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Asset Quality Disappoints; NIM Improvement Visible Over FY26!

Est. Vs. Actual for Q1FY26: NII – MISS; PPOP – BEAT; PAT – MISS

Changes in Estimates post Q1FY26

FY26E/FY27E (in %): NII -1.0/-1.2; PPOP +0.6/+1.0; PAT -3.4/+0.6

Recommendation Rationale

• Early Monsoon Dents Asset Quality; Improvement Expected Over H2: In Q1, higher credit costs were on account of stress in the vehicle and consumer segments. The unseasonal monsoon impacted the vehicle capacity utilisation levels, affecting borrower cash flows. Moreover, slower industrial production and economic activity added to the stress in the segment. However, the onset of the festive season and completion of the monsoon season are driving better agri output to improve borrower cashflows in Q2 and further improvement in a seasonally strong H2. CIFC has strengthened the team, in line with its continued focus on collections. It has also tightened its credit filters in the vehicle portfolio. Consequently, rejection rates have been higher, despite which CIFC continues to gain market share. Currently, focus remains on arresting the pace of roll-forwards and improving the roll-backs. In the non-vehicle portfolio (Hl, LAP, SBPL), the management expects credit costs to gradually normalise. In the CSEL portfolio, credit costs are optically higher owing to the rundown in the fintech book. Moreover, credit costs in the CSEL portfolio are also higher owing to customers with multiple loans (~5% of the Rs 7,000 Cr business loan book). With near-term uncertainty persisting, credit costs in Q2 are expected to remain elevated at 1.7-1.8%, before tapering meaningfully in H2; as FY26 credit costs settle at 1.4-1.5%.

• NIM Improvement to Play Out Over FY26: In Q1, NIMs contracted QoQ, with no meaningful benefit of the rate cut flowing in the CoF. With ~50% of the bank borrowings being EBLRlinked, the benefit of the rate cut will reflect in Q2. The benefit of the MCLR-linked loans will be visible from Q3 onwards. Thus, the management expects CoF to improve by 20bps in FY26. While the company has not passed on the benefit of the rate cut to its customers yet, it expects a pass-on of 5-8bps during the year. Thus, NIMs are expected to improve by 12-15bps in FY26. We expect NIMs to range between 7.8-7.9% over FY26-28E.

• Opex to Climb Up: CIFC’s Q1 C-I Ratio was flat QoQ owing to controlled costs. However, with the impact of the annual salary hike reflecting in Q2, opex growth is expected to inch up. Furthermore, the company plans to add gold loan branches primarily in Tier I markets, before expanding into Tier 2 and beyond markets. The management has highlighted that CIFC does not intend to pursue aggressive branch additions across most businesses. Thus, controlled opex growth and productivity improvement should help drive Opex ratio improvement, thereby keeping C-A ratio at 2.9-3% over the medium term.

Sector Outlook: Positive

Company Outlook: While Q1 was a tough quarter for CIFC, growth is expected to gradually pick up over FY26. Disbursement growth is expected to be soft in FY26; however, the management remains confident of maintaining AUM growth of 20-25%, mainly driven by the LAP and HL segment and a focus on the newly launched gold loan business. VF growth improvement is contingent on improving macros. In the near term, the newer businesses will deliver tepid growth. NIMs are likely to benefit from a largely fixed-rate book and CoF repricing downwards. Controlled opex and productivity gains should help CIFC improve its cost ratios over the medium term. Nearterm challenges on credit costs will persist; however, they are likely to settle from H2 onwards. We expect CIFC to deliver RoA/RoE of 2.4-2.5%/20-22% over FY26-28E.

Current Valuation: 4.0x FY27E BV Earlier Valuation: 4.25x FY27E BV

Current TP: Rs 1,675/share. Earlier TP: Rs 1,780/share Recommendation: We maintain our

BUY recommendation on the stock. Alternative BUY Ideas from our Sector Coverage Shriram Finance (TP – Rs 750/share)

Financial Performance:

? Operational Performance: Disbursements growth was flat YoY and down 8% QoQ, owing to slower growth across most segments. The Vehicle disbursements grew by +7/-5 YoY/QoQ, LAP by +21/-15% YoY/QoQ and Home Loans -1/-11% YoY/QoQ. Newer business disbursements were weak and degrew by 31/8% YoY/QoQ. AUM was marginally lower than our expectations at 24/4% YoY/QoQ, with slower growth in the Vehicle portfolio. VF/LAP/HL/New Business AUM grew by 18/37/33/19% YoY.

? Financial Performance: NII grew by 23/4% YoY/QoQ, led by healthy AUM growth, and a ~20bps margin compression. NIMs (reported) stood at 7.8% vs 7.6/8% YoY/QoQ. Non-interest income grew by 50/-3% YoY/QoQ. Opex growth was controlled and grew by 23/2% YoY/QoQ. C-I Ratio stood at 37.6% vs 39.0/38.0% YoY/QoQ. PPOP growth was strong at 30/3% YoY/QoQ. Credit costs (calc.) inched up sequentially and stood at 187bps vs 139bps QoQ. PAT growth was healthy at 21/-10% YoY/QoQ. ? Asset Quality deteriorated with GNPA/NNPA at 4.29/2.86% vs 3.97/2.63% QoQ.

Asset quality deterioration was visible across all segments. SMA2 pool inched up to 3.1% vs 2.5% QoQ.

Key Highlights

• Growth Momentum Expected to improve in H2: CIFC’s disbursements were muted in Q1 owing to seasonal weakness, conscious exit from certain partnership businesses in the consumer segment (impact of Rs 1,500 Cr), trimming disbursements to the supply chain (impact of Rs 500 Cr) along with change in housing registration process in few key markets impacting growth. While the disbursement growth in FY26 is expected to remain soft at 10%, the management is confident of growing AUM by 20-25%. AUM growth is expected to be driven by 15% AUM growth in the VF segment, contingent on agricultural activity, improving industrial activity and economic growth. CIFC has seen underlying asset growth to be weak in the VF segment. Despite slower growth in the segment, CIFC has managed to gain market share across most categories ex-Tractors and Construction Equipment. The company has consciously pulled back growth in the tractor segment, citing pricing pressures. The HL and LAP segment growth is expected to remain strong, with AUM growth pegged at ~30% each in FY26. In the CSEL segment, the company has cut down its fintech lending and curtailed supply chain financing. Thus, growth in the CSEL segment will continue to remain muted over FY26.

We trim our AUM estimates by ~2% for FY26, considering challenges in the key VF segment and asset quality challenges in the newer segments and expect CIFC to deliver a 22% CAGR AUM growth over FY25- 28E.

Outlook We expect CIFC to deliver a strong AUM/NII/Earnings growth of 22/24/25% CAGR over FY25-28E. While we tweak our AUM growth estimates marginally downwards, better visibility on NIM improvement has resulted in a minor ~1% cut in our NII estimates over FY26-27E. The company’s efforts to control opex growth and gradual improvement in credit costs should help support earnings. We trim our FY26E EPS estimate by ~3.4%, while maintaining our FY27E EPS estimates.

Valuation & Recommendation

We reiterate our BUY recommendation on the stock with a target price of Rs 1,675/share, implying an upside of 18% from the CMP. We value CIFC at 4.0x FY27E BV (vs 3.4x FY27E BV currently)

Key Risks to Our Estimates and TP

• The key risk to our estimates remains a slowdown in overall credit growth, which could potentially derail our earnings estimates.

• Inability to scale up new products, along with asset quality concerns cropping up, continues to remain a risk to our earnings estimates

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