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Robust growth; NIM headwinds persist

AUM grew 26.5% YoY to INR5,846.2bn driven by strong momentum across mortgages and urban/ rural consumer finance, while MSME growth is expected to recover in H2FY27. We build AUM growth of 26%/25% for FY27/FY28E in-line with management guidance. NIM (calc.) moderated to 9.5% and is likely to face marginally higher compression than earlier guidance (10-15bps) amid rising funding costs. Fee-income growth is expected at 15-18% over the medium term, with final regulations on insurance commissions and revolver loans remain key monitorables. Despite sequential asset quality deterioration, partly due to temporary shorter-tenor gold loan schemes, management remains confident of the credit cost outlook. We factor in credit cost of ~1.6% for FY27E. Additional provisioning buffers and the proposed INR175bn capital raise strengthen balance-sheet resilience. We retain our P/ABV multiple of 4.0x Sep’28E, arriving at a TP of INR1,150. Sustained growth, resilient asset quality and a strong balance sheet profile underpin our positive view. Reiterate BUY.

Expect AUM growth of ~26% in FY27E:

AUM grew 26.5% YoY/ 6.9% QoQ to INR5,846.2bn, driven by Mortgages (+30% YoY), Urban Sales Finance (+43% YoY), Urban B2C (+19% YoY) and Rural B2C (+29% YoY). MSME growth remained subdued (+3% YoY), though management expects double-digit growth in H2FY27 supported by improved vintage performance and changes to origination practices. Gold loan portfolio (~4% of AUM) is expected to scale up through organic distribution expansion and deeper franchise penetration with ~2,800 branches expected by FY27. BAF has shifted to 9-12- month gold loan schemes to reduce delinquencies arising from missed interest payments and loan rollovers. It also plans to launch alternative term-loan variants from Nov’26 to mitigate the potential impact of proposed RBI restrictions on revolver loans. The company continues to calibrate originations across riskier segments, including MFI and B2B lending in select geographies. Management expects 60-62mn new loan disbursements and 18-20mn customer additions in FY27, while reiterating its AUM growth guidance of 26-27% for FY27 and 23-25% over the medium term. We build an AUM growth of 26%/25% for FY27/FY28E supported by deeper customer penetration, wider distribution and FINAI-led lending opportunities.

NIM under pressure; efficiency gains to support profitability:

NII grew 23.6% YoY/ 6.1% QoQ to INR133.3bn. While reported CoF stood at 7.31% (vs. 7.40% in Q1) supported by benefit from interest rate hedging, calc. NIM declined QoQ to 9.51% vs 9.62% as yields moderate. Management expects NIM compression to be marginally higher than its earlier FY27 guidance of 10-15bps, as the impact of higher repo rates feeds into funding costs in H2FY27. We build NIM at ~9.5% for FY27E. Management remains comfortable sustaining 15-18% fee-income growth over the medium term, despite potential IRDAI commission draft headwinds. Reported opex/ NTI ratio was stable at 33% in Q2 (vs. 33.1% YoY) and company expects opex ratio to improve by 25-40bps in FY27 aided by productivity gains and operating efficiencies. The Board has approved a capital raise of INR175bn (INR117bn QIP + INR58bn pref. issue) to support growth across the company and its subsidiaries and strengthen balancesheet resilience. Management reiterated its long-term PAT growth target of 23-25% and RoE guidance of 19- 21%; we build in similar return ratios.

Higher provisioning buffers; credit cost outlook supportive:

Headline GNPA/NNPA declined sequentially to 1.06%/0.42% vs. 0.96%/0.39% in Q1FY27 while PCR stood comfortable at 60%. Stage 2&3 assets increased by INR16bn in Q2, including INR10.5bn from gold loans largely due to shorter-tenor schemes discontinued since Aug’26. However, no broader deterioration in gold loan repayment trends or customer leverage is noted. Rural and unsecured lending risks are being actively managed through district-level monitoring and calibrated originations, particularly in drought-affected geographies. The company has also reduced 3+ personal loan origination from 14% to 7%, targeting a further reduction to 3.5% by FY27-end. Company reiterated its focus on maintaining a resilient balance sheet amid an uncertain global environment, thereby creating a macro-economic overlay of INR3.4bn. Management remains optimistic on credit cost outlook for FY27 and we build a credit cost of 1.6% for FY27E supported by prudent provisioning and improvement in vintage credit performance.

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