Aye Finance sustains margins and asset quality despite drought-related headwinds
AYE Finance Ltd.
BUY
₹133
₹133.75
₹200
50.38%
Investment View and Valuation
In its October 22, 2026 results update, ICICI Securities maintained its BUY recommendation on Aye Finance while reducing the target price to Rs 200 from Rs 285. The reduction reflects a lower valuation multiple of 1.4 times FY28E book value per share, versus 2 times earlier, to account for near-term volatility.
The broker nevertheless believes Aye Finance is successfully navigating macroeconomic headwinds through its positioning in the Rs 0.15 million to Rs 0.5 million ticket-size segment, differentiated cluster and AI-ML-led underwriting, and execution capabilities.
Strong Q2FY27 Operating Performance
Aye Finance reported a strong Q2FY27, supported by healthy asset-under-management growth, higher disbursements and improving operating leverage.
| Metric | Q2FY27 performance |
|---|---|
| AUM | Rs 7,597 crore; up 4 per cent QoQ and 26 per cent YoY |
| Disbursements | Rs 1,403 crore; up 15 per cent QoQ |
| September 2026 disbursements | Rs 500 crore, supported by festive-season demand and working-capital requirements |
| Net interest income | Rs 3,346 million; up 4 per cent QoQ and 39 per cent YoY |
| PAT | Rs 867 million; up 16 per cent QoQ and 151 per cent YoY |
| Operating cost to average assets | 8.61 per cent, an eight-quarter low |
| Cost-to-income ratio | 48.3 per cent versus 50.3 per cent in Q1FY27 and 56.5 per cent in Q2FY26 |
| Reported RoA | 4.0 per cent |
Resilient Margins and Lower Funding Costs
Margins remained resilient despite a rising-rate environment. Reported yield was 22.3 per cent, while the cost of borrowings declined 15 basis points QoQ to 10.6 per cent. NIM moderated 34 basis points QoQ to 15.6 per cent but remained above management's FY27 guidance range of 14.25 per cent to 14.75 per cent.
The June 2026 A+ credit-rating upgrade supported funding costs, while incremental borrowing cost declined to 10 per cent. Management expects the cost of borrowings to continue declining as higher-cost legacy borrowings mature over the next year.
Identifying Businesses With Long-Term Growth Potential
Exceptional wealth creation often comes from businesses that compound over time. DSIJ's Multibagger Pick focuses on identifying growth-oriented companies through detailed fundamental research.
Improving Asset Quality
Asset quality improved during the quarter, with lower portfolio-at-risk and non-performing assets. Non-overdue collection efficiency remained strong at 99.2 per cent.
| Asset-quality metric | Q2FY27 | Quarterly change |
|---|---|---|
| PAR X | 3.8 per cent | Down 20 basis points QoQ |
| Gross NPA | 4.2 per cent | Down 30 basis points QoQ |
| Net NPA | 1.6 per cent | Down 10 basis points QoQ |
| Credit cost | 3.82 per cent | Expected to move closer to 3.5 per cent |
Management expects credit cost to move closer to 3.5 per cent, with exit Q4FY27 credit cost below 3.5 per cent.
FY27 Guidance
| Metric | FY27 guidance |
|---|---|
| AUM growth | 25 per cent to 30 per cent |
| NIM | 14.25 per cent to 14.75 per cent |
| Operating costs | 8.25 per cent to 8.75 per cent |
| Credit cost | 3.5 per cent to 4.0 per cent |
| RoA | 4.0 per cent to 4.5 per cent |
Risks and Growth Catalysts
Drought conditions in parts of Maharashtra, Karnataka and Madhya Pradesh remain a monitorable risk, as these states account for around 18 per cent of AUM. Management stated that there were no early signs of portfolio stress and that disbursements would be calibrated in drought-declared districts.
Aye Finance has limited direct agricultural exposure because its 571 branches are located in Tier-2 and Tier-3 towns and it does not undertake agricultural or rural lending. The company has tightened underwriting for mortgage-backed MLAP loans in Maharashtra and Gujarat. The cattle book, representing 25 per cent to 28 per cent of the portfolio, has shown stable collections.
Growth catalysts include more than 30 planned branch additions in Q3FY27, expected H2FY27 seasonality, and a planned pilot in gold loans and other secured products.
Disclaimer: This is a summary of a research report published by the broker/research house identified above. The views, recommendations, target prices and estimates are those of the respective broker and do not represent DSIJ investment advice. The summary may be AI-assisted, hence please refer to the original report for complete details, disclosures and risks.
