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Q1 disbursements remained flat YoY due to a slowdown in Vehicle Finance/Home Loan/ CSEL. Lower capacity utilization and excess rain in the quarter led to sluggish growth; however company expects a pick-up in H2 led by a positive festive season. Factoring in the same, we build an AUM growth of 22%/ 21% in FY26/ FY27E. We expect NIM to improve supported by expansion in high-yielding new business verticals and lower CoF. Expect opex to remain elevated as the company is in expansion mode (gold loans). Asset quality trends weakened in the quarter, resulting in higher credit cost (1.8%). We factor in the same and revise our credit cost assumptions for FY26/FY27E. We cut our multiple to 3.7x (vs. 4.2x Mar-27 ABV earlier) to arrive at a TP of Rs 1,500. Maintain HOLD.

• Q1 disbursements flat; expect 22% growth in FY26: 1QFY26 disbursements stood flat YoY at Rs 243.3 bn with VF/Home Loans/LAP/New Business growing at 6.9%/ -0.8%/ 21.5%/ -28.8% YoY. Within VF, company is seeing lower capacity utilization on account of excess rain/ seasonality; however it expects an improvement in H2 with a strong festive season/ rural demand. Commentary also highlighted a conscious slowdown in new business verticals (supply chain financing and fintech-lending with partners) on account of higher stress in these segments. HL disbursements have also been flat YoY due to registration issues in some markets. Q1 AUM growth stood steady at 24% YoY /4% QoQ to Rs 1,921.5 bn and company is guiding for a similar runrate in FY26. We build an AUM growth of 22%/ 21% in FY26/FY27E.
• CoF starts moderating; benefit to come in subsequent quarters: NII grew by 24% YoY/4% QoQ. While CoF moderated by 10 bps QoQ to 7%, it was offset by lower yield. Consequently, reported NIM declined by 20 bps QoQ to 7.8%; however company expects margins to improve by ~15 bps in FY26 aided by a lower CoF. 50% of its bank borrowings are linked to EBLR which will see the benefit of lower CoF from Q2 onwards, while the other 50% is MCLR-linked where re-pricing will happen with a lag. Opex costs remain elevated (Opex/ AUM ratio at 2.9%) as the company is undertaking continuous expansion in new verticals (gold loans). We expect NIM trajectory to see a gradual improvement in FY26E supported by expansion in new business verticals and lower CoF. Moreover, high opex spend in new businesses is likely to be offset by an improvement in productivity.
• Asset quality trend deteriorates; stress in VF/ CSEL: Asset quality trend declined in the quarter with GS3/NS3 at 3.16%/ 1.78% vs. 2.81%/ 1.54% in 4QFY25. Company maintains a PCR of 43.7%, while total provisions stood at 1.97% of gross advances. Commentary indicated higher stress in the auto (Small CV and tractor segment) and CSEL portfolio (fintech-partners). However, it expects credit costs to stabilize in Q2 and improve over the year as the partnership book has started to run-down and company has curtailed disbursements in segments with higher stress. Credit cost stood at 1.8% in 1Q and we expect it to trend at ~1.6% for FY26E.

Q1FY26 Concall Highlights

Growth

• 1QFY26 disbursement growth was flat (at Rs 243.25 bn) due to a slowdown in VF, home loan and CSEL segments.
• However, AUM growth remained steady (+24% YoY) to Rs 1,921.5 bn driven by the VF and LAP segments. AUM growth is expected to be maintained at ~23%, contingent on H2 performance.
• AUM mix as on 1QFY26 in terms of VF/LAP/Home Loans/New Business stood at 55%/23%/10%/12%.
• HL saw flat disbursements due to changes in the registration process in some geographies. Commentary suggests lower expansion in FY26 with disbursement growth of 10%
• Company did lower disbursements in fintech lending (of ~Rs 15 bn) and supply chain finance (of Rs 5 bn) with a focus on improving in-house book.
• Company expects to see a rebound in growth driven by festive demand and rural recovery. VF disbursement growth was soft in Q1 due to seasonality, early monsoon and weak industrial activity but a recovery is likely as these effects fade.
• Company has opened ~73 branches for gold loan segment in the tier 1 region, aiming expansion in tier-2 and 3 cities in coming quarters. All disbursements were made to new customers. Operating profitability
• Company expects NIM to improve from Q2 driven by a 20-bps reduction in CoF as 50% of borrowings are EBLR-linked. It intends to pass 7–8 bps to customers thereby a net benefit of 12–15 bps is anticipated. ? Company expects opex to AUM ratio to trend at ~3% with an improvement in productivity; however rise in Q2 is anticipated on account of increment to employees.

Asset quality

• Asset quality trend declined in the quarter with GS3/NS3 at 3.16%/ 1.78% vs. 2.81%/ 1.54% in 4QFY25. Commentary indicated higher stress in small CV, tractor and unsecured SME segments while secured SME is also seeing some pressure but it is expected to stabilize.
• Credit cost is expected to remain at 1.7–1.8% in Q2 with improvement from Q3. Base case assumes levels similar to FY25 with a potential ~10 bps improvement in a positive scenario.
• The segment-wise GS3 ratio for VF/ LAP/ HL/ CSEL/ SME/ SBPL stood at 3.89%/ 2.26%/ 1.68%/ 2.29%/ 2.87%/ 3.36% vs. 3.52%/2.02%/1.32%/2.06%/2.36%/2.59% as on 4QFY25.

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