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Weak quarter; rebuilding phase focused on operational improvements

Sequential moderation in credit costs; reported NIM contracts ~250bp QoQ

• Spandana Sphoorty’s (SPANDANA) 1QFY26 loss stood at ~INR3.6b (vs. a loss of INR4.3b in 4QFY25). 1Q NII declined ~70% YoY to ~INR1.3b (~8% miss). Operating loss stood at INR587m (PQ: operating profit of INR251m). Total borrower count declined ~18% QoQ to 2m.
• Opex rose ~10% YoY to ~INR2.1b (inline), resulting in a cost-income ratio of ~140% (PY: ~40% and PQ: ~90%).
• Credit costs stood at ~INR4.2b, resulting in annualized credit costs (as a % of average loans) of ~34% (PQ: ~36% and PY: ~8%). Technical write-offs stood at INR5.8b (vs. INR6.5b in 4QFY25). As a prudent measure, the company recognized additional credit costs of INR1.3b for the quarter due to technical write-off. Excluding this, impairment costs would have been INR2.9b. Recovery from the 90dpd account was INR410m in 1QFY26 (vs. INR520m in 4QFY25).
• Spandana indicated that disbursements in Jul’25 were nearly equivalent to the total disbursements in 1QFY26, with momentum strengthening further in Aug’25 as MTD-Aug’25 was tracking better than the corresponding period run-rate in July. Management anticipates a significant acceleration in both AUM and disbursement growth from 2HFY26, even as 2Q is still expected to remain challenging.
• The company shared that the appointment of the new MD&CEO is expected within the next 30-45 days, with the Board currently evaluating both internal and external candidates for the role. Spandana highlighted that FY26 will be a year of rebuilding for the company, with process enhancements aimed at improving efficiency and reducing operating costs. Profitability is likely to remain under pressure for one to two more quarters, with a gradual recovery anticipated thereafter.
• We model AUM to decline ~20% in FY26 and expect profitability only in FY27 now. We expect credit costs for SPANDANA to remain elevated in 2QFY26, with AUM growth likely to remain subdued in FY26. While there are no nearterm catalysts, we reiterate our BUY rating on the stock with a TP of INR280 (based on 1.1x Mar’27E P/BV), given that SPANDANA now trades at an undemanding valuation of 0.9x Mar’27E P/BV.

AUM down ~58% YoY; disbursements dip ~88% YoY

• AUM declined ~58% YoY and ~27% QoQ to ~INR50b. Disbursements declined ~88% YoY to INR2.8b. Disbursements in Jul’25 stood at ~INR2.7b.
• The number of loan officers (net) declined by ~3,135 during the quarter; SPANDANA currently employs ~8,859 loan officers.

Reported NIM contracts ~250bp and yields drop ~130bp sequentially

• Reported yields declined ~130bp QoQ to ~19.4%, while CoF rose ~20bp QoQ to ~12.3%, resulting in a ~150bp QoQ decline in spreads to 7.1%.
• Reported NIM declined ~250bp QoQ to ~8.2%. This was primarily driven by interest income reversals on loans, which slipped into Stage 3. We estimate NIM of 9%/13.2% in FY26/FY27 (vs. FY25: ~15.1%).

GNPA declines ~15bp QoQ; technical write-offs at INR5.8b

• GNPA/NNPA declined ~15bp/5bp QoQ to ~5.5%/1.15%. PCR was broadly stable QoQ at ~79%. Stage 2 declined ~130bp QoQ to ~7.9%.
• Gross collection efficiency (including arrears) declined to 91.1% (PQ: 91.5%), and net collection efficiency declined to 90.6% (PQ: 90.9%). X-bucket Collection Efficiency stood at 97.9% in Jun’25 vs. 98.6% in Mar’25. Further, the X-bucket CE stood at ~98.5% in Jul’25.
• Customers having loans from SPANDANA +>= 3 lenders as of Jul’25 stood at ~21% (compared to ~20.3% in Apr’25).
• Management shared that forward flows into the GNPA bucket remained elevated, indicating that a higher proportion of overdue accounts still continue to flow forward into higher buckets. However, collection efficiency in the current bucket improved to 98.5% in Jul’25, suggesting stronger recoveries from customers who are not yet overdue. Management expects forward flows to stay high for the next 1-2 quarters, with a gradual moderation likely from 3Q/4Q onwards as collection measures and portfolio quality improvement measures start to take effect.
• CRAR stood at ~40.8% as of Jun'25. The company completed its Rights issue of INR4b (partly paid-up), which saw participation from promoters and institutional investors. CRAR, after the Rights issue, stood at 46%.

Highlights from the management commentary

• Management indicated that stricter operational controls have been implemented, including compulsory house visits before loan disbursement, the introduction of e-signing to enable faster processing, and various other enhancements in the onboarding process.
• A dedicated collection team of over 500 members recovered INR410m from overdue accounts during the quarter, with these efforts further supported by an extensive tele-calling initiative to enhance recoveries.

Valuation and view

• SPANDANA reported a weak 1QFY26, with a sharp decline in disbursements and AUM, as the focus shifted to strengthening collections and operational stability. Credit costs were elevated due to forward flows from Stage 2 assets and are likely to remain high in 2QFY26 as well, and we expect near-normalization only by the end of FY26.
• SPANDANA will continue to exhibit asset quality stress for the next couple of quarters. We estimate SPANDANA to deliver RoA/RoE of 1.6%/6% in FY27E. While there are no near-term catalysts, given the undemanding valuation of 0.9x Mar’27E P/BV, we reiterate our BUY rating on the stock with a TP of INR280 (based on 1.1x Mar’27E P/BV).

Highlights from the management commentary

Guidance

• FY26 will be a rebuilding year, with a focus on process improvements for higher efficiency and lower operating costs.
• Targeting 20% AUM growth for FY26. ? Profitability to remain under pressure for one more quarter; recovery expected thereafter.
• From H2FY26, substantial improvement in AUM and disbursement growth expected, though 2Q will remain stressed.
• Emphasis on ground-level operational efficiency: 81 branches have been merged; AUM will be run down to reduce costs. Staff will be replenished only in geographies with proven productivity.

Asset Quality & Credit Costs

• MFI portfolio trending towards stability.
• Stricter controls introduced: compulsory house visits before disbursements, esigning for faster processing, and other onboarding improvements.
• About 50% of active and dormant customers are eligible for fresh loans under tighter credit norms.
• GNPA at 5.5%; NNPA at 1.15%.
• Forward flows into the GNPA bucket remain elevated, but current bucket CE improved to 98.5% in July; forward flows are expected to remain elevated for 1– 2 quarters, with deceleration in forward flows from 3Q/4Q onwards.
• On a BAU basis, MFI credit costs will be 2.5–3%. Digital collections have improved to 14% from 3–4% earlier.

Collections

• A 500+ member collection team recovered INR410m from overdue accounts this quarter, complemented by tele-calling efforts.
• Digital payment solutions are implemented to improve customer service and extend collection windows.
• Collection efficiency is improving in the top five states. ? X-bucket collection efficiency at 97.9% vs 98.6% in Mar’25—dipped in April/May but has normalized in July.
• Current bucket collection efficiency of the loans source post implementation of MFI Guardrails 2.0 stood at ~100%.

AUM

• Disbursements of INR 2.8b in the quarter; July alone saw INR 2.7b. Strong momentum continues into August, with the first two weeks exceeding July’s pace.
• AUM at INR 49.5b, down ~58% YoY; targeting 20% growth in FY26.

Liquidity

• Liquidity at INR 17.3b; CRAR at 40.8% as of Jun'25.
• Post-rights issue, CRAR rises to 46%.

Financials

• NII stood at INR 1.3b, down 37% QoQ and 70% YoY, impacted by AUM decline and interest income reversals.
• Operating loss came in at INR590m vs. an operating profit of INR 250m in 4QFY25.
• Yields dropped to 19.4% from 20.4% in 4QFY25, while CoB rose ~20bp QoQ to 12.3%.
• Net loss of INR 3.6b was reported due to elevated provisions and technical write-offs.
• NIMs contracted 250bp QoQ to 8.2%.

Others

• It successfully completed the INR4b Rights issue, with incremental participation from institutional investors.
• Weighted average loan maturity is 6-7 months (never beyond 9-10 months under normal conditions). Profitability is expected to improve after one more quarter of stress.
• Spandana +>=3 earlier accounted for 30% of GNPA.
• Loan disbursement interval extended: previously 6 months after the first loan, now 12 months. Current mix: 85% loans for 2 years, 15% for 12–18 months.
• New leadership appointment expected within 30–45 days; candidates are being considered internally and externally.
• Promoter Kedaara holds 48.2% stake (41% via Fund 1, remainder via Fund 3), with holdings broadly unchanged after the Rights issue.

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