HDFC Securities' Pick of the Week: Northern Arc Capital Ltd.

HDFC Securities this week highlights Northern Arc Capital Ltd. (NACL), a diversified NBFC and financial services platform catering to underserved households and businesses across India. With a base case fair value of ₹315 and a bull case fair value of ₹340 over the next 2–3 quarters, HDFC recommends investors to buy the stock in the ₹284–290 band and add on dips in ₹257-263.

Q1FY26 Performance: Resilient Amid Sectoral Headwinds

Northern Arc Capital demonstrated resilience in Q1FY26 despite macro and sectoral pressures from MFI stress, regulatory scrutiny, and liquidity tightening:

• Net Interest Income (NII) grew modestly by 0.6% YoY to ₹342 crore, impacted by elevated MSME stress and a 100bps yield decline.
• Pre-Provision Operating Profit (PPoP) rose 18% YoY to ₹207 crore, offsetting elevated credit costs.
• Adjusted PAT declined 13% YoY to ₹81 crore, reflecting one-time provisioning in FY25.
• Assets Under Management (AUM) increased 12% YoY, with the Direct-to-Customer (D2C) mix rising to 53%, led by MSME (~34% YoY growth) and consumer (~25% YoY) segments.

Despite elevated credit costs due to residual MFI stress, profitability remained stable, supported by a strong balance sheet and robust liquidity. GNPA/NNPA stood at 1.1%/0.6%, maintaining industry-leading asset quality.

Strategic Expansion and Growth Drivers

1. Direct-to-Customer Lending:

NACL is building a resilient D2C portfolio, targeting 70% mix by FY28, expanding in MSME, consumer, and rural segments. Innovative products, omni-channel reach, and proprietary tech solutions like nPOS, Nu Score, and Nimbus enhance risk-adjusted returns.

2. Technology Platforms Transforming the Ecosystem:

• Nimbus: End-to-end debt platform streamlining origination, underwriting, and fund placements.
• nPOS: Cloud-based API platform for co-lending and partner integration.
• Nu Score: AI-driven credit scoring for faster, data-driven lending decisions.
• AltiFi: Retail debt investment platform providing HNIs, retail investors, and corporates access to debt securities, enhancing fee income.

These proprietary platforms allow scale, efficiency, and deeper penetration in underserved credit segments.

3. Diversified Funding and Liability Management:

NACL maintains a strong liability profile, with relationships across banks, offshore lenders, and NBFCs. Credit ratings remain robust at AA- (Stable), with short-term facilities at A1+ since 2015. The company proactively manages interest rate and liquidity risks while reducing cost of funds through MCLR transmission and offshore taps.

4. Extensive Partner Network:

With over 353 Originator Partners, 54 Retail Lending Partners, and 1,400+ Investor Partners, NACL has created a wide-reaching ecosystem, enabling fee generation and scalable growth.

Valuation and Recommendation

HDFC Securities projects:

• Base Case Fair Value: ₹315 (1.15x FY27E ABV)
• Bull Case Fair Value: ₹340 (1.25x FY27E ABV)
• Time Horizon: 2-3 quarters

The stock is recommended for buy in ₹284-290 band and add on dips in ₹257-263, representing attractive risk-adjusted returns (0.95x FY27E ABV in base case). Tailwinds include RBI rate cuts, favourable monsoon, and growing credit demand from underserved segments.

Risks and Considerations

• Interest Rate Risk: Adverse rate changes may impact NII and profitability.
• Portfolio Concentration: Heavy exposure to MSME, MFI, and consumer finance (~88% of portfolio) increases sector-specific risk.
• Unsecured Lending: High-ticket unsecured loans carry NPA risk.
• Competition: Banks, NBFCs, and fintechs may pressure margins and growth.

HDFC Securities’ Take

Northern Arc Capital, with its strong domain expertise, advanced technology platforms, and diversified funding base, is strategically positioned to benefit from India’s underserved credit growth. While sectoral challenges and residual MFI stress may pressure short-term profitability, the company’s focus on D2C expansion, robust risk management, and scalable technology infrastructure supports long-term growth.

For investors seeking exposure to a mid-sized NBFC with resilient asset quality, scalable technology-driven operations, and growth potential in underserved segments, Northern Arc Capital emerges as HDFC Securities’ Pick of the Week.