D2C scale-up and operating leverage to drive earnings acceleration

Transformation gaining scale: Northern Arc (NACL) has steadily evolved from a credit intermediary into a diversified D2C-led financial services franchise. D2C assets have increased from ~19% of lending AUM in FY21 to ~59% in FY26 and should rise further to ~68% by FY28E, expanding the addressable opportunity and strengthening the growth profile.

Multiple growth engines to sustain ~21% AUM CAGR: Consumer finance and MSME lending have emerged as the key growth engines, while improving collections should support a calibrated recovery in rural finance. Expansion into adjacent secured products provides further optionality. We model ~21% AUM CAGR over FY26-28E.

Capital-light businesses differentiate the franchise: Northern Arc’s credit solutions ecosystem-including placement volumes of ~INR118b and fund AUM of ~INR31b, provides a scalable source of fee income. Growth in these businesses should diversify revenues, improve earnings resilience, and reduce dependence on balance-sheet expansion.

PAT growth to materially outpace AUM growth: A favorable asset mix, resilient margins, operating leverage, and normalization in credit costs are expected to drive ~33% PAT CAGR vs. ~21% AUM CAGR over FY26-28. We expect RoA/RoE to improve to ~3.2%/~15% by FY28E.

Risk discipline underpins sustainable growth; reiterate BUY: Improving collections, declining Stage 2 assets, and granular portfolio monitoring reinforce confidence in asset quality. NACL’s transformation into a diversified D2C-led credit platform is steadily strengthening the quality of its growth profile. The combination of multiple lending growth engines, an expanding fee-income business, improving profitability drivers, and a robust risk management framework positions the company to deliver sustainable growth with improving earnings quality. As the D2C franchise gains further scale, NACL appears well placed to compound growth while generating superior risk-adjusted returns. At 1.1x FY27E P/BV, we believe valuations do not fully capture the improving growth and profitability trajectory. Reiterate BUY with a TP of INR405, based on 1.3x FY28E P/BV.

Well-positioned to capture consumer and MSME credit opportunities

NACL continues to deliver robust growth, with AUM increasing ~22% YoY to ~INR166b (as of Mar’26), led by its D2C franchise (~59% of lending AUM vs. ~19% in Mar’21). Growth remains diversified across consumer finance (~50% YoY, aided by strong partner integrations and ~70% repeat rates), MSME lending (~43% YoY, via branch expansion and LAP growth), and rural finance, which is experiencing improving asset quality and collections. With FY27 AUM growth guidance of ~22-25%, we expect NACL to deliver an AUM CAGR of ~21% over FY26-28E.

Strengthening earnings resilience through scalable fee-income streams

The credit solutions business (placement volumes of ~INR118b, fund management AUM of ~INR30.9b as of Mar’26 ) is becoming a meaningful, largely risk-free fee income contributor, supported by ~368 originators and 1,500 investor partners. As the platform scales, it should improve earnings stability and reduce revenue cyclicality.

Favorable asset mix and funding optimization to support resilient margins

NACL’s increasing focus on the D2C lending model is driving a favorable portfolio mix shift toward higher-yielding segments such as consumer finance, MSME lending, and rural finance, supporting margin expansion. The D2C-led mix shift toward higher-yielding segments (consumer, MSME, and rural) supports margin expansion, complemented by a diversified liability franchise (banks ~53% and offshore ~30%) and ~40% fixed-rate liabilities (as of Mar’26). We expect NACL to sustain NIMs of ~10.7-10.8% over FY27E-28E.

Granular risk oversight and conservative provisioning enhance stability

Asset quality continues to improve, with GNPA/NNPA moderating to ~1.2%/~0.6% as of Mar’26 and Stage 2 assets declining from ~1.8% (Dec’25) to ~1.5% (Mar’26). This is supported by a 100+ member risk team, AI-driven analytics, and field oversight across ~680 districts, along with 100% provisioning on unsecured 90+ DPD loans and FLDG/CGFMU cover. We estimate credit costs of ~2.6%/~2.5% for FY27E/FY28E.

Valuation and View: Earnings to compound faster than assets

NACL is transitioning from an intermediary-led credit platform into a diversified D2C-led financial services franchise. Multiple growth engines, an expanding capitallight credit solutions ecosystem, operating leverage, and normalizing credit costs should enable PAT growth to materially outpace AUM growth, driving a structural improvement in return ratios. The stock trades at 1.1x FY27E P/BV. We model an AUM/PAT CAGR of ~21%/33% over FY26-28E, with an RoA/RoE of ~3.2%/15% in FY28E. We reiterate our BUY rating with a TP of INR405, based on 1.3x FY28E P/BV.