Northern Arc Capital Ltd (NORTHARC) Q2FY27 Concall Transcript - Sep-2026 Qtr
Moderator (Motilal Oswal Financial Services Limited): Ladies and gentlemen, good day, and welcome to the Northern Arc Capital Q2 FY '27 earnings conference call, hosted by Motilal Oswal Financial Services Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I would now hand the conference over to Mr. Abhijit Tibrewal from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir.
Abhijit Tibrewal (Motilal Oswal Financial Services Limited): Yes, thank you, Muskan. Good evening, everyone. I am Abhijit Tibrewal from Motilal Oswal and it is a pleasure to welcome you all to this earnings call. Thank you very much for joining us for the Northern Arc Capital call to discuss their Q2 FY '27 earnings. To discuss the company's earnings, I am pleased to welcome Mr. Ashish Mehrotra, Managing Director and Chief Executive Officer; Mr. Atul Tibrewal, Chief Financial Officer; Mr. Parthasarathi Rallabhandi, Group Risk Officer and Governance Head; and Mr. Chetan Parmar, Head Investor Relations. On behalf of Motilal Oswal, we thank the senior management and the Investor Relations team of Northern Arc for giving us this opportunity to host you today. I now invite Mr. Mehrotra for his opening remarks. With that, over to you, sir.
Ashish Mehrotra (Northern Arc Capital Ltd): Hey, thank you, Abhijit. Thank you, everyone. Good evening, and thanks for joining us today evening. It's my pleasure to welcome you to Northern Arc Capital's conference call to discuss our performance for the quarter ending 30th September '26. I'm joined by my colleagues: Atul Tibrewal, our CFO; Parthasarathi, our Group Risk and Governance Head; Jigar, head of our strategy; Chetan Parmar, head of our Investor Relationship. Let me begin with a few highlights for the quarter.
Ashish Mehrotra (Northern Arc Capital Ltd): very pleased to share that we continued on our growth journey with an AUM increase by 34% on an year-on-year basis, taking to 19,003 crores and delivering a record profit for the quarter of 129 crores despite the challenging geopolitical environment. The performance reflect the resilience of our diversified business model, strength of a robust risk management framework, and our execution capabilities. The macroeconomic environment or the macro environment during the quarter two 2027 remained challenging amidst of persistent geopolitical uncertainty arising on account of West Asia conflict, heightened global inflationary pressures and impact of El Nino phenomena, concerns overall potential supply disruption, volatility in the global crude oil prices and continued to increase retail inflation in India for 4.38 in June '26 to 5.54% during the quarter. Further, the rainfall deficiency and drought-like condition in parts of India raised concern about agricultural throughput, rural income, and consumption demand. The evolving implication of AI technological challenges also remain an important consideration for the broader economic and the business environment. Despite these macroeconomic headwinds, India's credit environment remains supportive in Q2, underpinned by resilience domestic demand, sustained consumption, and healthy credit offtake across the key segments. If you look at as of August '26, the bank credit grew by about close to 19% on a y-o-y basis, and the retail lending remained the key growth driver with NBFC retail loan book growing at about 22% on year-on-year basis. The robust domestic consumption demand arising art of coming out of rising aspiration, expanding access to formal credit and increase in digital adoption continues to drive growth in India's personal loan market. This momentum is reflected in 34% year-on-year increase in personal loan originations by value in Q1 FY '27, as per TransUnion CIBIL data. The rising disposable income and favorable financial conditions are also fueling spending while government infrastructure push and continued policy support should sustain economic activity and further accelerate the credit growth. Deeper credit penetration among younger and creditworthy borrowers further supports the industry's growth outlook. Moving to India's MSME credit ecosystem continued to demonstrate strong momentum if you look at data as of June '26, with small business credit portfolio, which means the loans the companies with overall revenue of less than 5 crores surpassed 50 lakh crores. Revenue registering about 15% year-on-year growth. Growth was concerned concentrated predominantly in loans above 10 lakhs with stable delinquencies and smaller enterprise borrower witnessed higher delinquencies, underscores the need for prudent underwriting. With 3.6 crores to 8.8 crores registered MSMEs, a significant growth in the registered MSME entities in India, access to formal credit and significant headroom for further credit penetration remains a big opportunity for us. The microfinance industry continued its gradual recovery in Q2 '27, supported by improving asset quality, stronger collection and a revival in dispersal momentum. Following a prolonged period of portfolio con contraction, repayment behavior showing signs of improvement aided by tighter underwriting norms, borrower level indebtedness guardrails put in by MFIN and implemented by most of the lenders and greater lending discipline. Improved improving collection efficiency and a renewed focus on responsible lending are supporting the more stable operating environment for the sector. Having said so, we remain cautious in geographies affected by rainfall deficiency. Moving to geopolitical crisis, the ongoing geopolitical tension continues to create uncertainty around global trade and crude oil prices. It is fair to highlight that less than 2% of our portfolio directly indirectly exposed to segments which are directly impacted by high crude oil prices. Though we remain insulated in the first order of impact on this crisis, however, we continue to be vigilant and cautious, given that the headwinds of this translates into inflation and other such trends. Turning to drought situation, while the El
Ashish Mehrotra (Northern Arc Capital Ltd): tributed to rainfall deficiencies in certain parts of India that raise concerns about drought-like conditions. Our direct exposure to the most affected regions remain very, very limited. Maharashtra and Karnataka have been identified among the states facing the significant rainfall related challenges. It's like to highlight that in Maharashtra we have no exposure to MFI. In Karnataka, following the MFI indebtedness and issues and subsequent state ordinance, we had significantly strengthened our assessments and underwriting processes over a period of time. And all our loans in our rural finance business are underwritten using, whether they're coming from JLG or non-JLG, are underwritten using a proprietary score card called Neo score. Further, the significant portion of our portfolio is supported through CGFMU providing additional protection against potential credit losses. Having said so, we remain very cautious in Karnataka and prioritizing customers with stronger credit profiles and proven repayment track record with Northern Arc. The collection efficiency remained robust at 99.7% as of September 26, with key states such as Tamil Nadu and Karnataka demonstrating very strong performance. With respect to intermediate retail lending business, we draw comfort from their strong capitalization and resilience with no partner defaulted during the recent microfinance stress. We continue to closely monitor the borrower level cash flows, repayment behavior, and portfolio quality. Overall, our limited direct exposure to drought affected areas, strengthened underwriting standard, diversified credit protection and a strong financial position of our lending partners, provides us with confidence in our ability to navigate the evolving situation. I think it's fair to spend a few sentences talking about the consultation paper issued by the IRDAI on insurance distribution and commission. Our proposal aim to The proposal aim to enhance the prudence and ensure better pricing for policyholder and greater participation and penetration of protection solution to country at large. From Northern Arc perspective, we continue to participate, however, fair to highlight we do not expect any material impact from this proposal as insurance commission income account for less than 1% of the net revenue in H1. The inflation trend leading to higher interest rates, I think that's one of the interesting part of conversation in the recent days. The persistent inflationary pressure coming driven by elevated energy prices, supply-side uncertainties have contributed to rising global bonds yields, tighter financial condition. We have started witnessing marginal increase in yield on incremental borrowing. However, our diversified borrowing profile, our asset-liability structure provide a degree of resilience against rising interest rates. Approximately 37% of our borrowings are at fixed rate, which were locked in much earlier. Looking at the interest rate to environment, we expect COF to increase marginally in H2. On asset side, our intermediate retail business, which accounts to 25% of our of our loans assets, has a variable portfolio allowing us the yield to adjust the response and change the interest rate subject to contractual reset mechanism. To this effect, we have already increased our FBLR by 30 basis points. Further loans worth approximately 8,500 crores are scheduled to mature over the next six months and expected to get repriced automatically. This provides a natural hedge against the rising cost of funds and helps mitigate the potential impact on margins. We further expect that our direct-to-customer mix doing to increase to about 70% from current 66%, which will partly compensate the increase in COF. We believe we should be able to maintain our NIMs guidance for rest of the year and for the full year on FY '27, 50. Just now turning to about our own performance. We continue to build a strong momentum where we saw a sequential growth across the sector. We reported the profit after tax of 129 crores for the quarter, a strong 41% growth on a YoY basis, underscoring the resilience of our diversified business model and a very disciplined execution. Our assets under management grew by 34%
Ashish Mehrotra (Northern Arc Capital Ltd): YoY basis to 19,003 crores out pacing the industry growth. This was driven by direct to customer segment which now contribute 62, 66% of our total assets under management. Direct to customer portfolio itself grew by 16% quarter-on-quarter, crossing 12,502 crores. MSME financing continue to be an important growth driver, with portfolio expanding by 39% on an year-on-year basis to 4,240 crores. The company expanded its geographical footprint by entering Uttar Pradesh with additional 11 branches. Further, company remain focused on growing its book through higher ticket loan against property between 10 to 15 lakhs and above segment. In parallel, the intensified our collection efforts led by led to an about 80 basis point quarter-on-quarter improvement in our expected collection efficiency to 98.3% at in September '26. Consumer finance, another key segment where we continue to see strong momentum in our business with assets under management increasing by 19% quarter-on-quarter to 6,912 crores. India's consumption demand remain very strong across both rural and urban markets, increasingly driven by increasingly driven by access to credit. The company continues to focus on building more resilient portfolio through higher ticket size loans and a longer-tenor loans. The share of loans with ticket sizes above 50 lakh has increased, 50,000 has increased from 37% to about 69% in '26. Similarly, the shares of disbursements with tenor more than 6 months have now gone to about 95% over the same period. This calibrated shift in portfolio mix reflects company focus on improving customer profiles and strengthening portfolio quality. In a rural finance business, we continue to build on momentum with quarterly disbursement of 399 crores and AUM grew by 12% quarter-on-quarter to about 1,350 crores. Our 30-plus days past due date, 30+ DPD continue to be one of the lowest in the industry at .4%. In our credit solutions segment, we continue to benefit from strong and expanding network of our 382-plus originating partner. The quality of this of this network remains high with around 93% of our rated of our partners rated BBB and above and approximately 93% maintain capital adequacy upward of 20%. This provides a robust foundation for sustainable growth of our intermediate retail lending. As part of our credit solution for platform, we recorded a healthy growth of 7% quarter-on-quarter in our volume, taking to the disbursement of 6,501 crores. This business is predominantly a fee-led business and we've seen the big growth there. We like we keep saying, continues to complement our lending operation. Our placement volume in Q2 grew by about 60% on year-on-year basis to 4,088 crores. Our performing credit funds AUM stood at 2,787 crores. We successfully closed our seventh fund delivering the gross return of 14.5%. Further, we achieved the first close of our diversified debt fund with 400 crores of investment, committed investments. The fund is of 2,000 crores in size and we continue to raise money and deploy money for this fund. The company has also launched our first ever open-ended private credit fund called Savings+ Fund. This milestone reflect continued progress both in terms of delivering return in line with our guidelines to our investor, at the same time building high-quality scale with launch of new offering in our private credit landscape. This performance underscore our strategic focus in building a very comprehensive credit solution ecosystem which is unique and powerful, and leveraging capital-light fee streams along with balance sheet led lending model. Our proprietary technology stack, a key role in enabling credit under the credit solution business, called Nimbus, and our B2B platform has enabled over 1 trillion of credit flow through this platform. And our nPOS, which is our a partner origination system for retail loans, and our API-based on- on-lending and co-lending platform, we underwrite over 20 to 25,000 loans a day. Our proprietary lending machine-led machine learning led underwriting scorecards now enable over 450 active algorithms, reflecting our ongoing commitment to tech-driven risk management. Turning to our key balance sheet and financial highlights, our consolidated assets under management, as I mentioned, grew by 23% YoY and 4% on quarter-on-quarter basis to
Ashish Mehrotra (Northern Arc Capital Ltd): portfolio has essentially helped us people to select the right set of customers, both in terms of ticket size, price default, probability of default and get right set of risk adjusted return. Further, we continue to see strong traction in our retail bonds platform, Altifi, which has now registered users of over 1,10,000 and growing every hour. Volumes on the platform is more than doubled year-on-year, increased from 164 crores in Q2 to about 450 crores in Q3 in Q2 of '27, reflecting a strong investor participation and engagement on the platform. Sorry. Together, these businesses enhance capital effici- efficiency, diversify revenue streams, enable us to facilitate a large flow of credit beyond our balance sheet. Risk management remains at core of our strategy and continue to be a key differentiator for Northern Arc. Our underwriting framework leverages over 52 million data points, more than 30 plus proprietary risk models supported by dedicated team of over 100 plus professionals. On-ground presence spanning 25% of India's districts. This combination enabled us to identify emerging trends early and generate right set of risk indicators, maintaining strong portfolio quality across the business cycle. During the quarter, our asset quality remained stable with net NPA, of less than of 0.5% as of 30th September '26. However, our provisioning coverage ratio on stage 3 has improved by 10% to about 58.9%. Credit costs for the Q2 was flat on a was flat on quarter-on-quarter to 2.6%, remaining within our guided range and reflecting the effectiveness of our risk management and collection framework. Overall, we delivered a strong quarter supported by healthy disbursement momentum, resilient portfolio performance, and steadily improving credit trends. While we remain watchful of external uncertainty, including geopolitical development, weather-related risks, we believe our diversified portfolio, disciplined underwriting approach, and a robust risk control positions us well to navigate through these challenging periods. With that, I'd like to hand over and invite my colleague, Atul, to take you through the financial details. Atul, over to you.
Atul Tibrewal (Northern Arc Capital Ltd): Thank you, Ashish. And good evening, everyone. Let me walk you through the financial highlights for Q2 FY '27. We achieved an important milestone during this quarter with our direct-to-customer AUM crossing 12,500 crores, underscoring the continued execution of our strategy to build a granular, diversified, and scalable retail franchise. Our total AUM stood at 19,003 crores, reflecting a strong 34% YoY growth. The D2C segment contributed 66% of the AUM with MSME Finance at 22%, Consumer Finance at 36%, MFI at 7% of the portfolio. Net interest income grew by 32% YoY and 8% quarter-on-quarter to 425 crores. Our net interest margin for Q2 was 9.3%, reflecting the strength of our portfolio mix and disciplined pricing approach. Our cost of fund increased marginally by 9 bps quarter-on-quarter to 8.55% for Q2, primarily re- reflecting the tighter liquidity and interest rate environment. Encouragingly, our incremental cost of fund remained stable at 8.8%, demonstrating our continued access to diversified funding source at competitive rates. Total net revenue, including fee income, grew by 32% YoY and 9% Q-on-Q to 453 crores. At the same time, the operating expense remained well controlled with the expense ratio stable at 3.6%, reflecting ongoing operating leverage and disciplined cost management. Pre-provisioning operating profit grew by 32% YoY and 9% quarter-on-quarter to 286 crores. Despite the broader macroeconomic uncertainties, the asset quality continue to be resilient. The credit cost remained stable at 2.6%, well within our guided range and reflective of the strength of our underwriting and collect- collection capabilities. Consequently, PAT grew by 41% YoY to 129 crores. Our profitability ratios also continue to improve with ROA increasing to 2.8% and ROE improving to 12.4%. On the liability side, we continue to diversify our funding franchise with a sustained focus on securing long-term sources. Anticipating a tighter sys-
Atul Tibrewal (Northern Arc Capital Ltd): liquidity and a reversal in the interest rate cycle following the geopolitical developments earlier in the year, we maintain higher liquidity levels on our balance sheet to support growth and preserve funding flexibility. As a result, our liquidity position remains quite strong with a surplus liquidity of approximately 1,300 crores and a liquidity coverage ratio above 150%, providing a comfortable buffer to support the future growth. Total borrowings stood at 14,107 crores as on September 26. Around 63% of our borrowings are linked to variable interest rates with nearly half of this benchmark to MCLR, where the transmission of rate movements typically occurs with a lag. We continue to maintain a diversified funding mix with 23% of the borrowings sourced from offshore and the DFI partners, and the remaining 77% from the other domestic institutions, underscoring the strength, depth, and diversification of the lending relationship. Our balance sheet remains strong, tangible net worth increased by 15% YOY to 4,221 crores, reflecting consistent earnings growth and capital accretion. Debt-equity ratio improved to 3.3x, further strengthening our financial position while preserving ample capacity to support the future growth. We continue to maintain a comfortable capital position with CRAR at around 21%, well above the regulatory requirements, providing sufficient headroom to fund future growth opportunities while maintaining strong balance sheet resilience. To conclude, the quarter reflects the strength of our franchise and the resilience of our business model. We delivered a healthy growth, improved profitability, maintained strong asset quality, and further strengthened our capital position. While we remain watchful of the external uncertainties, our diversified portfolio, prudent leverage, disciplined risk management, and a strong liability franchise provides us with a confidence in our ability to sustain profitable growth. Our focus will continue to be on balancing the growth with portfolio quality, maintain superior risk-adjusted returns and creating long-term value for the shareholders. With that, we open the floor for questions. Thank you.
Moderator (Motilal Oswal Financial Services Limited): Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask question may press star and one on their touchtone telephone. If you wish to remove yourself from question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. The first question is from the line of Raghav Garg from Ambit Capital. Please go ahead.
Raghav Garg (Ambit Capital): Hi. Good evening. I just have one question. On your OpEx, so when I look at the average cost per employee or even other OpEx per branch, that has risen by about 11% quarter-on-quarter and 17% respectively. So, what is the reason for that? And then even when I look at the employee cost, you know, when I look at the YoY trends over the last four, five quarters, they've been rising at 20-25%. So, just wanted to understand what's going on there in the OpEx line item. Why is it Why are the unit costs rising so much? That's the only question that I had.
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