Mumbai: Shares of non-banking financial companies (NBFCs) are in focus after global brokerage UBS upgraded L&T Finance and revised its stance on Bajaj Finance, citing expectations of a renewed personal-loan growth cycle in India. UBS upgraded L&T Finance to Buy from Neutral and raised its target price to Rs 380 from Rs 350.
For Bajaj Finance, UBS upgraded the stock to Neutral from Sell and increased its target price to Rs 1,100 from Rs 910. The brokerage’s latest assessment is based on its expectation that personal loans could become a key driver of the next phase of unsecured credit growth.
According to UBS, India’s unsecured lending market could be entering a fresh growth cycle, supported by improving asset quality, stable household leverage and sufficient liquidity in the financial system.
Personal loans could lead the next credit cycle
UBS expects personal loans to play a central role in the recovery of unsecured lending. The brokerage estimates that personal-loan growth could accelerate to around 30% for NBFCs and 9% for banks.
The outlook comes after unsecured lending remained broadly flat as a proportion of household leverage over the past three years. At the same time, UBS noted that asset quality has improved across several lending segments.
The brokerage expects this combination of improving asset quality and relatively stable leverage to create room for lenders to expand personal-loan portfolios.
Private banks and large NBFCs with established personal-loan franchises could benefit from such a recovery, according to the UBS assessment.
L&T Finance gets Buy upgrade
L&T Finance has received the stronger rating change, with UBS moving the stock from Neutral to Buy. The brokerage raised its target price to Rs 380 from Rs 350.
UBS expects L&T Finance to benefit from faster personal-loan growth and an improvement in return on assets (ROA). The brokerage expects the company’s ROA to move towards around 3%.
The brokerage has also increased its FY28E earnings-per-share estimate for L&T Finance to Rs 21 from Rs 20.20 earlier.
UBS raised the target valuation multiple from 17 times to 18 times. Combined with the revised earnings estimate, this resulted in the new target price of Rs 380.
The upgrade reflects UBS’s expectation that L&T Finance could participate meaningfully in a renewed unsecured lending cycle as personal-loan growth improves.
Bajaj Finance target price raised
UBS has also revised its view on Bajaj Finance. The brokerage upgraded the stock to Neutral from Sell and increased its target price to Rs 1,100 from Rs 910.
However, UBS continues to flag valuation as a consideration for the stock. While the brokerage expects cyclical earnings upgrades as yield-accretive growth combines with healthy asset quality, it has retained a Neutral rating.
For FY28E, UBS raised its EPS estimate for Bajaj Finance to Rs 49 from Rs 48.50. It also increased its target price-to-earnings multiple to 22 times from 19 times.
The revised target price therefore reflects both the higher earnings estimate and the higher valuation multiple assigned by the brokerage.
Gold loans could make room for personal loans
Another factor highlighted by UBS is the outlook for gold lending.
The brokerage expects pressure from gold loans to ease as gold prices stabilise. It believes moderation in gold-loan growth could potentially be accompanied by renewed growth in personal loans.
This would allow lenders with diversified retail portfolios to adjust their lending mix as different segments move through their respective growth cycles.
The shift is particularly relevant for NBFCs, where retail lending has become an important component of overall loan growth.
Liquidity may support NBFC funding
UBS also believes that expectations of higher interest rates may not necessarily translate into a major earnings risk for NBFCs.
The brokerage expects funding conditions to remain relatively supportive because of surplus liquidity in the financial system and anticipated FCNR-B inflows.
FCNR-B deposits are foreign-currency non-resident bank deposits that can provide foreign-currency funding to Indian banks. UBS expects these liquidity conditions to help support the funding environment for financial institutions.
At the same time, the brokerage acknowledged that interest-rate expectations remain an important factor for the sector.
NBFC stocks have already corrected
UBS noted that large diversified NBFC stocks had declined between 2% and 10% over the preceding month. According to the brokerage, the market had already been factoring in expectations of a possible rate hike and weaker margins.
The recent correction therefore forms part of the backdrop against which UBS reassessed its views on individual lenders.
For investors tracking NBFC stocks, the latest report highlights the importance of loan growth, asset quality, funding costs and valuation in determining how individual companies could perform as credit growth changes.
UBS view on other NBFCs
UBS has maintained Buy ratings on Poonawalla Fincorp, Cholamandalam Investment and Finance and Shriram Finance.
The brokerage remains Neutral on HDB Financial Services, SBI Cards and M&M Financial Services.
This indicates that UBS’s latest assessment is not uniformly positive across the NBFC sector. Its views differ based on individual companies’ exposure to personal loans, earnings prospects, valuations and other business-specific factors.
What the target prices mean
The latest UBS targets are analyst estimates and should not be treated as assured future share prices. The targets reflect the brokerage’s assumptions about earnings, valuation multiples, loan growth and sector conditions.
| Company | Earlier UBS view | New view | Earlier target | New target |
|---|---|---|---|---|
| L&T Finance | Neutral | Buy | Rs 350 | Rs 380 |
| Bajaj Finance | Sell | Neutral | Rs 910 | Rs 1,100 |
The revisions come as UBS expects personal lending to become a more important growth engine for India’s unsecured credit market.
Conclusion
UBS has upgraded L&T Finance to Buy and raised its target price to Rs 380 from Rs 350, while upgrading Bajaj Finance to Neutral and increasing its target to Rs 1,100 from Rs 910. The brokerage expects a renewed personal-loan growth cycle in India, with improving asset quality, stable household leverage and supportive liquidity providing the backdrop.
For L&T Finance, UBS expects faster personal-loan growth and ROA improvement towards 3%. For Bajaj Finance, it expects earnings benefits from yield-accretive growth and strong asset quality, while continuing to flag valuation as a consideration.