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Growth phase begins; gradual improvement in profitability to follow

Legacy book run-down to drive credit cost improvement

* Indostar Capital Finance (INDOSTAR)’s 2QFY27 PAT stood at INR132m (vs. INR115m in 1QFY27). NII grew 34% YoY to INR2b. Other income stood at INR407m during the quarter (PQ: INR367m).

* Opex rose ~10% YoY to INR1.3b, translating into a cost-to-income ratio of ~54.9% in 2QFY27 (PY: 63.6% and PQ: 58.2%). PPOP grew 58% YoY to INR1.1b. Credit costs stood at ~INR961m (PQ: ~INR815m). This translated to annualized credit costs of ~4.6% in 2QFY27 (PQ: 4% and PY: 3.1%).

* INDOSTAR is targeting ~35% disbursement growth over the next 3 years, driven by deeper market penetration, geographic expansion, and a strengthened distribution franchise, supported by a ~51% increase in the sales force, completion of product verticalization, and leadership onboarding. VF is expected to remain the key growth driver, complemented by the scaling up of MLAP, which is targeted to contribute ~10-15% of overall AUM (over the next 3 years), supporting gradual portfolio diversification. We expect INDOSTAR to deliver an AUM CAGR of ~26% over FY26-28E.

* INDOSTAR’s gradual run-down of the legacy portfolio and declining funding costs is expected to support lower credit costs and margin stability, driving a meaningful improvement in profitability. Management targets ~2% RoA by 2HFY28 and PAT of INR4.5-5b in FY29.

* We estimate a CAGR of 26%/42% in AUM/PAT over FY26-28 and an RoA/ RoE of ~2.1%/~7% in FY28E. Reiterate BUY with a TP of INR240 (premised on 0.9x Sep’28E BVPS).

Healthy disbursement momentum; Micro-LAP gaining traction

* Total AUM grew 12% YoY and 2.6% QoQ to ~INR84.6b. VF AUM grew 13% YoY and 2.6% QoQ. Total disbursements grew 51% YoY and ~13% QoQ to ~INR14b. VF disbursements stood at ~INR13.2b, growing ~47% YoY and ~12% QoQ.

* Micro-LAP AUM grew ~177% YoY/ ~29% QoQ to INR2.8b. Disbursements in Micro-LAP grew ~174% YoY to INR740m. LTV in this segment stood at 40.3% as of Sep’26.

* INDOSTAR plans to launch its LAP business in Karnataka and Madhya Pradesh in 2HFY27, with a calibrated approach towards building the portfolio. It also intends to gradually increase ticket sizes, with the median ATS expected to stabilize at ~INR1m, even if this entails some moderation in yields. We expect the company to deliver an AUM CAGR of ~26% over FY26-28E.

Key highlights from the management commentary

* INDOSTAR does not intend to concentrate its portfolio in any single product segment and has consciously decided to restrict the share of any individual segment to ~35-40% of overall AUM.

* The company intends to pass on any increase in the cost of funds to borrowers, in line with the approach followed by other NBFCs.

Valuation and view

* The company delivered a healthy 2QFY27 performance, driven by robust disbursement growth, improving asset quality and sequential NIM expansion. Going forward, the run-down of the legacy book and lower funding costs are expected to support credit cost normalization and margin stability, while a strengthened distribution franchise and improving customer profile provide a foundation for sustained growth and profitability improvement.

* We estimate a CAGR of 26%/42% in AUM/PAT over FY26-28 and an RoA/ RoE of ~2.1%/~7% in FY28E. Reiterate BUY with a TP of INR240 (premised on 0.9x Sep’28E BVPS).

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