Indostar banks on improving asset quality, branch expansion for growth

Synopsis

Indostar Capital share price: Indostar Capital shares jumped 21% post-Q4 results on strong net interest income, better asset quality, and cost rationalisation. Focused expansion and debt repricing aim to sustain momentum and improve profitability in FY26.

The stock of Indostar Capital has gained 21% since its March quarter result declared on April 29 compared with nearly 4.5% increase in the ET NBFC index. The mid-tier nonbanking financial company (NBFC) reported strong growth in net interest income and improved asset quality amid tightened lending policies. The company sold stressed loans in a transaction with an asset reconstruction company (ARC) during the quarter which is expected to keep asset quality high in FY26 as well.

Indostar’s cost-income ratio has historically been higher in the vicinity of 70%. It has undertaken a cost optimisation drive to rationalise operating costs. The company aims to bring the cost-income ratio down to around 50% in the coming quarters.

Over the past two years, the company has been focusing on expanding its reach. It added over 150 branches during the period to take the total count to 587 at the end of March 2025. It also augmented the workforce significantly by 1764 to 5,763. The management expects these initiatives will help in achieving 12-15% growth in assets under management (AUM). In FY25, its AUM grew by 26.1% to Rs11,053 crore.

The retail share in the AUM reached 99% in FY25 from 26% in FY18. It undertakes commercial vehicle financing, small and medium enterprises (SME) lending, and loan against property (LAP).

The company plans to replace high cost debt worth Rs 800 crore attracting an interest rate of 12% with fresh borrowings at a coupon rate of 10% in the June 2025 quarter. This is expected to reduce the debt servicing cost. The company spent over half of the revenue from operations on interest payment in each of the two years to FY25.

Indostar’s net profit grew by 2.6% to Rs36.2 crore in the March 2025 quarter. Net interest income (NII) at Rs181 crore fell year-on-year by 22% due a high base of one-time gain in the previous year’s comparable quarter. Disbursements at Rs1,535 crore were 13% lower from the year ago as the company implemented tighter lending policies. On a standalone basis, gross non-performing assets (NPA) fell to 4.5% from 5% by similar comparison.

Motilal Oswal expects 94% growth in net profit of Indostar between FY25 and FY27. The brokerage has a buy rating on the stock with a target price of Rs360. On Thursday, it was last traded at Rs352.5 on the BSE.

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