2 hours ago
Viral Shah, Senior VP at IIFL Capital, said that credit growth trends remain healthy and asset quality is holding up despite economic uncertainties. Shah remains positive on diversified lenders such as Shriram Finance and Cholamandalam Investment, while cautioning that gold financiers remain heavily dependent on movements in gold prices.
Large non-banking finance companies (NBFCs) — lenders that operate like banks but cannot accept deposits — are set for earnings upgrades of 3-5%, driven by falling borrowing costs and asset quality that is holding better than expected, according to Viral Shah, Senior Vice President at IIFL Capital.
Shah said the macro backdrop has shifted in NBFCs' favour. Crude oil is below $80 a barrel, the rupee is strengthening, and the Reserve Bank of India (RBI) is not under pressure to raise rates. "This backdrop is positive for NBFCs, especially the large ones," he said. IIFL had made an anti-consensus call a month ago that downside risks were already priced in — a view Shah said is now playing out.
Borrowing costs for NBFCs have fallen 30-40 basis points from their peak — the primary driver of earnings upgrades. Three-year debt paper is the relevant benchmark for most NBFCs; five-year paper for mortgage-focused lenders. Costs remain 10-20 basis points above pre-war levels, leaving room for further easing. The monsoon is the remaining variable: a normal season would support rural credit demand and could push upgrades beyond the 3-5% base case, he said.
Shah's argument is a growth-adjusted one on valuations. Large NBFCs trade at 19-20 times earnings versus roughly 15 times for large Shriram Finance
. Adjust for growth, however, and the multiples converge. Large NBFCs are forecast to deliver 25% compounded earnings growth over two years. Large private banks are expected to grow at 15-18%; all large banks, including public sector lenders, average around 12%. "When you adjust it for the growth on a PEG basis, you will see that the multiples are similar to what it is for a large private bank," Shah said. His recommendation: both large NBFCs and large private banks, not one over the other.
Today's large NBFCs are also structurally different from earlier cycles, Shah noted. They have moved away from single-product lending and are now multi-product and multi-segment, reducing earnings volatility.
In vehicle finance, Shah pushed back on the view that falling crude prices directly improve credit quality. Based on 20 years of data, diesel price changes show no meaningful correlation with asset quality at lenders like Shriram Finance or Cholamandalam. Truck utilisation is the real driver. Freight rates rose 2% in April and May, recovering half of the diesel cost increase — a further 1.5-2% would close the gap. "It is not an alarming situation that people anticipate," Shah said. His top picks in vehicle finance are Cholamandalam Investment and Tata Capital. Outside that segment, he named PNB Housing Finance, Five-Star Business Finance, and Five-Star Business Finance.
Shah was cautious about gold financing companies. Around 70-80% of their stock price moves are determined by gold prices, with volume growth at just 2-3%. A flat gold price — not even a decline — is now a negative outcome because larger NBFCs are entering the space and adding competitive pressure. "We are entering this scenario on a much stronger footing," Shah said of the broader NBFC sector, pointing to underlying asset quality trends holding up across the board.
For the full interview, watch the accompanying video
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