Northern Arc Capital’s D2C lending mix drives AUM growth and margin outlook

Investment View and Valuation

Motilal Oswal Financial Services reiterated its BUY rating on Northern Arc Capital following a steady 1QFY27 performance. The broker’s central thesis is that a rising contribution from the direct-to-consumer (D2C) lending franchise, expansion of fee-generating businesses and stable Intermediate Retail lending should support growth, margin expansion and improved return ratios.

Motilal Oswal values Northern Arc Capital at 1.2 times FY28E price-to-book value and retains a target price of Rs 395.

1QFY27 Financial Performance

Northern Arc Capital reported 1QFY27 PAT of about Rs 114 crore, up about 46 per cent year on year and 11 per cent above Motilal Oswal’s estimate. Net interest income increased about 45 per cent year on year to about Rs 490 crore, also 11 per cent above estimate. Pre-provision operating profit grew about 27 per cent year on year to Rs 260 crore, representing a 7 per cent beat, while credit costs of about Rs 110 crore were in line with estimates.

Operating expenses rose about 41 per cent year on year to about Rs 260 crore, 10 per cent above the broker’s estimate. Other operating income declined about 42 per cent year on year to about Rs 29 crore, from about Rs 65 crore in the preceding quarter, because assignment income fell to Rs 7 crore from Rs 40 crore.

AUM Growth and Distribution Network

Lending AUM grew 26 per cent year on year and 1.6 per cent quarter on quarter to Rs 16,900 crore in June 2026. D2C lending increased to about 64 per cent of lending AUM, versus about 59 per cent in March 2026.

Placement volumes declined amid geopolitical tensions. The company had 30 active digital partners, 373 originator partners and 430 branches, comprising 90 MSME branches and 340 Rural branches.

Asset Quality Remains Resilient

Gross and net Stage 3 assets improved to about 1.0 per cent and 0.5 per cent, respectively, from 1.2 per cent and 0.6 per cent in the preceding quarter.

Collection efficiency was about 99.6 per cent, with no incremental Stage 3 additions in Intermediate Retail. Management said the quarter-on-quarter decline in the Intermediate Retail business was seasonal rather than an asset-quality concern. Annualised credit cost was about 2.8 per cent in 1QFY27, compared with 3.2 per cent a year earlier.

Margins, Funding and Management Outlook

Calculated 1QFY27 NIM improved about 65 basis points sequentially to about 12.3 per cent. Yields improved about 80 basis points to 18.8 per cent, partly offset by a 25-basis-point rise in the cost of borrowings to 8.4 per cent.

Management expects RoA to improve gradually towards about 3 per cent by March 2027, driven by margin improvement, fee income and operating leverage. It expects NIM to improve towards about 9.5 per cent in the near term and approach 10 per cent by FY27-end.

Management expects placement traction to improve across MFI, MSME and Consumer Finance. The company has received SEBI approval for a diversified debt fund and Savings Plus Fund. Borrowings were 27 per cent offshore and 73 per cent domestic.

Broker Estimates and Key Execution Factors

Motilal Oswal expects AUM and PAT to compound at about 21 per cent and 34 per cent, respectively, over FY26-FY28E. The broker forecasts FY28E RoA of 3.2 per cent and RoE of 15 per cent.

Motilal Oswal raised FY27E EPS by 4 per cent, reflecting higher NIM partly offset by higher operating expenses. Key execution factors include:

• Sustaining D2C growth.
• Scaling placement and fund management fee income.
• Controlling costs during investment in branches, sales and technology.
• Maintaining asset quality.