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Growth in the kitty; profitability is next

* Growth engine firing; multiple avenues support ~25% AUM CAGR: Piramal Finance has moved decisively beyond its balance-sheet transition phase. Growth AUM now accounts for ~98% of the portfolio, while retail contributes ~85% of AUM, leaving the legacy book at less than 2%. With retail disbursements rising ~44% YoY to INR125b in 1QFY27 and consolidated AUM rising ~25% YoY, visibility on the company’s ~25% FY27 AUM growth target remains strong. Importantly, growth is becoming more diversified. The established housing and LAP franchise is being complemented by gold loans, MFI, micro-LAP, unsecured lending and deeper cross-sell to its ~6m customer base. Cross-sell already contributes ~28-29% of business volumes, creating an opportunity to grow the franchise with lower customer-acquisition costs and potentially better credit outcomes.

* The next earnings lever will be richer portfolio mix and lower cost of funds: We see increasing scope for margin expansion as incremental originations are skewed toward higher-yielding, shorter-tenure businesses. Gold loans, MFI, micro-LAP and unsecured lending carry higher disbursement yields than the existing portfolio, and as these books season, the richer origination mix should progressively lift portfolio yields. At the same time, Piramal's improving credit ratings and greater access to diversified and multilateral funding should support a gradual reduction in cost of borrowings. Thus, we believe the next leg of NIM expansion is increasingly structural rather than purely rate-cycle driven. We estimate NIM at ~5.4%/5.9% in FY27E/FY28E.

* Operating leverage is emerging as the biggest profitability catalyst: The strongest change in the earnings profile is the widening gap between business growth and cost growth. In 1QFY27, AUM grew ~25% YoY, while opex increased only ~10%, driving the cost-to-income ratio down sharply to ~52.5% from 65.6% a year earlier. The Opex/AUM ratio has dipped consistently over the past eight quarters to 3.5% from 4.9%, despite the resumption of branch expansion. Technology and AI should further reinforce this operating leverage by allowing Piramal to scale underwriting, collections and operations without a commensurate increase in costs. Management expects opex/AUM to dip another ~40- 50bp over the next 4-5 quarters and is targeting ~2.5% RoAUM by 4QFY27.

* From growth to earnings – Piramal Finance is transitioning from the hard-work phase to the payoff phase: With the legacy book largely behind it, we believe the company has reached an important inflection point. We expect the convergence of ~25% AUM CAGR, improving NIMs, operating leverage and controlled credit costs to drive a sharp earnings recovery. We estimate PAT CAGR of ~55% over FY26-28E, with RoA/RoE improving to 2.8%/11.4% by FY28E.

* The ~INR38.5b primary equity infusion further strengthens the capital base, providing greater flexibility to pursue disciplined growth while maintaining a prudent risk profile. The stock currently trades at ~1.3x FY28E P/BV. We reiterate our BUY rating with a TP of INR2,480, based on our Mar'28E SoTP valuation.

Higher-yielding businesses will change the portfolio economics

* The shift in portfolio mix will be an important enabler because the newer businesses carry materially higher yields than the housing finance franchise.

* As of 1QFY27, housing loans accounted for ~36% of retail AUM and LAP accounted for ~31%, but the contribution from used-car loans, salaried personal loans, unsecured business loans, digital loans and micro-loans is steadily rising.

* The economics of the newer businesses are attractive. Disbursement yields stood at ~15.5% for used-car loans, ~16.6% for salaried personal loans and ~18.8% for unsecured business loans vs. ~11.7% for housing loans and ~12.8% for LAP.

* Gold loans could become another meaningful growth vector. Piramal Finance expanded its gold-loan branch network to 67 by Jun'26 from 22 in Mar'26 and is targeting ~200 branches by FY27-end. The business is focused on personal-use borrowers in Tier-2/3 markets, with no exposure to jewelers, bullion dealers, pawnbrokers, or wholesale customers.

NIM expansion is fundamental, not just a rate-cycle story

Piramal Finance's NIM was ~6.5% in 1Q, up ~47bp YoY, while the cost of borrowings stood at ~8.8%. We believe the next leg of margin expansion can come from two selfhelp levers – a richer asset mix and lower borrowing costs. The higher-yielding businesses are already generating disbursement yields well above the existing portfolio yield. As these books scale and season, we expect the higher yields to progressively flow through to portfolio yields. Meanwhile, upgrade to the AA+ rating and greater access to multilateral funding should help lower refinancing costs. We estimate NIM to improve to ~5.4% in FY27E and ~5.9% in FY28E (vs. 4.7% in FY26).

Valuation and view

* Piramal Finance is entering a phase where the benefits of its multi-year transformation can increasingly translate into earnings. With the legacy book largely behind it, a scalable retail franchise, a richer business mix, lower funding costs, improving operating leverage and disciplined credit outcomes provide a stronger foundation for sustained profitability improvement.

* The ~INR38.5b capital infusion further strengthens its balance sheet flexibility to fund growth while maintaining a prudent capital buffer. With Piramal Finance targeting ~2.5% RoAUM by 4QFY27 and >3% over the longer term, the improving operating architecture provides a credible pathway to sustained earnings expansion.

* We model a total AUM CAGR of ~25% and PAT CAGR of ~55% over FY26- FY28E, with RoA/RoE reaching 2.8%/11% by FY28E. We reiterate our BUY rating with a TP of INR 2,480 (based on our Mar’28E SoTP).

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