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    Northern Arc Capital Q1 FY26 earnings call

    NORTHARCGood
    Financial Services·29 Jul 2025
    Management Summary

    Northern Arc Capital reported a resilient Q1 FY26, demonstrating strong AUM growth and improved operating efficiency despite lingering FY25 headwinds. The company achieved its highest-ever Q1 placement volume, signaling a revival in credit demand. While PAT saw a slight decline YoY, asset quality remained stable, and management provided clear guidance for future growth and profitability, emphasizing a shift towards a credit solution ecosystem model.

    Highlights

    8

    • Assets Under Management (AUM) stood at INR13,351 crores, reflecting a 12% YoY growth.

    • Net Interest Income (NII) for Q1 FY26 was INR 298 crores, up 10% YoY.

    • Net revenue, including fee income, rose 9% YoY to INR325 crores.

    • Pre-provisioning operating profit increased 18% YoY to INR207 crores.

    • Profit After Tax (PAT) for Q1 FY26 was INR 81 crores, down from INR 93 crores in Q1 FY25.

    • Overall credit cost for Q1 FY26 stood at 3%, with GNPA at 1.1% and NNPA at 0.6%.

    • Debt-to-equity ratio improved to 2.7X from 3.9X in March 2024, with capital adequacy at 25.5%.

    • MSME business AUM grew 34% YoY, and consumer finance grew 25% YoY.

    What Changed2

    vs Q2 FY26

    Guidance items15 → 14 (-1)Risks discussed3 → 4 (+1)

    Key financials

    Single quarter

    08 metrics
    1. 01AUM₹13,351 Cr+12%YoY
    2. 02Net Interest Income₹298 Cr+10%YoY
    3. 03Net Revenue₹325 Cr+9%YoY
    4. 04Pre-provisioning Operating Profit₹207 Cr+18%YoY
    5. 05PAT₹81 Cr-12.9%YoY

    Segment breakdown

    Direct-to-Customer Business
    53% AUM Contribution
    MSME Finance
    20% AUM Contribution34% AUM Growth
    Consumer Finance
    26% AUM Contribution25% AUM Growth
    MFI
    7% AUM Contribution
    Intermediate Retail
    12% AUM Growth
    Fee Franchise (Placement & Fund Management)
    24% Income Growth
    List

    Guidance & targets

    14
    CategoryTargetPriority
    Credit Growth
    AUM Growth
    20% to 25%
    		High
    Business Mix
    Direct-to-Customer Business Mix
    70%
    		High
    Profitability
    Incremental RoA from Fee Franchise
    30 to 40 basis points
    		Medium
    Profitability
    ROA
    3.7% to 4%
    		High
    Profitability
    ROE
    16% to 18%
    		High
    Profitability
    ROA
    around 3.5%
    		Medium
    Profitability
    ROA
    close to 4%
    		Medium
    Operating Efficiency
    Opex Ratio
    3.6% to 3.9%
    		Medium
    Credit Cost
    H2 Credit Cost
    2.7% to 2.9%
    		Medium
    Credit Cost
    Full Year Credit Cost
    below 3%, anywhere between 2.8% to 2.9%
    		Medium
    Credit Cost
    Long-term Credit Costs
    2.5% to 3%
    		Medium
    Credit Cost
    Credit Cost
    2.7% to 2.8%
    		Medium
    Credit Cost
    Credit Cost
    2.5% to 2.6%
    		Medium
    Cost of Funds
    Overall Cost of Funds Reduction
    20 to 25 basis points
    		Medium

    Risks & concerns

    4
    RiskSeverity

    Residual impact of FY25 stress

    The residual impact of FY25 stress is expected to linger through the first half of FY26, particularly in the MFI segment. — Management acknowledged

    medium

    Stress in the microfinance (MFI) segment

    FY25 was marked by stress in the microfinance segment, though PAR 0+ accretion has reverted to March 24 level at 0.5%, indicating stabilization. — Management acknowledged

    medium

    Higher elevated flow rate in unsecured SME loans

    Unsecured SME loans are seeing higher elevated flow rates, but Northern Arc has low concentration in this segment. — Management acknowledged

    low

    Cyclical nature of rural finance business

    The rural finance business is cyclical, and management has been proactive in bringing down exposure and managing risk. — Management acknowledged

    low

    Q&A highlights

    3

    “We have done 100% provisioning on account of DLG. There is no more residual stuff. Whatever you will see, you will see the core provisioning. Anyway, our provisioning tends to be prudent on Stage 1, Stage 2.”

    Clarifies that DLG-related provisioning is complete and indicates a stabilization in core provisioning, suggesting a potential decline in future provisioning costs.

    asked by Digant Haria

    2 min read6 chapters

    Detailed Narrative

    01

    Q1 FY26 Performance Overview and Market Recovery

    Northern Arc Capital reported its highest-ever Q1 placement volume, signaling a recovery in credit demand. AUM grew 12% YoY to INR13,351 crores, with overall credit growth at 12% YoY (20% excluding rural finance). Net Interest Income increased 10% YoY to INR 298 crores, and net revenue rose 9% YoY to INR325 crores. The company acknowledged the lingering residual impact of FY25 stress in H1 FY26 but anticipates credit environment stabilization by the festival season.

    02

    Strategic Focus and Business Mix Evolution

    The company's strategy emphasizes building a credit solution ecosystem over a pure balance sheet-led model, reinforced by a 24% YoY growth in core fee income. The direct-to-customer business now contributes 53% to AUM, with MSME finance growing 34% YoY and consumer finance 25% YoY. Management aims to increase the direct-to-customer business mix to 70% by FY28, predominantly led by MSME, consumer, and rural finance.

    03

    Asset Quality and Credit Cost Management

    Asset quality remained stable with GNPA at 1.1% and NNPA at 0.6%. The overall credit cost for Q1 FY26 was 3%, including INR102 crores in provisions, largely due to MFI segment stress. Management confirmed 100% provisioning for DLG and expects H2 FY26 credit costs to land between 2.7% to 2.9%. Long-term credit costs are projected to be contained in the range of 2.5% to 3%.

    04

    Profitability and Operating Efficiency Targets

    Pre-provisioning operating profit rose 18% YoY to INR207 crores. The opex ratio improved by 57 basis points YoY to 3.5%. Northern Arc targets an annual AUM growth of 20-25% and aims for an ROA of 3.7-4% and an ROE of 16-18% over the next three years. The fee franchise is expected to add 30-40 basis points to RoA, reflecting in improved NIM.

    05

    Funding and Liquidity Position

    Total borrowings stood at INR9,422 crores, with 75% linked to variable interest rates, positioning the company to benefit from declining rates. The funding mix is diversified, with 30% from offshore/DFI and 70% from domestic sources. The debt-to-equity ratio improved significantly to 2.7X from 3.9X in March 2024, and capital adequacy remains strong at 25.5%. Incremental cost of funds declined to 8.7% in Q1 FY26 from 9.3% in Q1 FY25, with an expected 20-25 bps reduction in overall cost going forward⏳.

    06

    Technology and Credit Solutions Platform

    Northern Arc highlighted its unique credit solution ecosystem, leveraging its technology platform (Nimbus, nPOS, Nu Score) to originate and process large volumes of retail credit. The platform underwrites 18,000-20,000 loans daily and is used by two institutions for nPOS and two-three for scorecards. The company also offers its bonds platform, Altifi.ai, for retail investors to access high-yield bonds.

    This is an AI-generated summary of a publicly available earnings call transcript.