Jefferies On NBFC Stocks: Non-banking financial companies have taken a beating on fears of higher interest rates, but Jefferies believes the sell-off may have already done much of the heavy lifting on valuations.
With a 50-basis-point rate hike in CY26 looking likely, the brokerage argues that the impact will not be uniform, and some lenders could actually benefit.
Jefferies analysts Bhaskar Basu, Prakhar Sharma and Kamal Mulchandani said NBFC valuations are now near their lows, excluding the Covid period, even as growth remains strong and asset quality stays resilient.
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Against this backdrop, the brokerage finds the sector's risk-reward favourable and names Bajaj Finance (BAF), Aditya Birla Capital (ABCAP), Cholamandalam Investment and Finance (CIFC) and Shriram Finance (SHFL) as its top picks.
The call comes after NBFCs fell 9% over the past month, underperforming both NIFTY Banks, which declined 5%, and the NIFTY, which slipped 6%.
Why Jefferies Thinks The Worst Of Rate Fears May Be Priced In
The central argument rests on how NBFC stocks have behaved in previous rate-hike cycles.
Jefferies studied India's three rate-hike cycles over the past 15 years, including September 2013 to January 2014, June to August 2018 and May 2022 to February 2023. Its analysis suggests valuation multiples typically compress before the first rate hike as bond yields rise, while additional derating after the tightening cycle begins tends to be limited.
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Multiples also tend to recover as interest rates approach their peak.
In fact, during the six months following the first rate hike, NBFCs outperformed the NIFTY in two of the three cycles studied by Jefferies.
They also outperformed banks, although performance differed significantly across individual NBFC segments. Over the 12 months following the first hike, NBFCs outperformed the broader market.
That historical pattern makes the recent correction particularly important for investors assessing what a potential 50-bps hike could mean for NBFC stocks.
Rate Hikes Could Create Winners And Losers
Higher rates, however, are unlikely to affect every lender in the same way.
Jefferies expects housing finance companies with largely floating-rate assets and a higher proportion of fixed-rate liabilities to benefit. LICHF and BHFL have 46% and 35% fixed-rate liabilities, respectively, potentially allowing spreads to improve.
Among diversified NBFCs, ABCAP could also gain, with 70% of assets and 56% of liabilities floating rate. Bajaj Finance, where the corresponding mix is 43% and 38%, should remain broadly neutral.
Auto financiers face a tougher equation because their NIMs could decline. Even here, Jefferies finds SHFL and CIFC relatively better positioned. SHFL has only 18–19% floating borrowings following its rating upgrade, while CIFC has 37% floating-rate assets and 50% floating-rate liabilities.
Strong Growth Could Cushion The NIM Hit
The other part of the investment case is earnings.
Jefferies said growth remains strong and asset quality is benign so far. Credit costs could also positively surprise in some segments, including unsecured lending, cushioning the impact of weaker margins.
For CIFC, Jefferies expects healthy growth and lower credit costs to support more than 20% EPS growth despite potential NIM pressure from higher rates. The stock's valuation at 3.3 times FY1 book value is considered attractive.
At SHFL, the brokerage expects the rate-hike impact to remain limited, while growth could improve in the second half as MSME growth picks up. Its valuation of 1.8 times FY1 book value is viewed as reasonable.
One risk remains on the radar: a weak monsoon. Jefferies pointed to a 13% deficit and uneven rainfall distribution as a potential concern for lenders with rural exposure.
NBFC Valuations Near Lows
Sector valuations now stand at around 2.2 times FY1 book value, near their lows excluding the Covid period.
Jefferies therefore prefers diversified lenders such as Bajaj Finance and Aditya Birla Capital for their healthy growth and neutral-to-positive sensitivity to higher rates, along with the possibility of positive credit-cost surprises.
For investors, the brokerage's message is that a rate hike itself may no longer be the biggest risk. With NBFC stocks already derating ahead of monetary tightening, the more important question could be which lenders have the asset-liability mix, growth and credit costs to emerge stronger once rates start moving higher.
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