Outlook bright for auto financiers, but valuations may cap upside: Analysts

Vehicle financiers gain double digits in FY26 as AUM, NIMs and auto loan demand rise. Analysts turn positive on Shriram Finance, M&M Finance, Cholamandalam Investment, and Bajaj Finance

Auto finance stocks to buy: The double digit run in shares of automobile financiers seen thus far in fiscal 2025-26 (FY26) has more legs, believe analysts, as near-term risk-reward is turning favourable for the sector. They, however, caution that valuations are not inexpensive across the board and investors need to cherry pick stocks while investing.

 

"The outlook for vehicle financiers appears mildly positive at this stage, supported by improving margins, gradual recovery in vehicle demand, and stable asset quality. While credit costs remain a watch point, coupled with not-so-cheap valuations, the near-term risk-reward is turning incrementally favourable," said Arun Agarwal, vice president for fundamental research at Kotak Securities.

 

On the bourses, major vehicle financing non-bank finance companies (NBFCs) have logged double digit gains so far in FY26. While Shriram Finance shares have leaped 29.14 per cent (till December 11), M&M Financial Services, Cholamandalam Investment and Finance, and Bajaj Finance shares have surged between 12.50 per cent and 23.58 per cent, ACE Equity data shows.

 

By comparison, the Nifty50 index has gained 10.12 per cent so far in FY26, and the Nifty Financial Services index has risen 9.92 per cent.

 

Shriram Finance trades at a price-to-earnings (P/E) multiple of 14.6x, compared to its 5-year average (blended forward P/E) of around 10.3x, as per Bloomberg data.

 

M&M Finance, meanwhile, trades at 14.7x versus 5-year average of 12x, and Cholamandalam Investment trades at 23.6x versus 5-year average of 22.4x.

Auto financing to rise

According to analysts, tax rationalisation, rising incomes, preference for personal mobility, and under penetration of vehicles in India are driving demand for autos, and in turn financing. Moreover, as the gross domestic product (GDP) is expected to remain healthy at around 6.7 per cent in the next financial year, vehicle sales are set to rise over the near to medium term, aiding the vehicle finance market, as per CRISIL Ratings.

 

The rating agency estimates AUM of vehicle loans of NBFCs to grow at 16-17 per cent annually to ₹11 trillion by March 31, 2027. Segment-wise, CRISIL expects cars and utility vehicle (UV) financing to grow at 23 per cent annually over this fiscal and the next, CV financing to grow at 11 per cent, two/three-wheeler to rise 17 per cent, and tractor financing by 12 per cent during the period.

 

"Major auto financers have guided for AUM growth of around 17-19 per cent for FY26, along with expansion in net interest margin (NIMs) to the tune of 15-30 bps. This robust growth outlook, along with a fall in credit cost, are expected to aid the profitability of well managed companies," noted Vaqar Javed Khan, senior fundamental analyst at Angel One.

 

In this backdrop, Khan suggests investors can take selective exposure to auto financiers at current levels, and increase their allocation on dips. PL Capital has upgraded M&M Financial Services stock to 'Accumulate' with a target price of ₹375.

 

"While Q2FY26 disbursements were muted at ₹13,510 crore (up 3 per cent Y-o-Y), the company saw strong growth in tractor volumes (up 41 per cent Y-o-Y) and expects the trend to continue in H2FY26. Higher PV volumes, positive monsoon, and recovery in rural demand for tractors are likely to drive growth over the near-term. We expect AUM to grow 15 per cent in FY26 and 14 per cent in FY27E," it said.

 

ICICI Securities has a 'Hold' rating on Bajaj Finance with a target price of ₹1,050. Axis Direct has a 'Buy' rating on Shriram Finance with a target of ₹860.

 

"We remain confident in Shriram Finance’s ability to deliver a healthy AUM/NII/earnings growth of 16 per cent CAGR each over FY26-28E, driven by consistent and healthy AUM growth across focus segments, improving NIMs and controlled credit costs. We revise our EPS estimates upwards by around 4 per cent in FY26 and 1-2 per cent over FY27-28E," the brokerage said.