Buy Spandana Sphoorty Ltd for the Target Rs. 340 by Motilal Oswal Financial Services Ltd
Profitability to remain elusive in FY26
A year of consolidation ahead; we estimate elevated credit costs in 1HFY26
* Spandana Sphoorty’s (SPANDANA) 4QFY25 loss stood at ~INR4.3b (vs. MOFSLe loss of INR4.1b). FY25 loss stood at INR10.3b (vs. PAT of INR5b in FY24).
* 4Q NII declined ~47% YoY to ~INR2.1b (~11% miss). PPOP declined ~91% YoY to INR251m. Total borrower count declined ~16% QoQ to 2.5m.
* Opex rose ~7% YoY to ~INR2.1b (~23% lower than MOFSLe), resulting in a cost-income ratio of ~89% (PY: ~42% and PQ: 77%).
* Credit costs stood at ~INR6b, resulting in annualized credit costs (as % of average loans) of ~36% (PQ: ~32% and PY: ~4%). Technical write-offs stood at INR6.5b (vs. INR6.8b in 3QFY25).
* Spandana has received shareholder approval to raise up to ~INR7.5b of fresh equity capital. A Board Committee has been formed to oversee capital raise, including a possible rights issue in 2QFY26 with promoter participation.
* Management guided for ~20% growth in AUM and disbursements in FY26. However, we expect AUM growth to be back-ended, as the company will have to prioritize improving collections and stabilizing operations in 1HFY26, which will result in muted performance in the near term.
* Despite improvements in X-bucket collection efficiency and small recoveries from written-off accounts, Spandana will remain vulnerable in FY26 since it will have to provide for residual stress of its Stage 2 and 3 loans, which will keep incremental slippages and credit costs elevated in 1HFY26. Management shared that it expects a normalization in credit costs by 3Q/4QFY26, suggesting that profitability will remain elusive for another twothree quarters in FY26.
* Absence of a permanent CEO will add to business uncertainty. While the management shared that both internal and external candidates are being evaluated for the CEO position, the lack of leadership clarity at a critical franchise rebuilding phase could delay strategic execution and decisionmaking.
* We model AUM/PPOP CAGR of ~18%/-12% over FY25-27 with RoA/RoE of 2%/8% in FY27E. We expect credit costs for SPANDANA to remain elevated in 1HFY26, with AUM growth likely to remain subdued in FY26. We have not yet factored in the equity raise through the Rights issue in our estimates given the uncertainty on the quantum of the fresh equity raise. While there are no near-term catalysts, we maintain our BUY rating on the stock with a TP of INR340 (based on 0.9x Mar’27E P/BV), given that SPANDANA now trades at undemanding valuations of 0.8x Mar’27E P/BV.
AUM down ~43% YoY; disbursements significantly muted
* AUM declined ~43% YoY and ~24% QoQ to ~INR68b. Disbursements declined ~91% YoY to INR3.7b. SPANDANA has ~459 branches on a weekly repayment model, which contributed ~14% of its 4QFY25 disbursements.
* Loan officer count (net) declined by ~584 in 4Q to ~12k.
* Management shared that the implementation of internal guardrails (stricter than MFIN Guardrails 2.0) led the company to rationalize disbursements in 4QFY25, shifting the focus instead toward improving collections through enhanced on-ground customer engagement.
Reported NIM contracts ~60bp QoQ
* Reported yields declined ~40bp QoQ to ~20.7%, while CoF declined ~10bp QoQ to ~12.1%, resulting in a ~30bp QoQ decline in spreads to 8.6%.
* Reported NIM declined ~60bp QoQ to ~10.7% due to a decline in yields and an increase in the cost of borrowings. We estimate NIM of 12.1%/13% in FY26/FY27 (vs. FY25: ~15%).
GNPA rises ~80bp QoQ; technical write-offs at INR6.5b
* GNPA/NNPA rose ~80bp/25bp QoQ to ~5.6%/1.3%. PCR declined ~95bp QoQ to ~78.8%. Stage 2 saw an increase of ~150bp QoQ to ~9.2%.
* Gross collection efficiency (including arrears) declined to 91.5% (PQ: 92.4%) and net collection efficiency rose to 90.9% (PQ: 90.7%).
* Customers having loans from Spandana +>= 3 lenders as of Apr’25 stood at ~20.3% (compared to ~23% in Feb’25).
* Management shared that the company’s focus will be on strengthening borrower discipline at the field level and improving X-bucket collection efficiency, with a target to consistently maintain it above 99%. We model credit costs of ~8%/3.5% for FY26/FY27.
Highlights from the management commentary
* Management stated that both internal and external candidates will be considered for the CEO role, with the objective of selecting someone who fits the need and is aligned with the long-term aspirations of the company.
* Employee attrition stood at 56% in FY25, and the company has opted not to backfill vacancies in certain geographies where the borrower-to-loan officer ratio was significantly below the national average.
* Spandana is implementing an eKYC process that leverages Aadhaar-based OTP verification through eSign. Additionally, it is working with NPCI on the eSetu framework to enable Aadhaar-based customer identification, which will incorporate both OTP and face authentication for enhanced verification.
Valuation and view
* SPANDANA reported a weak 4QFY25, 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 1HFY26 as well. While X-bucket collection efficiencies continue to improve, we believe normalization is still a few quarters away and sustained improvement over the next 2-3 quarters will be critical for the stabilization of operations.
* SPANDANA is expected to see some more stress in its asset quality over the next couple of quarters. We estimate SPANDANA to deliver RoA/RoE of 2%/8% in FY27E. While there are no near-term catalysts, given the undemanding valuation of 0.8x Mar’27E P/BV, we maintain our BUY rating on the stock with a TP of INR340 (based on 0.9x Mar’27E P/BV).
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