Buy Northern Arc Capital for the Target Rs 395 by Motilal Oswal Financial Services Ltd
Steady quarter; D2C momentum strengthens growth outlook Lending AUM grew ~26% YoY; D2C AUM in the mix improved to ~64%
* Northern Arc’s (NACL) 1QFY27 PAT grew ~46% YoY to ~INR1.14b (~11% beat). NII rose ~45% YoY to ~INR4.9b (11% beat). Other income declined ~42% YoY to ~INR287m (PQ: ~INR649m) due to lower assignment income of INR69m (PQ: INR403m). Opex rose ~41% YoY to ~INR2.6b (10% higher than est).
* PPOP grew ~27% YoY to INR2.6b (7% beat). Credit costs stood at ~INR1.1b (in line). This translated into annualized credit costs of ~2.8% for 1QFY27 (PY: 3.2%).
* NACL expects RoA to improve gradually toward ~3% by Mar’27, driven by improving margins, higher contribution from fee-based businesses and operating leverage. The continued scaling of the D2C franchise (currently ~64% of lending AUM), along with growth in fee-generating businesses such as placements and fund management, is expected to enhance profitability and earnings quality, with fee income likely to contribute ~75-100bp to revenue over time. Further, disciplined cost management, despite continued investments in branch expansion, sales capacity and technology, is expected to support operating leverage as the business scales.
* NIM is expected to improve progressively to ~9.5% in the near term and approach ~10% by the end of FY27, supported by a favorable business mix and stable funding profile. The company’s diversified borrowing base and comfortable liquidity position are expected to provide resilience on funding costs, helping offset modest increase in MCLR from banks and support margin expansion.
* NACL remains focused on building a scalable, granular retail lending franchise, with growth increasingly driven by the expansion of its D2C platform, a strengthening fee-based ecosystem and stability provided by its IR lending business. The evolving portfolio mix, supported by higher-yielding retail assets and growth in fee-generating businesses, is expected to drive gradual improvement in profitability and return ratios. The company remains well positioned to achieve its targeted ~3% RoA in FY27E while sustaining healthy AUM growth.
* NACL trades at 1.1x FY27E P/BV. We model an AUM/ PAT CAGR of ~21%/34% over FY26-28E, with RoA/RoE of ~3.2%/15% in FY28E. Reiterate our BUY rating with a TP of INR395, based on 1.2x FY28E P/BV.
Lending AUM grew 26% YoY; credit solutions business muted in 1Q
* Lending AUM grew 26% YoY/1.6% QoQ to INR169b. D2C AUM in the mix improved to ~64% in Jun’26 (vs ~59% in Mar’26). MSME AUM rose ~40% YoY, Consumer AUM grew ~66% YoY and Rural AUM grew ~26% YoY.
* Fund AUM declined 6% YoY/ 3% QoQ to ~INR29.9b, while the placement volumes declined to INR16b (PY: INR28b) amid geopolitical tensions
* NACL plans to expand its Credit Solutions business in a calibrated manner while maintaining profitability and expects improving traction in placement volumes across MFI, MSME and Consumer Finance.
* The company has 30 active digital partners and 373 originator partners. The branch network has grown to 430 branches (90 for MSME and 340 for Rural). We expect NACL to deliver AUM CAGR of ~21% over FY26-28E, largely supported by strong D2C growth.
Valuation and View
* NACL delivered a steady 1QFY27 performance, supported by healthy growth across key operating parameters. Management remains confident of improving this momentum going forward in FY27, aided by the recovery in the MFI segment and continued growth across MSME and Consumer Finance businesses. The company is also focused on scaling the Credit Solutions business, which is expected to strengthen its fee income franchise, while continued emphasis on asset quality and prudent risk management provides a strong foundation for sustainable long-term growth.
* NACL trades at 1.1x FY27E P/BV. We model an AUM/ PAT CAGR of ~21%/34% over FY26-28E, with RoA/RoE of ~3.2%/15% in FY28E. Reiterate our BUY rating with a TP of INR395, based on 1.2x FY28E P/BV
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