3 Undervalued NBFC Stocks Trading Below Fair Value

India's non banking finance companies have navigated a tighter credit cycle over the past two years, with regulatory changes and funding cost pressures affecting different lenders unevenly depending on their loan book mix. Not every stock in the space carries the same multiple. A screen of listed NBFC stocks against the sector's average price to earnings ratio surfaces three names still priced below that benchmark.

Muthoot Finance, IIFL Finance and Mahindra and Mahindra Financial Services all currently trade below the broader NBFC industry PE, despite delivering healthy return on equity. This piece breaks down why each stock screens as undervalued, what the underlying financials show, and the risks that come with owning non banking lenders.

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Why These NBFC Stocks Screen as Undervalued

The NBFC industry currently carries an average price to earnings ratio of close to 19.8 times trailing earnings across listed non banking lenders in this classification. A stock trading meaningfully below that average, while still posting healthy return on equity, is a reasonable starting point for a relative valuation screen.

All three companies below clear that bar, with Muthoot Finance standing out for a return on equity well above the other two, a combination not always available among NBFC stocks priced at a discount to the sector multiple.

The table below lists these three companies alongside their current price, valuation multiple and return ratios.

Company	NSE Ticker	CMP (Rs)	PE Ratio	Sector PE	ROE	Market Cap (Rs Cr)
Muthoot Finance	MUTHOOTFIN	3,127.20	11.22	19.83	28.01%	1,28,550
IIFL Finance	IIFL	645.90	12.33	19.83	11.93%	27,822
Mahindra and Mahindra Financial Services	M&MFIN	384.55	16.43	19.83	10.72%	53,542

Muthoot Finance: Highest ROE From Gold Loans

Muthoot Finance is India's largest gold loan financier, lending against pledged gold jewellery through a nationwide branch network. The stock trades at a price to earnings ratio of 11.22, well below the sector average of 19.83, at a current price of around Rs 3,127.

Return on equity of 28.01 percent is by far the highest of the three NBFC stocks in this list, reflecting the strong economics of the gold loan business. On an EPS of Rs 285.39 and book value of Rs 1,011.33, the price to book multiple works out to 3.17, alongside a dividend yield of 0.94 percent.

IIFL Finance: Diversified Retail Lending at a Discount

IIFL Finance operates a diversified lending book spanning home loans, gold loans, business loans and microfinance. Its price to earnings ratio of 12.33 sits below the sector average of 19.83, at a current share price of around Rs 646.

Return on equity of 11.93 percent is more modest than Muthoot Finance, reflecting the different risk and margin profile of a diversified retail lender. On an EPS of Rs 53.03 and book value of Rs 327.24, the price to book multiple works out to 2.00, the lowest of the three.

Mahindra Finance: Rural and Vehicle Financing Focus

Mahindra and Mahindra Financial Services provides vehicle and rural asset financing, with a customer base concentrated in semi urban and rural India. The stock trades at 16.43 times trailing earnings, the narrowest discount to the sector average of 19.83 among these three NBFC stocks, at a current price of around Rs 385.

Return on equity of 10.72 percent is the lowest of the group, and the company pays the highest dividend yield of the three at 1.95 percent. On an EPS of Rs 23.45 and book value of Rs 191.65, the price to book multiple works out to 2.01.

Valuation Snapshot: PE, PB and Dividend Yield

Beyond the headline price to earnings ratio, book value multiples and dividend yield round out the valuation picture for these three companies. All three carry high debt to equity ratios, which is a structural feature of the lending business model rather than a sign of financial distress, since NBFCs borrow to on-lend to customers.

Company	Price to Book	Book Value (Rs)	Dividend Yield	Debt to Equity
Muthoot Finance	3.17	1,011.33	0.94%	4.02
IIFL Finance	2.00	327.24	0.61%	5.01
Mahindra and Mahindra Financial Services	2.01	191.65	1.95%	4.82

Muthoot Finance commands the richest price to book multiple of the three, reflecting its superior return on equity and the collateral backed nature of gold loans. IIFL Finance and Mahindra Finance trade at similar book value multiples despite different loan book compositions.

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Risks to Consider Before Buying These NBFC Stocks

A discount to the sector average price to earnings ratio does not remove company specific risk for NBFC stocks exposed to credit cycles and funding costs.

Asset Quality and Credit Cost Risk

A slowdown in the broader economy or a specific customer segment can push up non performing loans and provisioning requirements, directly hitting profitability for non banking lenders.

Funding Cost and Liquidity Risk

NBFCs rely on wholesale borrowing and bank lines to fund their loan books, and tighter liquidity conditions or rising interest rates can compress net interest margins.

Gold Price Volatility for Gold Loan Lenders

For gold loan focused NBFCs such as Muthoot Finance, a sharp decline in gold prices can reduce collateral values and affect loan growth and recovery dynamics.

Regulatory Change Risk

Changes in regulatory capital requirements, provisioning norms or lending guidelines from the Reserve Bank of India can affect growth and profitability across the NBFC sector with limited advance notice.

How to Track These NBFC Stocks

Investors evaluating these three names should track quarterly assets under management growth, asset quality trends, and how the sector average PE moves relative to each company's own multiple over time, rather than relying on the valuation gap in isolation among NBFC stocks. Comparing these numbers regularly is the most reliable way to judge whether the discount to fair value remains intact or has already closed.

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Conclusion

Muthoot Finance, IIFL Finance and Mahindra and Mahindra Financial Services are the three NBFC stocks currently trading below the sector's average price to earnings ratio of close to 19.8 times, while all three deliver healthy return on equity. That combination makes them worth a closer look for investors who already want exposure to India's non banking credit theme, though asset quality cycles and funding cost risk mean position sizing and diversification still matter when adding these names to a portfolio.

FAQs on Undervalued NBFC Stocks

Which NBFC stocks are trading below the sector average PE?

Ans. Muthoot Finance, IIFL Finance and Mahindra and Mahindra Financial Services are currently trading below the NBFC sector's average price to earnings ratio of close to 19.8 times, based on live NSE and BSE pricing.

Is Muthoot Finance undervalued compared to its sector?

Ans. Muthoot Finance trades at a price to earnings ratio of 11.22, well below the sector average of 19.83, while delivering a return on equity of 28.01 percent, the highest among these three NBFC stocks.

Why does Mahindra Finance trade closer to the sector average PE?

Ans. Mahindra and Mahindra Financial Services trades at 16.43 times earnings, the narrowest discount to the sector average of 19.83 among these three names, reflecting its lower return on equity of 10.72 percent relative to Muthoot Finance and IIFL Finance.

What is the market capitalisation of IIFL Finance?

Ans. IIFL Finance has a market capitalisation of around Rs 27,822 crore, with a price to earnings ratio of 12.33 against the sector average of 19.83.

Why do these NBFC stocks carry high debt to equity ratios?

Ans. High debt to equity ratios are a structural feature of the NBFC lending business model, since these companies borrow funds to on-lend to customers, and should be read differently from leverage at an industrial company.

What are the main risks in undervalued NBFC stocks?

Ans. The main risks include asset quality deterioration during credit cycles, funding cost and liquidity pressure, gold price volatility for gold loan lenders, and regulatory changes from the Reserve Bank of India.

Is a low PE enough reason to buy an NBFC stock?

Ans. A price to earnings ratio below the sector average is a useful starting screen for NBFC stocks but not a standalone buy signal. Investors should also review asset quality, loan book diversification and funding cost trends before investing.