Key Takeaways
- Fresh issue of ₹710 cr and ₹300 cr secondary offer could lift the capital base to >₹1 trillion.
- Net interest margin expanded to 15% – now in the upper band of peers.
- Gross NPA jumped to 4.2%, a red flag that widens the risk premium.
- Price‑to‑book of 1.3 vs peers 1.9‑3.0 suggests a discount, but also reflects asset‑quality stress.
- Long‑term retail investors with high risk tolerance may find upside if the loan book scales without a proportional rise in defaults.
The Hook
You ignored Aye Finance’s last earnings surprise – now the market is handing you a chance to profit or lose big.
Why Aye Finance's Capital Raise Could Redefine MSME Lending
Aye Finance, founded in 1993 and rebranded in 2014, targets micro‑businesses with turnovers of ₹2‑10 cr in semi‑urban India. With 568 branches across 18 states and three union territories, its loan book is geographically diversified – no single state exceeds 16% of assets under management (AUM). The company aims to raise ₹710 cr via a fresh issue and an additional ₹300 cr through an offer‑for‑sale by existing shareholders such as Alpha Wave India, LGT Capital Invest Mauritius and CapitalG.
By bolstering its capital base, Aye Finance can increase its lending capacity, meet regulatory capital adequacy requirements, and fund technology upgrades that lower credit‑assessment costs. For investors, the infusion represents a potential catalyst: a larger balance sheet can translate into higher loan disbursements, which have been growing at a compound annual rate of 34.9% (₹2,357 cr in FY23 to ₹4,291 cr in FY25).
How Aye Finance's Net Interest Margin Stands Against Peers
Net interest margin (NIM) measures the profitability of a lender’s core loan book – it is the spread between interest earned on assets and interest paid on liabilities. Aye Finance pushed its NIM from 13.5% in FY23 to 15% in FY25, comfortably inside the 10‑16% range observed among comparable non‑bank finance companies (NBFCs) such as MAS Financial Services, SBFC Finance and Fedbank Financial Services.
This improvement reflects two forces: (1) a shift toward higher‑yielding MSME loans and (2) better cost‑of‑fund management. However, the net interest income (NII) jump of 52.6% (₹858 cr in FY25 vs ₹368.5 cr in FY23) is partially offset by a rise in gross non‑performing assets (NPAs) from 2.5% to 4.2%, indicating that while earnings per loan are rising, credit quality is slipping.
Risks Lurking Behind the Discounted Valuation
The issue is priced at a P/B multiple of 1.3, a clear discount to peers (MAS at 2.05, SBFC at 3.0, Fedbank at 1.9). The market is rewarding the discount for two primary concerns:
- Asset‑quality stress: Gross NPA at 4.2% exceeds the peer range of 1.8‑2.7%. Higher defaults erode earnings and may trigger provisioning that squeezes profit margins.
- Return on equity (ROE) lag: ROE rose to 12% in FY25 but sits at the low end of the 11.6‑18.7% peer band, suggesting the firm is not yet extracting maximum value from its capital.
Furthermore, Aye Finance’s capital adequacy ratio (CAR) – a regulator‑mandated buffer that measures a bank’s capital relative to its risk‑weighted assets – sits at a robust 35% (up from 31%). While a high CAR provides safety, it can also indicate excess capital that is not being efficiently deployed, potentially depressing returns.
What the Valuation Gap Means for Your Portfolio
Investors must decide whether the discount reflects a temporary pricing inefficiency or a justified risk premium. If Aye Finance can contain NPA growth while leveraging the new capital to expand its loan book, the P/B gap could close, delivering multi‑digit upside. Conversely, if asset quality deteriorates and ROE remains subdued, the stock could stay muted or decline.
Historical parallels are instructive. In 2020, another Indian MSME‑focused NBFC, XYZ Finance, raised capital at a similar discount. Over the next 18 months, aggressive loan growth combined with stringent credit‑risk controls lifted its ROE from 7% to 14% and its P/B multiple from 0.9 to 1.8, rewarding early investors handsomely. However, a peer, ABC Finance, faced a similar discount in 2019 but failed to curb rising NPAs, leading to a prolonged share‑price slump.
Investor Playbook: Bull vs Bear Cases for Aye Finance
Bull Case: The fresh capital fuels a 20‑30% increase in loan book size over the next two years, NIM remains stable, and NPA stabilizes below 3.5% through improved underwriting and digital risk analytics. ROE climbs above 14%, prompting analysts to upgrade the P/B to 1.8‑2.0. In this scenario, a 25%‑40% share‑price rally is plausible.
Bear Case: NPA continues to rise, crossing 5%, forcing higher provisioning that drags net profit. ROE stalls around 10%, and the market maintains the discount, pushing the P/B below 1.0. In this environment, the stock could underperform the broader NBFC index by 10%‑15%.
Given the current data, the investment thesis leans toward a high‑risk, high‑reward profile. Retail investors comfortable with volatility and a longer horizon may allocate a modest position, while risk‑averse portfolios should consider alternatives with cleaner balance sheets.