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Weak quarter; gain from HFC sale partly used for provisioning

Credit costs elevated; focus this year will be on opex optimization IndoStar Capital Finance (IndoStar) delivered a weak performance in 1QFY26, with muted disbursements and weak AUM growth, impacted by tighter stringent underwriting and seasonal factors. Credit costs remained elevated, driven by technical write-offs and additional provisions made for accounts where recovery prospects remain uncertain.

Key highlights: 1) Disbursements declined ~39% YoY to ~INR8.58b and retail AUM rose ~9% YoY to INR77.8b; 2) Credit costs stood at INR4.9b (PQ: INR494m) 2) IndoStar partly utilized the gain from HFC sale for taking write-offs of ~INR1.6b, where the recovery of loans had become less certain, and for making incremental provisions of ~INR2.55b on select Security Receipts (SRs) as part of its focused efforts to accelerate resolutions and unlock value, 3) calc. NIM expanded ~25bp QoQ on lower CoB, and 5) opex optimization will be an important theme in FY26, given that management targets to bring down the cost-to-income ratio to ~50% over the medium term.

Financial Highlights

• Consolidated PAT stood at INR5.5b, which included pre-tax exceptional gain of INR11.7b from the sale of its housing finance subsidiary.
• NII grew ~25% YoY to INR1.3b. Opex rose ~26% YoY to INR1.4b, translating into a cost-to-income ratio of ~88% in 1QFY26 (PY: 78% and PQ: 66%). PPOP declined ~40% YoY to INR189m.
• Standalone AUM grew ~9% YoY to ~INR77.8b. VF AUM rose ~14% YoY to INR72b (PQ: ~INR74b).
• Micro-LAP AUM grew ~46% QoQ to INR760m. Disbursements in micro-LAP declined ~21% QoQ to INR270m. LTV in this segment stood at 33.3% as of Jun’25.
• Management indicated that demand for used commercial vehicles remains strong, supported by the vehicle scrappage policy and the high cost of new vehicles. Additionally, it shared that used CVs carry EMIs that are 40-50% lower than those for new vehicles, making them particularly attractive for small fleet operators and first-time buyers.
• We estimate a CAGR of 16%/135% in AUM/PAT over FY25-27, aided by improvements in NIM to 9.0%/10.1% in FY26E/FY27E. Reiterate BUY with a TP of INR330 (premised on 1.1x Mar’27E BVPS).

AUM grew ~9% YoY; disbursements declined 39% YoY in VF

• Disbursements declined ~47% YoY to ~INR8.6b. Vehicle finance (VF) disbursements declined ~39% YoY to INR8.3b.
• Management shared that the combined effect of policy tightening and the usual seasonal slowdown in 1Q resulted in weaker disbursement volumes. To offset this, the company is focusing on increasing the share of prime-quality borrowers in its portfolio. As its cost of borrowings declines further, it expects to expand its reach to a larger base of prime customers in the coming quarters. The company has guided for standalone AUM growth of ~12-15% in FY26. We model AUM CAGR of 16% over FY25-27E.

Credit costs high due to technical write-off and SR provisions

• Asset quality exhibited improvement, with standalone GNPA improving ~50bp QoQ to ~4.05% and standalone NNPA declining ~80bp QoQ to 1.7%. The improvement in GNPA was mainly driven by technical write-off of INR1.6b. During the quarter, the company revised its technical write-off policy for loans over 210dpd.
• Collection efficiency (including overdue) stood at ~94% (PQ: ~97%). CRAR was healthy at ~33% and the debt-equity ratio stood at 1.7x. Key highlights from the management commentary
• The company plans to roll out its Micro-LAP operations in Andhra Pradesh, after the successful launch in Tamil Nadu last year. The strategy involves co-locating Micro-LAP operations within existing vehicle finance branches, enabling better utilization of branch infrastructure, enhancing productivity, and expanding market reach.
• Management highlighted that a revised incentive plan for sales teams and channel partners has been rolled out to boost disbursement volumes and maintain/improve portfolio quality.

Valuation and View

• IndoStar delivered a weak quarter as disbursements and AUM growth were subdued, impacted by tighter underwriting standards and seasonal factors. Credit costs remained elevated, driven by technical write-offs and additional provisions made for accounts where recovery prospects remain uncertain.
• IndoStar has strategically prioritized the expansion of its loan book in the Used CV segment and micro-LAP. A reinforced management team, enhanced processes, opex rationalization and an improvement in the economic climate will serve as catalysts for IndoStar. Reiterate BUY rating on the stock with a TP of INR330 (premised on 1.1x Mar’27E BVPS).

Highlights from the management commentary

Guidance

• Guided for AUM growth of 12-15% in FY26 and ~15-17% in FY27.
• The company has guided for a 15% QoQ increase in disbursements in 2QFY26 and aims to keep disbursement volumes broadly in line with the FY25 levels.
• Expects to achieve savings in annualized opex cost of 8-10% due to its drive in reducing operating cost. The company targets to gradually reduce its cost-toincome ratio to ~50% over the medium term. ? It expects further benefits of ~20-25bp in CoB over the next three quarters.
• No immediate plans to launch new products; focus remains on scaling vehicle finance and micro-LAP.

Opening remarks and macro

• Inflation has eased. Monsoon outlook remains normal. The RBI has already cut the repo rate by 100bp, the benefit of which should gradually transmit to borrowers in the next few quarters, driving consumption and credit demand.
• The CV industry outlook is turning positive after facing two years of subdued demand. New vehicle sales in FY26 are expected to grow around 5%, supported by higher infrastructure spending and execution, replacement demand and fleet modernization initiatives.
• Used CV demand remains robust, aided by the vehicle scrappage policy, elevated cost of new vehicles and lower EMIs for used CVs (40-50% lower than new CVs), making them attractive for small fleet operators and first-time buyers.
• Demand for micro-LAP is resilient, particularly in rural and semi-urban markets.
• The company will continue to strengthen its multi-product branch model and deeper penetration in rural regions.
• It will continue to improve COF by repaying high-cost debt using low-cost funds.
• The company aims to have fairly diversified and more granular book in terms of vehicle finance, with no focus on a specific segment.

Asset quality

• In 4QFY25, IndoStar implemented proactive credit policy tightening aimed at strengthening asset quality amid a challenging environment.
• Loans booked under the new policy framework have 30+dpd levels at half of last year’s comparable levels.
• IndoStar revised its technical write-off policy to 210dpd (more conservative), which resulted in INR1.6b of write-offs in 1QFY26. IndoStar created additional provisions of INR2.55b for accounts with low near-term recovery visibility. Recovery efforts will continue despite technical write-offs. .
• OTS settlements led to INR450m of losses, with INR290m incremental provisions based on ECL.
• Increased CIBIL score cut-offs after spotting higher stress in low CIBIL score segments. It also tightened lending to certain rental profile categories.

Disbursements

• The combined impact of policy tightening and seasonal softness of 1Q led to a moderation in disbursement volumes. To mitigate lower disbursement volumes, the company is onboarding a higher proportion of prime-quality borrowers. As Cob declines, IndoStar can cater to more prime customers going forward
• A revised incentive plan for sales teams and channel partners has been rolled out to boost disbursement volumes and maintain or improve portfolio quality.
• Disbursements are generally slow in 1Q. It is seeing good traction in 2Q.
• There was a general slowdown in market and the company tightened its policy measures, which led to a slowdown in disbursements.

Liability and NIMs

• CoB in 1QFY26 was 60bp lower YoY.
• Successfully replaced INR8.7b of high-cost long-term debt (which has average cost of ~12%), with fresh borrowings at 9.5%, saving INR210m annually.
• It plans to replace INR14.8b of additional high-cost debt over the next three quarters.

Micro-LAP

• The company aims to launch Micro-LAP expansion in Andhra Pradesh, following the successful launch in Tamil Nadu last year.
• The aim is to co-locate micro-LAP operations with existing vehicle finance branches to optimize reach and branch productivity.
• Initial rollout in AP will cover 16 branches, staffed by senior professionals with deep micro-market expertise.
• Product parameters: ATS: INR600k, LTV: 95% cases and Origination: 100% in-house.

Opex

• Cost optimization program is launched, targeting 9-10% annualized opex savings, to be reflected over the next 12 months.
• Medium-term goal: reduce cost-to-income ratio to ~50%.

Financial highlights

• Disbursements stood at INR8.58b. Disbursement yields stood at 18.4% due to continuous focus on Tier 3 & Tier 4 towns.
• AUM stood at INR77.8b, up 9% YoY (down QoQ due to write-offs done in 1Q).
• NII stood at INR1.58b, up 10% YoY, supported by improved NIMs.
• GNPA/NNPA stood at 4.04%/1.68%.
• NIMs stood at 6.2% (vs. 5.9% in PQ).
• EMI-to-EMI collection efficiency at 89% and overall collection efficiency at 94%.
• Strong CRAR provides sufficient growth headroom.

Sale of Niwas Housing finance

• In Jun’25, IndoStar successfully completed all necessary conditions for the sale of Niwas Housing Finance. The company derecognized its investment in Niwas Housing Finance and received sale proceeds on 17th Jul’25. This transaction resulted in a one-time gain of INR11.7b in 1QFY26 (post-tax gain of INR10.07b).
• Following the sale, IndoStar is now operating as a standalone NBFC, focusing exclusively on two core product lines; Vehicle Finance and Micro Loans.

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