Motilal Oswal has initiated a 'Buy' rating on Indostar Capital Finance with a target price of Rs 240. The brokerage anticipates significant asset and profit growth through fiscal year 2028, driven by a pivot toward retail lending. Investors should track the company's progress in reducing legacy loan stress and managing credit costs as it scales its new portfolio.
Motilal Oswal has started its coverage of Indostar Capital Finance, assigning a 'Buy' rating with a target price of Rs 240. The brokerage firm is optimistic about the lender's future, projecting a compound annual growth rate of 26% for assets under management and 42% for profit after tax between fiscal years 2026 and 2028. This positive outlook is based on a valuation of 0.9 times the expected book value per share for September 2028.
Operational Performance and Growth
The company's second-quarter results for fiscal year 2027 highlighted a strong shift toward retail growth. Retail disbursements surged 51% compared to the same period last year. This focus on the retail segment helped the company generate a net interest income of Rs 242.3 crore. The management's strategy aims to move away from older loan segments, which have historically pressured profitability, toward a more retail-focused business model.
Operational improvements were also visible in asset quality metrics. The gross stage 3 assets—a measure of bad loans—improved to 4.46% in the second quarter, down from 4.84% in the previous quarter. This indicates that the company's efforts to clean up its loan book are showing initial results.
Legacy Book and Credit Costs
Despite the growth in the retail segment, credit costs remain an important monitorable for investors. The company has reported elevated credit costs, largely due to provisions required for its legacy loan book—loans issued before January 2025. These provisions have impacted short-term profitability, with the company reporting a net profit of Rs 13.2 crore for the second quarter.
However, there is a clear pathway for this to change. The legacy portfolio is shrinking and is expected to account for only about 10% of the total assets under management by the end of fiscal year 2027. Management has indicated that credit costs are likely to moderate starting in the fourth quarter of fiscal year 2027 as this older portfolio continues to decline.
Investors will likely watch the company's ability to maintain high disbursement growth while simultaneously lowering credit costs. The pace at which the legacy portfolio is replaced by the new, higher-quality retail book will determine the company's financial health in the coming quarters. Monitoring the quarterly trend in credit costs and the reduction of legacy assets will be key to understanding whether the company can hit the growth targets set by analysts.