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Disbursements pick up; asset quality weakens

Quick Pointers:

* Q2 disbursements see a pick-up (+18% YoY); expect 16% AUM growth in FY26

* Headline asset quality ratios see a spike and continue to be a monitorable

Q2 has seen a pick-up in disbursement growth (+18% YoY) post GST rationalization. While Q2 AUM grew 15% YoY, we build a higher run-rate of 16% for FY26, anticipating a pick-up in economic activity. Calculated NIM improved 9 bps QoQ to 5.47%; we expect an improvement in FY26 supported by a lower CoF. Asset quality trend deteriorated in the quarter (GS3/NS3 at 2.03%/ 1.13%) due to cash-flow pressures in the MSME segment; however, company expects an improvement post GST reform and a positive monsoon. We marginally tweak our estimates and value SUF’s standalone business at Rs 4,049 (2.8x Sep-27 ABV) and assign a value of Rs 951 to subsidiaries with a 20% holding company discount to arrive at a TP of Rs 5,000. While outlook on growth is improving, high credit costs continue to be a drag. Maintain HOLD rating as the stock price captures all the positives.

* Disbursements picking up; expect 16% AUM growth in FY26: Q2 saw a pickup in disbursement growth (18% YoY) to Rs 81.1bn. While industry growth in MHCV segment remains flat, LCV/ SCV and tractors saw positive momentum. Consequently, Q2 AUM grew 15% YoY/4% QoQ to Rs 554.2bn, driven by MHCV (+17% YoY), Cars (+19% YoY), CE (16% YoY) and Commercial lending (+102% YoY on a low base). Company expects the impact of GST 2.0 on consumption to be buoyant, rural demand to improve after a healthy monsoon period and private sector capex to pick up in subsequent quarters. We factor an improvement in H2 and build an AUM growth of 16%/ 15% in FY26/ FY27E.

* Expect NIM to improve aided by lower CoF: NII grew by 27% YoY/5% QoQ to Rs 7.1bn. While yield declined by 12 bps QoQ to 11.89%, it was offset by a 26 bps improvement in CoF to 7.16%. As a result, calculated NIM improved by 9 bps QoQ to 5.47% (vs. 5.38% in 1QFY26). Company is focusing on the right asset class/ customer mix to optimize margins; we expect NIM to improve in FY26 supported by a lower CoF. Opex grew 10% YoY/ 3% QoQ while C/I ratio stood higher at 29.6% (vs. 27.7% in 1QFY26). PBT grew +9% YoY and PAT grew 14% YoY, in-line with AUM growth.

* Headline asset quality ratios see pressure: Asset quality trend deteriorated in the quarter with Gross stage 3/Net stage 3 at 2.03%/ 1.13% vs. 1.91%/ 1.08% in 1QFY26. GNPA/NNPA (as per RBI’s) stood at 2.80%/ 1.79% vs. 2.66%/ 1.71% in 1QFY26 and the company maintains a PCR of 45%. Commentary indicated a spike in asset quality concerns with Q2 seeing cash-flow pressures for MSME borrowers in the system. While collections activity remained challenging, company expects an improvement in H2 post GST reforms. Capital Adequacy Ratio stood at 19.3% as of 2QFY26.

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