Morgan Stanley warns of NBFC earnings cuts, urges selective approach

Morgan Stanley sees more FY26 earnings downgrades for NBFCs and advises investors to focus on stocks with strong fundamentals and valuation safety amid sector volatility

Morgan Stanley has reiterated its “stay selective” stance on Indian non-bank financial companies (NBFCs), cautioning that further consensus earnings downgrades were likely in the ongoing financial year 2026 (FY26).

 

The global brokerage has advised investors to focus on stocks offering a margin of safety in both valuations and fundamentals amid emerging volatility and sector dispersion.

 

The firm’s latest investor presentation pointed to early signs of volatility, with recent earnings and asset quality trends underlining the need for a cautious, bottom-up investment approach.

 

“In our March 2025 report, our view was limited upside in large-caps following substantial year-to-date rallies and better opportunities and risk-reward among select small-caps. We have seen small-caps outperform since. We continue to look for opportunities bottom up,” Morgan Stanley observed.

 

 

Following the Q4FY25 and Q1FY26 results, most NBFCs have seen downward revisions to consensus estimates, a trend the brokerage expects will persist in upcoming quarters.

 

“We expect further consensus EPS cuts post Q1, especially for NBFCs where downside risks to expectations and valuations remain elevated. In this backdrop, we recommend a selective approach, with emphasis on margins of safety in earnings and valuations,” the report said. 

 

Morgan Stanley was overweight on Bajaj Finance, SBI Life, Shriram Finance, Aditya Birla Capital, Can Fin Homes, and PNB Housing. Among smaller caps, it preferred affordable housing financiers such as Aptus Value Housing Finance and Home First Finance for their long-term secular growth prospects and potential for re-rating.

 

The brokerage maintained an equal-weight rating on Muthoot Finance, Cholamandalam Finance, ICICI Prudential Life, ICICI Lombard, Aavas Financiers, Mahindra Finance, and Manappuram Finance.

 

It retained underweight calls on SBI Cards, L&T Finance, PB Fintech, MCX, and LIC Housing Finance. According to the brokerage, stress in unsecured credit remains, but personal loans were showing greater resilience compared to credit cards and microfinance, where asset quality improvement was yet to play out.

 

For risk-averse investors, Morgan Stanley recommends looking at defensive businesses with healthy return on equity and attractive valuations, citing Power Finance Corporation and REC as preferred options.

 

On the vehicle and commercial loans front, the brokerage saw early signs of stress, though it describes overall trends as manageable at this stage.