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Healthy growth outlook with improving credit cost

Quick Pointers

* Expect 23% AUM growth in FY27E aided by new verticals and recovery in MSME

* NIM compression expected as bond yields harden

* Credit cost outlook positive for FY27E at 1.45-1.60%

AUM grew 22% YoY to INR 5,099.8bn led by strong growth in mortgages, sales finance and B2C loans. Company is witnessing sustained traction in new verticals (Cars, Gold, MFI) and new customer addition (~15-17mn in FY27); we build an AUM growth of 23%/22% in FY27/FY28E. Expect FY27 NIM to moderate as hardening of bond yields is likely to impact CoF. Asset quality ratios saw improvement across segments while credit cost improved in Q4 (1.65%) supported by a healthy trend in vintage credit performance. Opex is likely to moderate by ~30 bps in FY27 benefited from improved FINAI capabilities. We slightly tweak our estimates to account for positive growth outlook, lower credit cost guidance/improved opex in FY27E. Upgrade to BUY with a multiple of 4.1x (vs. 3.9x earlier) and a TP of Rs 1,100.

Expect AUM growth of ~23% in FY27: AUM grew 22.4% YoY/5.3% QoQ to INR 5,099.8bn, driven by Mortgages (+25.2% YoY), Urban Sales Finance (+28.6% YoY), Urban B2C (+19.1% YoY) and Commercial lending (+22 YoY%). New product launches contributed 3.5% of the AUM mix with strong traction witnessed in Gold loans/MFI and tractor financing segments. Gold loan portfolio is expected to comprise ~5% of AUM by FY27 as the company adds new branches. The company has proactively slowed down MSME volumes (+6% YoY) in FY26 due to higher delinquencies in the segment; expect growth to pick-up in H2FY27. The Captive 2W & 3W Finance declined 60% YoY and now contributes <1% of AUM.  New loans booked in 4QFY26 grew +20.5% YoY to 12.9mn and BAF added 3.9mn new customers during the quarter, taking the total customer franchise to 119.3mn. The company remains confident of adding ~15-17mn new customers in FY27 with an AUM growth of 22%-24% driven by (1) strong ramp-up in new segments (gold, MFI, tractor) and (2) recovery in MSME. We build an AUM growth of 23%/22% for FY27/FY28E.

NIM to moderate; efficiency gains to support profitability: NII grew 20.1% YoY/ 4.1% QoQ and NIM (calc.) moderated to 9.6% vs 9.7% QoQ. While reported CoF stood at 7.41% (vs. 7.45% in Q3), management expects a marginal compression in NIM on account of higher CoF in subsequent quarters due to hardening of bond yields. The company estimates non-interest income to grow by 16-18% and is optimistic on continued profit growth. We expect NIM to moderate by ~10bps to 9.5% in FY27E. Opex/ NTI ratio stood elevated at 33.8% in FY26 due to the impact of new labour code and accelerated expansion in gold loan branches. However, company expects it to improve by 25-40bps in FY27 with efficiency gains from FINAI capabilities. We build an improvement in FY27E/FY28E opex on account of better operating efficiencies (FINAI capabilities, service and contact centers). With a focus on growth in new and secured business verticals, we expect BAF to deliver RoA/RoE of 4.3%/ 21.2% by FY28E.

Credit cost to improve in FY27: Headline GNPA/NNPA improved sequentially to 1.0%/0.4% vs. 1.2%/0.5% in Q3FY26 while PCR stood comfortable at 60%. BAF recorded an additional provision amounting to INR 1.4bn as a prudent buffer towards management and macro-economic overlay. In Q4, the company revised accounting for recoveries on written-off loans by adjusting them towards loan losses which will result in lower reported provisioning. Consequently, credit cost is guided to be in the range of 1.45-1.60% for FY27. Management highlighted an improvement in vintage credit performance across 3MOB, 6MOB and 9MOB and remains optimistic about credit cost outlook for FY27. We build a credit cost of 1.6% for FY27E factoring in a revision in provision recognition, normalization of MSME stress and winding-up of captive 2W/3W share in the AUM mix.

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