From structural reset to scalable compounding
Moderating opex & improving asset quality likely to drive 2.5% RoA by FY28
We attended an analyst/investor meet hosted by IndoStar Capital Finance (Indostar). The following are our key takeaways from the management meet:
Indostar has evolved from a wholesale-focused NBFC into a granular, retail-led franchise with a diversified mix across vehicle finance and MLAP. After a deliberate underwriting tightening phase since Jan’25, the business is now seeing a more balanced trajectory, with improving growth, asset quality, and costs, setting the stage for stable, scalable long-term compounding.
Following the recent reset, growth has rebounded meaningfully, led by stronger execution, expanded sales capacity, and improving lender confidence. Indostar is targeting ~40% disbursement growth in FY27, supported by a 450+ branch network across 23 states, a diversified borrower base, and deeper penetration in northern markets. Vehicle finance, especially used vehicles, remains the core engine, while MLAP is being scaled in a calibrated manner, given its longer seasoning cycle, and is expected to reach ~15% of AUM over the next two years.
Despite some moderation in yields due to a conscious shift toward prime borrowers, margins have remained stable, supported by a meaningful decline in CoF and improving lender confidence. Incremental borrowings are now being raised at lower rates, reflecting a structurally stronger funding profile.
Operating efficiency has improved materially, fueled by cost rationalization, vendor renegotiations, and increased digitization across underwriting, approvals, and onboarding segments. About 65% of credit decisions are now scorecard- driven, enhancing both speed and consistency.
Tighter underwriting has been a key strategic shift, with sharper credit filters and reduced exposure to higher-risk segments. While this temporarily slowed AUM growth, it has driven a marked improvement in portfolio quality and a steady decline in delinquencies. The share of new book is rising (~60% of AUM), improving visibility on sustained asset quality going forward.
The business is entering a phase where a cleaner portfolio, an improving funding profile, and a more efficient operating model are converging to support sustainable growth. As execution stabilizes and underwriting benefits flow through, the key monitorables will be the durability of AUM growth and profitability. We estimate a CAGR of 23%/36% in AUM/PPOP over FY26-28, supported by NIM improvement to 11.1%/12% in FY27E/FY28E. Reiterate BUY with a TP of INR270 (based on 0.9x FY28E BVPS).
