Indostar Capital Finance sees disbursement momentum as asset quality recovery supports growth

Investment View and Valuation

Motilal Oswal Financial Services identifies early signs of business stability at Indostar Capital Finance, supported by robust disbursement momentum, improving funding costs and an expected recovery in asset quality. The broker reiterates its Buy rating and values the company at Rs 310 per share, based on 1.2 times March 2028E book value per share.

The broker estimates AUM and PAT CAGRs of 23 per cent and 60 per cent, respectively, over FY26-FY28, driven by margin expansion, lower credit costs and operating-efficiency gains.

1QFY27 Financial Performance

Disbursement Momentum and AUM Growth

Total AUM increased 6 per cent year-on-year and 2 per cent quarter-on-quarter to about Rs 8,240 crore. Vehicle-finance AUM grew 7 per cent year-on-year and 3 per cent sequentially.

Total disbursements increased 44 per cent year-on-year to about Rs 1,240 crore, including vehicle-finance disbursements of roughly Rs 1,190 crore, up about 43 per cent.

Micro-LAP was a faster-growing business. Its AUM rose about 186 per cent year-on-year and 24 per cent quarter-on-quarter to Rs 220 crore, while disbursements grew about 85 per cent year-on-year to Rs 50 crore. Loan-to-value in micro-LAP was about 39 per cent as of June 2026.

Asset Quality and Credit Costs

Asset quality remains a key monitorable. Gross Stage 3 assets were stable sequentially at about 4.8 per cent, while net Stage 3 rose about 40 basis points quarter-on-quarter to 2.5 per cent. Provision coverage declined about 7 percentage points sequentially to about 50 per cent.

Management stated that around 80 per cent of NPAs originate from the legacy book and expects gross NPAs and credit costs to improve over the next three to four quarters as that book runs off. Management attributes healthier newer-vintage performance to tighter underwriting, better customer selection, higher CIBIL scores and lower new-to-credit exposure.

Motilal Oswal forecasts credit costs of 2.6 per cent for FY27E and 2.2 per cent for FY28E.

Funding Costs and Margin Outlook

Funding costs offer support to margins. Reported cost of funds fell about 30 basis points sequentially to 9.9 per cent, although incremental cost of funds rose about 10 basis points to 9.1 per cent. Vehicle-finance disbursement yields improved about 20 basis points sequentially to 17.4 per cent.

Management expects portfolio yields of roughly 17-17.25 per cent in the near term while balancing growth and competitive pricing. The broker expects net interest margins of about 9.9 per cent in FY27E and 9.8 per cent in FY28E as higher-cost borrowings are repaid and liabilities diversify.

Growth Strategy and Management Targets

Management targets about 35 per cent disbursement CAGR and PAT of Rs 450-500 crore by FY29. Vehicle-finance growth is expected to benefit from replacement-led commercial-vehicle demand, affordability and infrastructure spending.

The business is diversifying across commercial vehicles, passenger vehicles, construction equipment and farm equipment. Management targets micro-LAP to contribute about 15-20 per cent of the portfolio within three to five years, aided by branches, new geographies, digitisation, larger ticket sizes and limited competition in Tier-3 to Tier-6 markets.

A planned 50 per cent increase in frontline sales headcount by March 2027 is intended to support expansion.

Key Monitorables

• Consistent execution of the targeted disbursement and micro-LAP expansion.
• Sustained improvement in asset quality as the legacy book runs off.
• Reduction in gross NPAs and credit costs over the next three to four quarters.
• Ability to maintain funding-cost benefits and expected net interest margins while balancing growth and competitive pricing.