Motilal Oswal sector of the week: NBFC; AB Capital, Chola Finance top picks

The NBFC sector is witnessing a phase of mixed loan growth, with clear divergence across sub-segments, even as easing funding costs and stable asset quality continue to support earnings momentum. Aggregate loan growth for the broader NBFC universe is estimated at around 15 per cent year-on-year as of Dec’25, reflecting a gradual demand recovery in select pockets rather than a broad-based upcycle.

 

Demand trends remain uneven. Gold financiers are emerging as the strongest growth engine, supported by robust traction in gold loans, translating into sharp expansion in overall assets under management (AUM). Vehicle financiers are also reporting improved disbursement momentum, aided by pent-up demand, festive-season tailwinds, and policy support such as GST rate cuts. Diversified lenders are seeing growth revive as unsecured loan disbursements regain traction following a period of caution. In contrast, microfinance institutions continue to face subdued growth, with lenders prioritising asset quality over expansion amid elevated rejection rates. Housing finance companies, including affordable housing-focused players, have reported relatively softer disbursement trends, impacted by intense competition from banks and seasonal disruptions.

 

 

On the profitability front, declining cost of funds is providing a structural tailwind. Borrowing costs have continued to trend downward across most NBFCs, though net interest margin (NIM) performance remains segment-specific. Vehicle financiers and affordable housing lenders are expected to benefit from margin expansion, while larger housing finance players may see some compression due to competitive pressures and lending rate adjustments. Overall, margin dynamics remain supportive of earnings growth.

 

Asset quality across the sector has remained broadly stable. Seasonal improvements have supported vehicle finance portfolios, while housing-focused lenders have reported limited incremental stress. In microfinance, while credit costs are moderating sequentially, full normalisation is expected only over the next few quarters. Importantly, diversified lenders and infrastructure-focused financiers have not reported any material deterioration, reinforcing balance sheet resilience.

 

These trends are translating into healthy earnings growth. Sector-wide profit after tax is estimated to grow at a strong pace year-on-year, driven by steady net interest income growth, controlled operating expenses, and moderating credit costs outside the microfinance segment. Excluding microfinance, earnings growth remains robust, underscoring the sector’s underlying strength.

 

Structurally, the sector is evolving toward more diversified portfolios, tighter underwriting standards, and a renewed focus on sustainable growth rather than aggressive expansion. Over the medium term, NBFCs with strong liability franchises, diversified product offerings, and proven risk management frameworks appear well positioned to benefit from demand normalisation, easing funding conditions, and stable asset quality, supporting a constructive outlook for the sector.

AB Capital – TP: ₹380

Aditya Birla Capital is well-positioned for sustained growth, driven by its expanding lending franchise, improving asset quality, and growing scale across insurance and asset management. The NBFC business is expected to see gradual NIM expansion, supported by a rising share of higher-yield personal and consumer loans and controlled credit costs. The housing finance arm is set for continued AUM growth with improving RoA to 2–2.2 per cent over the next 6–8 quarters, aided by better operating leverage. Meanwhile, the asset management and insurance verticals continued to scale, supported by rising AUM, healthy premium growth and improving persistency metrics. 

 

The company’s focus on cross-selling, digital initiatives, and the “One ABC” platform should enhance operating efficiency to take ROE to 16 per cent by FY28E and drive a 25 per cent PAT CAGR over FY25-28.

Chola Finance – TP: ₹2,040

Early signs of a cyclical upturn in vehicle financing are becoming visible as disbursement momentum improves across segments. In 2QFY26, management reiterated guidance of 20–25 per cent AUM growth, supported by sustained recovery in vehicle demand post GST cuts and festive-led momentum, with growth visible across most VF categories. Growth drivers include a gradual shift towards newer BS6 vehicles, calibrated expansion in gold loans and consumer durables, and improving funding conditions. 

 

Management expects NIM expansion of 10–15bp in 2HFY26 as cost of funds moderates, while credit costs are likely to ease sequentially, albeit remaining elevated for FY26 due to legacy fintech runoff. Structurally, CIFC is evolving into a more diversified and resilient NBFC, backed by disciplined risk management and improving asset quality. Management targets restoring RoTA to 3.5 per cent over time. We expect PAT CAGR of 25 per cent over FY25–28, with RoA/RoE of 2.7 per cent/20 per cent by FY28. We are positive on Chola Finance, driven by improving growth visibility and confidence of crossing 20 per cent AUM growth in FY26.

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(Disclaimer: This story is by Motilal Oswal Financial Services Research desk. Views expressed are his own.)