- Key Takeaway 1: Motilal Oswal maintains a BUY rating with a target of INR 270, implying a ~30% upside.
- Key Takeaway 2: Q3 FY26 showed weaker disbursements and a marginal rise in GS3, but management plans aggressive branch expansion.
- Key Takeaway 3: Asset quality is expected to stabilise as the newly‑underwritten loan book scales.
- Key Takeaway 4: Sector‑wide credit tightening hints at a potential rebound for disciplined NBFCs.
- Key Takeaway 5: Historical NBFC turnarounds suggest a 12‑month lag between underwriting discipline and earnings recovery.
The Hook
You’re missing the next upside in IndoStar Capital Finance if you ignore the latest Motilal Oswal note.
IndoStar’s FY26 Q3 numbers look rough, but the story beneath the headlines reveals a catalyst‑rich platform that could reward patient capital.
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Why IndoStar Capital Finance’s Q3 FY26 Disbursement Slump Matters
The company reported a “subdued” loan disbursement figure for the quarter, a clear signal that the top‑line growth engine is currently throttled. Disbursements fell short of the consensus estimate by roughly 5%, reflecting a tighter underwriting stance. While lower disbursements usually raise red flags, they also indicate a strategic pivot toward higher‑quality assets—a move that can protect the balance sheet during macro‑economic headwinds.
In the context of the broader NBFC sector, many peers are still chasing volume, inflating their non‑performing assets (NPAs). IndoStar’s decision to sacrifice short‑term growth for credit discipline aligns it with the “quality‑first” playbook that has historically delivered superior risk‑adjusted returns.
Asset Quality Deterioration: GS3 Rise and What It Signals
GS3, the metric that captures the proportion of loans in the 91‑180‑day delinquency bucket, rose by roughly one percentage point sequentially. Though a 1pp uptick sounds modest, it is a leading indicator of potential stress in the loan book. Motilal Oswal’s analysts note that the rise is primarily driven by legacy exposures that were originated before the recent underwriting tightening.
For investors, the key is to differentiate between “transient” GS3 spikes and systemic credit erosion. IndoStar’s management expects the newer, better‑underwritten portfolio to gradually dilute the older, riskier assets, thereby stabilising GS3 over the next two quarters.
Branch Expansion and Frontline Sales: Catalysts for Future Growth
Management has outlined a clear roadmap: open 50 new branches and add 200 frontline sales professionals by FY27. Historically, branch density correlates strongly with loan disbursement velocity in the NBFC space. A larger footprint expands market reach, especially in Tier‑II and Tier‑III cities where credit penetration remains low.
Each new branch is expected to generate an average disbursement of INR 200 crore per annum once fully staffed. This translates to a potential incremental AUM (Assets Under Management) of INR 10,000 crore over the next three years, assuming a conservative 85% utilisation rate.
Sector Context: NBFC Credit Trends and Competitive Landscape
The NBFC sector in India has been under pressure from tighter RBI guidelines, higher funding costs, and a slowdown in consumer credit demand. However, the same environment rewards firms that maintain rigorous underwriting standards. Competitors such as Bajaj Finance and Mahindra & Mahindra Financial Services have seen their GS3 metrics inch upward as they chase market share, resulting in widening spreads between earnings and asset quality.
IndoStar’s disciplined approach positions it as a “defensive” player. While peers may experience higher short‑term growth, they also carry elevated credit risk, which could translate into earnings volatility and potential downgrades in the near term.
Historical Parallel: Past NBFC Turnarounds After Tight Underwriting
A look back at 2018‑2020 reveals a pattern: NBFCs that tightened credit standards during a macro‑slowdown—such as Shriram Transport Finance—initially posted weaker loan growth but subsequently posted a 12‑15% YoY increase in net profit once the loan book composition shifted toward higher‑quality assets.
Investors who entered these turnarounds at the trough enjoyed a multiple expansion of 3‑4x over a 24‑month horizon. IndoStar’s current trajectory mirrors that historical playbook, suggesting a similar upside potential if the credit cycle stabilises.
Valuation Mechanics: How Motilal Oswal Arrives at INR 270 Target
Motilal Oswal values IndoStar at 0.9× its projected book value per share (BVPS) for December 2027. The underlying assumptions include:
- A steady AUM growth rate of 15% CAGR driven by branch expansion.
- GS3 stabilisation at 3.5% by FY28, limiting provisioning needs.
- Net interest margin (NIM) compression of 20 basis points, offset by lower cost of funds.
- Return on equity (ROE) improving from 8% to 12% as asset quality improves.
At a current market price of around INR 210, the target price of INR 270 represents roughly a 28% upside, factoring in a modest risk premium for execution risk.
Investor Playbook: Bull vs. Bear Cases
Bull Case: The branch rollout accelerates, GS3 stabilises, and AUM grows at >15% CAGR. This drives earnings expansion, prompting a re‑rating to “Outperform” and a price rally toward the INR 270 target.
Bear Case: Disbursement momentum remains weak due to prolonged funding constraints, GS3 continues to rise, and asset quality deteriorates, forcing higher provisions and a potential downgrade.
For the risk‑adjusted investor, a phased entry—starting with a modest position now and adding on any pull‑back—captures upside while managing execution risk.