Spandana Sphoorty margins improve as new-rule loans support AUM recovery

Investment View and Valuation

Motilal Oswal Financial Services retained its Neutral rating on Spandana Sphoorty in its July 24, 2026 results update. The broker noted that the microfinance lender is building momentum through operational recalibration, with sequential margins and asset quality improving. It continues to monitor the pace of disbursement expansion, operating-cost control and access to liabilities.

Motilal Oswal’s target price is Rs 290, based on 0.9 times its estimated March 2028 book value, compared with the current market price of Rs 261.

1Q FY27 Financial Performance

Spandana Sphoorty reported profit after tax of about Rs 119 million in 1Q FY27, up about 125 per cent quarter on quarter but around 28 per cent below Motilal Oswal’s estimate. Net interest income grew 14 per cent year on year and about 40 per cent quarter on quarter to approximately Rs 1.5 billion, an 18 per cent beat against the broker’s estimate.

Non-interest income was lower than estimated, primarily because of reduced assignment income. Operating expenditure declined about 26 per cent year on year to around Rs 1.5 billion, while pre-provision operating profit turned positive at about Rs 163 million from a loss of Rs 100 million in the preceding quarter. Provision write-backs of Rs 13 million, net of recoveries, resulted in an annualised credit cost of negative 0.1 per cent.

AUM Recovery and Operating Recalibration

Assets under management declined about 1 per cent year on year but increased about 11 per cent quarter on quarter to Rs 48.9 billion in 1Q FY27. Disbursements rose about 390 per cent year on year on a low base, but declined about 11 per cent quarter on quarter to Rs 13.7 billion.

Total borrowers declined about 4 per cent quarter on quarter to 1.11 million, while the net loan-officer count fell by about 410 to approximately 6,750. Loans originated under the new credit rules accounted for about 91 per cent of MFI AUM.

Management is targeting AUM of Rs 60–65 billion by March 2027 and around Rs 100 billion by March 2028 through disciplined lending, calibrated expansion and higher productivity. Its operating priorities include:

• Deepening its presence in Maharashtra and Tamil Nadu.
• Optimising branches in core states.
• Retaining higher-quality customers.
• Scaling its individual-loan pilot in Madhya Pradesh.
• Using the new loan-origination-system platform to support product capability and scalable growth.

Margins and Funding Costs

Reported yields improved by about 180 basis points quarter on quarter to around 24.6 per cent, while the cost of funds declined about 40 basis points to approximately 12.8 per cent. As a result, spreads improved about 220 basis points to 11.8 per cent and reported net interest margin expanded about 250 basis points to 12.5 per cent. Incremental cost of funds declined about 70 basis points to around 11.3 per cent.

Management expects gradual margin expansion from an improved portfolio mix, moderately higher yields, lower income reversals and lower incremental borrowing costs. This outlook is supported by a larger share of bank borrowings and credit-guarantee-scheme liabilities.

Asset Quality and Recoveries

Asset quality improved during the quarter. GNPA declined about 20 basis points quarter on quarter to 3.6 per cent, while NNPA remained stable at 0.7 per cent. Stage 3 provision coverage increased about 55 basis points to 81 per cent.

Management is seeking to improve the 1–90 DPD bucket and maximise recoveries from the legacy 90+ DPD pool. It guided for gross credit costs of around 2.5–3.0 per cent in FY27. The company also expects to receive the balance Rs 2 billion of rights-issue proceeds before the end of the current quarter.

Earnings Outlook and Key Monitoring Factors

Motilal Oswal raised its FY27 earnings per share estimate by about 40 per cent, reflecting higher net interest margins and lower provisions. The broker forecasts compound annual growth of 43 per cent in disbursements and 42 per cent in AUM over FY26–FY28. It estimates FY28 return on assets of 3.2 per cent and return on equity of 11 per cent.

Key factors to monitor are the sustainability of margin gains, the pace of disbursement recovery, the trajectory of operating expenses and improved access to liabilities.