Indian NBFCs Eye Valuation Re-rating as Asset Quality and Loan Growth Stabilise
India’s non-banking financial companies are shifting from earnings recovery to potential valuation re-ratings as credit costs normalise and operating leverage strengthens profitability across major lenders.
India’s non-banking financial sector is entering a new phase of structurally stronger earnings growth, prompting analysts to anticipate a broader valuation re-rating. This shift is driven by healthier loan growth, normalised credit costs, and emerging operating leverage rather than just lower provisions.
Asset quality has emerged as a primary catalyst after nearly two years of stress across microfinance, unsecured personal loans, and select retail segments. Collection efficiencies have improved and fresh slippages have moderated due to tighter underwriting and a strategic pivot toward secured lending.
Loan expansion is recovering across vehicle financing, housing, gold loans, and digital lending without visible deterioration in risk discipline. Vehicle financing specifically benefits from recent GST cuts and steady commercial vehicle replacement cycles.
Lenders are now prioritising return-accretive growth over sheer market share expansion. Investments in technology, digital sourcing, and centralised operations are beginning to deliver the operating leverage necessary to improve medium-term return ratios.
Siddhartha Khemka, head of research for wealth management at Motilal Oswal Financial Services Ltd, notes that Bajaj Finance has moved beyond basic earnings normalisation. The company is supported by broad-based loan growth, resilient margins, and AI-led execution, warranting a target price of 1,300.
L&T Finance is similarly well-positioned through its transition to a granular, retail-focused franchise. The company is projected to achieve a 30 per cent compound annual growth rate in profit after tax between fiscal years 2026 and 2028, with a target price of 380.
By fiscal year 2028, L&T Finance expects its return on assets and return on equity to reach 2.6 per cent and 15 per cent, respectively. This trajectory is underpinned by scaling core retail segments and expanding emerging businesses like micro-loan against property.
As balance-sheet risks recede and funding costs moderate from first-quarter levels, the sector’s fundamentals are aligning for sustained profitability. Investors are increasingly viewing these lenders as capable of offsetting gradually softer lending yields through disciplined risk management and operational efficiency.
