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Growth and margin pressure persists

Q2 disbursements growth was steady (+11.1% YoY), while higher repayments resulted in muted loan book growth of 5% YoY to INR3,219.6bn. AUM is guided to grow at 8- 10% in FY27 with diversification into higher-yielding LAP, LRD, self-employed borrowers and project finance. We build a lower AUM growth of 6%/7% in FY27/28E on account of elevated prepayments (~12%) and intense competition from banks constraining growth. We expect NIM to moderate by 8/20bps in FY27/28E to 2.6%/2.5% as rising CoF and competitive pricing to put pressure on margins. Headline asset quality saw an improvement and we build credit cost of -2/12bps for FY27/28E factoring in strong recoveries in H1FY27. However, the shift towards riskier segments is likely to increase asset quality risks. We tweak our FY27/ FY28E estimates downward factoring in weaker growth and NIM compression expected over FY27/28E. We keep our multiple unchanged to 0.6x on Sep’28E P/ABV, resulting in TP of INR520. Retain ‘Hold’.

* Expect 6%/7% growth in FY27/ FY28E: Q2 disbursements came at INR181.3bn (+11.1% YoY), while elevated prepayments (~12% vs 9-10% normally) led to a modest 5% YoY growth in loan book to INR3,219.6bn. Retail and Project loans contributed 97% and 3% of loan book respectively. The AUM mix in terms of salaried/non-salaried borrowers remained stable at 85:15. Management has guided for 12-14% disbursement growth in FY27 with a focus on diversifying its portfolio towards higher-yielding self-employed borrowers, LAP, LRD and project finance. LAP is targeted to contribute 20% of business in FY27. This strategic shift aims to reduce direct competition with banks in the prime salaried housing segment, thereby improving portfolio yields. Additionally, the company is expanding into smaller-ticket project financing of INR0.5-1bn (vs. earlier INR4-6bn), targeting opportunities in tier 2/3/4 cities. While company expects healthy disbursement momentum to translate into 8-10% AUM growth for FY27, intense competition from banks and higher prepayments are likely to constrain loan book expansion. Accordingly, we build loan growth of 6%/7% for FY27/28E.

* NIM to moderate over FY27/28E: Q2 yield improved marginally QoQ to 8.83% (vs. 8.80% in Q1), while CoF increased to 7.15% (vs. 7.08% in Q1). Consequently, reported NIM was stable at 2.58%. Incremental CoF declined in Q2 to 6.91% vs 7.06% QoQ. The company has increased PLR by 25bps across both existing and new loans which is expected to support margins from Q3 onwards. Additionally, lending rates on select products were increased in Q2. Management reiterated its FY27 NIM guidance of 2.5-2.6%, while expecting the recent repo rate hike to increase borrowing costs by ~10bps in FY27. We expect NIM to moderate by 8/20bps in FY27/28E to 2.6%/2.5%, factoring in rising CoF and pricing pressure due to competitive intensity from banks. The shift towards higher-yielding LAP and self-employed loans may provide some cushion, although the benefit could be partly offset by higher credit risk.

* Headline asset quality improves: Asset quality improved in Q2 with GNPA/NNPA at 2.05%/1.03% vs. 2.14%/1.11% in Q1. Stage 2 assets improved by 7bps QoQ to 2.53%. Recoveries in Q2FY27 stood at INR5.5bn which includes INR0.8bn from written-off accounts. Management expects a 7-10bps improvement in recoveries over current levels by FY27. GNPA for IHL/ NHIL stood at 1.09%/2.36% respectively, while stage 3 assets remain elevated in the NHC segment due to legacy stressed cases. Further, two loan accounts extended to entities associated with Dr. Subhash Chandra with an exposure of INR13.6bn remain classified as NPAs. While no significant ARC sale was executed during Q2, two projects are lined up for resolution through ARC transactions in H2FY27. Management expects credit cost at 8-10bps for FY27 and we estimate -2bps/12bps for FY27/ FY28E factoring in strong recoveries during H1FY27.

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