI norms for microfinance companies such as ‘removal of pricing cap’ should start flowing in. We believe worst is over for Manappuram Finance and the company is now one amongst our top pick. Recommend ‘BUY’ at TP of ₹144 (TP unchanged),” they further added.

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.