In a recent note, the brokerage said growth and collections are tracking well ahead of last year, while softer bond yields and expectations of delayed interest rate hikes should support net interest margins (NIMs).
Jefferies expects the sector to deliver healthy loan growth, easing credit costs and largely range-bound NIMs. While valuations have recovered from the lows seen during the recent geopolitical tensions, they remain broadly around long-term averages.
Among its preferred picks, Jefferies favours Bajaj Finance Ltd. and Aditya Birla Capital Ltd. in the diversified NBFC space, Cholamandalam Investment and Finance Company Ltd. and Shriram Finance Ltd. among auto financiers, and Home First Finance Company India Ltd. and Aavas Financiers Ltd. in the affordable housing finance segment.
The brokerage believes diversified NBFCs such as Bajaj Finance and Aditya Birla Capital are relatively better insulated from potential rural stress arising from a weak monsoon or El Nino conditions.
Meanwhile, select auto financiers such as Cholamandalam Investment and Shriram Finance are benefiting from improving growth trends, easing credit costs and company-specific tailwinds.
Jefferies noted that spreads for prime housing finance companies may remain under pressure until interest rates move higher, although asset quality is expected to remain resilient. It also expects growth for affordable housing finance companies (AHFCs) to improve after a relatively weak first half.
However, the brokerage flagged the monsoon as the key risk to monitor. June rainfall, which accounts for nearly 19% of the annual monsoon, is currently tracking around 42% below normal levels. As a result, rural demand and asset quality remain important watchpoints for lenders with exposure to the rural economy.
Jefferies highlighted that India has witnessed monsoon deficits of more than 5% in FY15, FY16, FY19 and FY24. Of these, FY16 and FY24 were El Nino years, while rainfall shortfalls were most severe during FY15 and FY16.
Given the current backdrop, the brokerage believes diversified NBFCs are best positioned to navigate near-term uncertainties.
