IGI Logo

Growth to pick up in H2; credit cost elevated Quick Pointers:

* Flat disbursement growth due to a slowdown in VF, HL and CSEL; seeing an uptick in Oct-25 volumes

* Asset quality deteriorates; expect credit cost to trend at 1.6% in FY26E

Q2 disbursements remained flat YoY due to a slowdown across segments. Lower capacity utilization and excess rain in the quarter led to sluggish growth; however, company is seeing green-shoots in Oct-25 driven by the benefit of GST cuts/ festive season. Factoring in the same, we retain our AUM growth estimate of 22%/ 21% in FY26/ FY27E. We expect NIM to improve supported by a lower CoF; opex to remain elevated as the company is in expansion mode (gold loans). Asset quality trends weakened in the quarter while credit cost stood elevated at 1.8%. While company saw higher stress in the CSEL portfolio, it expects a moderation in H2. We revise our credit cost assumptions for FY26/FY27E and slightly increase our Sep-27 ABV multiple to 3.8x (vs. 3.5x earlier) to arrive at a TP of Rs 1,725. Maintain HOLD as the stock price captures all the positives.

* Q2 disbursements flat; seeing improvement in Oct-25: 2QFY26 disbursements stood flat YoY at Rs 244.4bn with VF/Home Loans/LAP/New Business growing at 10%/ -7%/ 8%/ -22% YoY. Company is seeing strong traction in PV/ 2W in Oct-25 supported by positive GST reform and a strong festive season and expects the trend to continue. While commentary indicated lower capacity utilization in MHCV/ CE on account of excess rain, it is seeing a pick-up in LCV/ Small CV volumes. HL disbursements were down 7% YoY due to registration/ e-katha issues in certain markets (Karnataka); however Oct-25 is seeing positive volumes. New business disbursements saw a decline due to a conscious slowdown in CSEL/ fintech-lending with partners while company continues to ramp-up in gold loans. Q2 AUM grew 21% YoY /4% QoQ to Rs 1,991.6bn; however company is guiding for a higher run-rate in H2. We build an AUM growth of 22%/ 21% in FY26/FY27E anticipating a pickup in the VF/ HL and LAP portfolio.

* NIM improves; expect CoF to reduce further: NII grew by 24% YoY/6% QoQ. While yield moderated by 10 bps QoQ to 14.7%, it was offset by a lower CoF at 6.8% (down 20 bps QoQ). Consequently, reported NIM improved by 10 bps QoQ to 7.9%. Company expects margins to improve by ~10-15 bps in H2FY26, factoring a pass-through from MCLR-linked loans. Opex costs remain elevated (Opex/ AUM ratio at 3.3%) as the company is undertaking continuous expansion in new verticals (gold loans). We expect NIM to see an improvement (+16 bps) in FY26E aided by a lower CoF. Moreover, high opex spend in new businesses is likely to be offset by an improvement in productivity.

* Asset quality trend weakens; stress peaking in CSEL: Asset quality trend deteriorated in the quarter with GS3/NS3 at 3.35%/ 1.90% vs. 3.16%/ 1.78% in 1QFY26. Company maintains a PCR of 43.2%, while total provisions stood at 2.04% of gross advances. While company saw higher delinquency in the CSEL portfolio (fintech-partners), it expects credit costs to moderate in H2 as the partnership book has started to run-down and company has curtailed disbursements in the portfolio. Credit cost stood elevated at 1.8% in 2Q and we expect it to trend at ~1.6%/ 1.5% for FY26/ FY27E..

Please refer disclaimer at https://www.plindia.com/disclaimer/

SEBI Registration No. INH000000271