Earnings Call Transcript - XNSE:INDOSTAR 2026-10-30

Operator

Ladies and gentlemen, good day and welcome to Indostar Capital Finance Ltd. Q2-FY27 Earnings Conference Call. 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 operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Ayushi Gupta. Thank you and over to you, ma'am.

Ayushi Gupta, Head of Investor Relations

Thank you. Good afternoon, everyone. I welcome you all to the Q2 and H1FY27 earnings conference call for Indostar Capital Finance Limited. To discuss the performance we have from the management, Mr. Randeep Singh, Managing Director and Executive Vice Chairman, and Mr. J.S. Jain, Chief Financial Officer. Thank you, sir. Before we proceed with the call, I would like to mention that some of the statements made in today's call may be forward-looking and may involve risk and uncertainties. For more details, kindly refer to the investor presentation and other filings that can be found on the company's website. Without further ado, I would like to hand over the call to the management for their opening remarks, and then we can open the floor for Q&A. Thank you, and over to you, sir.

Randeep Singh, Chairman

Thanks, Ayushi. Good afternoon, everyone, and thank you for joining us today. I am Ranthir Singh, Managing Director and Executive Vice Chairman of Indosar Capital Finance Limited. On behalf of the entire Indosar team, I extend a warm welcome to all of you on our Q2 and H1 FY27 Unlinked Conference Call. We appreciate your continued support and confidence in our company. I trust you have had an opportunity to review our financial results and investor presentations, which have been uploaded on our website and filed with the stock exchanges. Before discussing our business performance, let me set the context with the macro indicators most relevant to our business, both those that affect us directly and those that work through our customers and segments. The Indian economy continued to demonstrate resilience during the quarter, despite an uncertain global backdrop, characterized by geopolitical developments, elevated commodity prices, and volatility across financial markets. Domestic economic activity remained healthy, supported by resilient consumption, sustained infrastructure spending, and continued investment activity. Reflecting the strength of these underlying trends, the Reserve Bank of India revised its FI27 GDP growth forecast upwards to 7.1% from 6.7% earlier. At the same time, inflationary pressure resurfaced during the quarter. CPI inflation increased to 4.82% in August 2026, driven largely by food and fuel prices. In response, the MPC committee increased the repo rate by 25 basis points to 5.50% and adopted a calibrated tightening stance. While interest rates have moved modestly higher, overall traded demand across the economy remains healthy and broad-based. The quarter was also characterized by weather-related challenges, uneven monsoon distribution, and strengthening El Nino conditions created concerns around agriculture activity and rural demand in certain regions. However, urban demand remained resilient, and the festive season contributed positively to consumption trends, trade activity, and transportation demand across civil markets. From a credit demand perspective, the operating environment remained constructive. Non-food bank credit grew 18.8% year-on-year in August 2026 and 10% further to 19.4% by September end, reflecting healthy demand across retail, agriculture industry, and service segments. Credit growth to the services sector remained particularly strong at 24.3%, supported by lending to trade, NBFCs, and commercial real estate. Looking specifically at the vehicle finance ecosystem, demand conditions remained supportive during the quarter. Transportation activity continued to benefit from infrastructure execution, replacement demand, and healthy logistics activity. Vehicle finance created within the NBSC sector grew 15.5-15.4% year-on-year as of August 2026, reflecting healthy activity levels across transportation link segments. Industry outlook also remained encouraging. ICRA expects NBSC vehicle finance portfolio to continue growing at a healthy pace over FI26 and FI27, supported by increasing financing penetration and replacement demand, while Lint has continued to focus on improving portfolio quality and risk-adjusted returns. ICRA has also highlighted the growing role of pre-owned vehicle financing with the share of used vehicles in NBSP portfolios expected to exceed 41% by 527. Against this backdrop, our focus during the quarter remained firmly centered on accelerating growth while maintaining portfolio quality. As the operating environment continues to evolve, we remain committed to building a stronger and more resilient franchise through disciplined, underwriting, prudent risk management, and consistent execution. Over the last several quarters, we have undertaken a number of initiatives to strengthen customer selection, enhance credit assessment, and improve portfolio monitoring capabilities. We continue to refine our underwriting framework through proprietary scorecards, product-specific risk filters, and system-driven decision-making processes. At the same time, we have strengthened our monitoring architecture to enhance early-warning systems, technology-led portfolio surveillance, and a continued focus on selection effectiveness. These efforts are directed towards improving the quality of the new originations, enhancing portfolio resilience, and creating a stronger foundation for sustained profitability. We are encouraged that the benefits of these actions are increasingly visible across customer quality metrics, portfolio behavior, and overall asset quality trends. Let me now move to our operating performance, beginning with disbursements. During the quarter, retail disbursements stood at Rs 1,399 crore compared to Rs 1,235 crore in the previous quarter and Rs 927 crore in the corresponding period last year. For H1 F527, retail disbursements stood at Rs. 2634 crore. Retail assets under management stood at Rs. 8459 crore as of September 2026 and now accounts for 97% of our overall AUM. Year-on-year, we grew our overall disbursements by 51%, 47% in vehicle finance business, and 174% in MLAP business. In our Q4, FY26 earning call, we share the target of 35% CAGR growth in disbursements over three years, and we are tracking well on that target. We had also mentioned about initiating significant steps for future growth in earlier running calls. Following is the update on the theme. Number one, significant increase in ground sales force in vehicle finance business. Our field sales force number has increased from about 1,235 to 1,868 over the last one year, representing a growth of about 51%. We will continue to invest further in field sales force to take full advantage of a large pan-India national network. Second, verticalization of our sales team in vehicle finance. All our four national sales managers are on board for CV, PV, FE, and CE verticals and are building significant capacities and capabilities in each of these verticals for future growth. Along with NSM, we have also onboarded state-level leaders for each of these verticals and will add further managerial capacity in the next two quarters. For a .26 earning call, we have guided for 100 branch additions over the next three years. We are making steady progress, and number of branches have increased from 454 to 475 in the last two quarters. Fourth, alignment of our channel payouts and proactive refinements in line with industry trends. Fifth, significant improvement in turnaround time, customer, and channel experience due to ongoing improvement in no journey simplification, document simplification, data science-led scorecards, and digitization. These improvements have led to significant increase in volumes in passenger vehicle segment, which is very tax-sensitive. Our disbursements in passenger vehicle segments has grown by almost 75% over the last one year. While being growth-focused, our priority continues to be on improving the quality of growth. Over the last several quarters, we have consciously focused on sourcing better quality customers, enhancing asset allocation, enhancing asset selection, and maintaining disciplined underwriting standards across all business segments. Our credit quality has shown significant improvement since the start of the tightening period, beginning Jan 2025. 30 plus delinquency on disbursements done in period from Jan 26 to September 26 as of 30th September 26 is down by 71%, compared to delinquency on disbursements done from Jan 24 to September 24 as of 30th September 24. The improvement in customer quality continues to be reflected across our portfolio. The share of prime customers, defined by us as CYBIL scores of 725 and above, in our portfolio has improved to 85% in Q2 FY27 from 80% in Q2 FY26. Additionally, the number of borrowers with SIBL scores of 700 and higher has reached 95% in last quarter's disbursements, reflecting the cumulative impact of tighter customer selection. Early delinquency levels have remained stable at around 2.4%, among the lowest levels seen over the last many years. The performance of customers acquired under the strengthened underwriting framework remains significantly better than the historical vintages. Gross stage 3 assets in the vehicle finance portfolio improved to 4.4% compared to 4.7% in the previous quarter, while net stage 3 assets improved to 2.4% from 2.5%. These trends reinforce our confidence that the actions taken over the last several quarters are helping us build a stronger and more resilient portfolio. Another encouraging trend is the increasing contribution of the portfolio originated after the tightening of underwriting standards in vehicle finance business. As the share of the newer portfolio continues to increase, we are seeing a clear improvement in overall portfolio behavior. A significant portion of the residual stress continues to remain concentrated within the older portfolio originated pre-Zan 2025. Our pre-titening portfolio contribution has reduced from 65% in Q2F86 to only 26% in Q2F86. This is in line with the guidance we provided in Q4-F826 earnings call. We had also guided that the book originated under new underwriting will be 85% of the overall book in Q4-F827, and we are well on our way to meet that guidance. As this legacy book and the new book becomes a larger proportion of the overall portfolio, we expect continued sequential improvement in delinquency matrices, credit costs, and significant improvement in profitability over the coming quarters. Our vehicle finance portfolio also continues to become increasingly diversified across commercial vehicles, passenger vehicles, construction equipment, and farm equipment, reducing concentration risk and helping us build a more balanced and granular franchise. Over the last one year, our MHPV disbursement share has come down from 31% to 27%, and passenger vehicle share has gone up from 23% to 31%. Let me now turn to our Microlab business, which continues to scale steadily and remains one of our key strategic priorities. This bus spent in Q2 FY27 was Rs.74 crore, up 174% year-on-year. AEM closed the quarter at Rs. 280 crore, up 177% year-on-year. Importantly, this growth continues to come with strong asset quality. 99.6% of the portfolio is current, and 90 plus BPD is only 0.18%. While the MLab book is not seasoned as yet, we have made a very good start on portfolio quality front. We continue to focus on self-employed borrowers and small business owners while maintaining conservative underwriting standards. Our average ticket size on MLAP disbursement has moved up to about 8.9 lakhs in September from 6 lakhs a year back, in line with our communication in last quarter about ticket size stabilizing around 10 lakhs. We continue to consciously work towards increasing the average ticket size in a lab business, Even if that means accepting slightly lower yields. Over the last few months, we started building an alternate business channel covering connectors and DSAs. And in the last few months, contribution from these channels is in the range of 20 to 25% range. Our weighted average loan-to-value remains around 40%. We are maintaining disbursement yield of about 20% besides upfront processing fees. The journey in the live business remains fully digital with e-application, e-agreement, e-natch at 100%. Our collection in this business is 100% digital and cash collection is zero. We continue to expand the franchise in a calibrated manner across selected markets while leveraging our existing distribution infrastructure and operating platform. Our objective remains to build scale gradually while ensuring that portfolio quality remains at the center of every growth decision. As communicated in previous sending calls, Bihar and Uttar Pradesh did go live in August and September, and additionally, we also went live in West Bengal. We now operate from 154 co-located branches across nine states and one union territory against 71 branches in two states one year back. Encouraged by our early portfolio performance, we are now working towards launching our lab business in Karnataka and Madhya Pradesh over Q3 and Q4. This is in line with our communication in early earning costs that while we have the opportunity to launch a business in all 24 states and union territories we operate in, we will follow our calibrated expansion approach. We plan to consolidate in these states prior to our next phase of expansion. In our effort to build a future ready organization, I would like to share an update on data science and AI initiatives. In February 2026, we set up a dedicated data science practice with the ultimate objective of deciding every credit and collection decision basis data along with extensive usage in other business and support areas. Our bureau-based scorecard for used car and STV now drives in principle credit approval and straight-through processing. We have reached STP's rate of 74% in used car business and 68% in STV. Portfolio quality has held up well in these products post-implementation of scorecards. In other VF products for now, we are using custom-built scorecards for hard rejections instead of approval. In collection, we now have a model for every stage of delinquency, from predicting bounces among customers who are current, but have a high chance of bouncing by the due date, to propensity to pay in the higher DPD bucket. We have embedded bureau risk triggers into these models, so our customers' behavior with other lenders feeds into how we prioritize them. Each model sorts customers into high, medium, and low risk, so that our collection call center and team knows exactly where to focus. We have also introduced AI bot calling for preemptive and bucket-ex customers. The bots are performing on par with our human caller, which gives us a clear opportunity to optimize collection costs. We also built a model that predicts fresh NPAs six months ahead with a very high degree of accuracy. Over the next two quarters, we will roll out a self-service AI-enabled BI layer for our business teams, a settlement model to decide whom to settle and at what price, and acquisition scorecard for the new cars, MLAP, farm equipment, and construction equipment business. We will continue to invest in data science team and build capacity for future growth. In addition to the data and AI-led initiatives, we are reinforcing our collection field force with a separate, approximately 400-strong team dedicated to hard workers. This will enable sharper focus on and better resolution of higher DPD accounts. Overall, we see encouraging signs of the progress across both of our core businesses. The quality of customer acquisition continues to improve. As we move ahead, our priorities remain unchanged. We will continue to focus on disciplined underwriting, portfolio quality, collection effectiveness, and sustainable, profitable, high growth, while ensuring that risk management remains central to every business. Our focus over the last several quarters has not only been on growing the business, but on building a stronger and more sustainable earning profile. The improvement in customer quality, lower non-starter ratios, stable early delinquency trends, and better performance of the newer vintage gives us the confidence in the long-term profitability potential of the franchise. Let me now touch upon our progress towards the long-term objectives that we had laid out for the business. Over the last 18 months, a significant amount of effort has gone into strengthening the foundations of the franchise. We have improved customer selection, enhanced underwriting standards, invested in technology-led monitoring capabilities, strengthened collection infrastructure, and diversified the portfolio across customer segments and asset categories. At the same time, we have continued to invest in our distribution capabilities. Our branch network expanded to 475 branches during the quarter, and we remain focused on deepening our presence across existing and new markets. Alongside this, we continue to invest in talent, analytics, and operating infrastructure to support sustainable growth over the coming years. Our vehicle finance business today is materially stronger than it was a couple years ago. The quality of customer acquisition and portfolio continues to improve. Similarly, in Microlab, we continue to build a scalable, secured lending franchise while maintaining a strong focus on portfolio quality. We remain encouraged by both the growth trajectory and portfolio performance of the business. Looking ahead, while we remain mindful of the external uncertainties, including inflationary pressures, geopolitical developments, and weather-related disruptions, our priorities remain unchanged. We will continue to focus on disciplined execution, prudent risk management, and sustainable property growth. The progress made across customer quality, asset quality, liability management, and business diversification provides us confidence that Indostar today is operating from a position of far greater strength and resilience. We believe the foundation built over the last several years position us well to participate in the opportunities ahead while continuing to create long-term value for all our stakeholders. We are satisfied with the progress we are making towards targets shared with you in Q4 FY26 earning calls, which was 35% CAGR disbursement growth over the next three years and PAT of 450 to 500 crores in FY29. With that, I will now request Jayesh to take you through the financial performance in greater detail.

J.S. Jain, CFO

Thank you, Andhith. Good afternoon, everyone. Let me now take you through our performance for Q2 and H1 FY27. First and foremost, our asset under management stood at Rs. 8,459 crore as of September 30, 2026. Retail AUM stood at Rs. 8,204 crore and now accounts for 97% of our overall AUM, reflecting the continued progress in building a granular and diversified retail franchisee. Disbursements for the quarter stood at Rs. We continue to focus on building a more diversified portfolio across commercial vehicles, passenger Our customer quality metrics continues to improve. The share of prime customers, which is a Sibyl score of 725 and more, in our portfolio increased to 85%, while the non-starter ratio remained low at 1.7%. Early delinquency trend also remained stable at approximately 2.4%, reflecting the benefits of the underwriting measures implemented over the last several quarters. In Microlab, we continued to witness healthy momentum during the quarter. Disbursements stood at Rs.74 crore, while AUM increased to Rs.280 crore. We remain encouraged by the growth trajectory of the business and, more importantly, by the quality of the portfolio being built. The business continues to be characterized by strong political quality, conservative underwriting standards, and disciplined customer selection. The weighted average ATV remains below 40% average ticket size, has increased to 8.9 lakhs, and 98% of the portfolio continues to be backed by residential collaterals. Asset quality within the business remains strong with gross sales-free asset of only 0.18%, providing confidence regarding the long-term scalability and sustainability of the franchisee. Moving to the liability side, during the quarter, we continued to strengthen and diversify our borrowing profile. Our weighted average cost of borrowing reduced to 9.7%, while incremental borrowing cost stood at 9.1%. The continued improvement in our borrowing profile reflects increasing lender confidence, diversification of funding relationships, and the overall stagnating of the franchisee over the last several quarters. During the quarter, we also did a direct assignment transaction of our VF portfolio, amounting to Rs. 132 crore. We ended the quarter with liquidity of Rs.827 crore and continued to maintain a comfortable ALM position across all maturity buckets. From a capital perspective, our balance sheet remains well capitalized. Our capital adequacy ratio stood at 36% as of September 30th, 2026, providing substantial headroom to support future growth opportunities. Coming to asset quality for the company as a whole, asset quality indicators continue to remain encouraging during the quarter. Gross phase 3 for the company improved to 4.5% compared to 4.8% in the previous quarter, while net stage 3 improved to 2.4% from 2.5%. As discussed earlier, a significant portion of the residual stress continues to remain concentrated within the older portfolio. At the same time, the performance of the customer acquired under the revised underwriting framework remains significantly better than historical cohorts and continues to provide confidence in the long-term credit outlook of the portfolio. Collection performance remains stable during the quarter and we continue to see encouraging trends across customer quality, delinquency behavior, and portfolio performance. Coming to the financials, net total income for the quarter stood at Rs. 243 crore compared to Rs. 190 crore in the corresponding period last year. Pre-provision operating profit stood at Rs. 109 crore during the quarter, reflecting stable operating performance and continued business momentum. In Q4, F526, we had created a precautionary management overlay of Rs. 49 crore on vehicle finance book against the potential impact of West Asia crisis and higher fuel prices. Over the last six months, the portfolio had absorbed the diesel price increase well. The stage 2 has stayed content. Early delivery increase is well below last year, and loans return after the price increase are performing better than the earlier code. With the stress not metabolizing and our recalibrated ECL model adequately covering actual losses, we have released the overlay of Rs. 49 crore in Q2 F527, while continuing to monitor the situation closely. The overall ECL percentage as a percentage of total book reduced from 5% to 4%. With this, the revised impairment and credit costs for the quarter stood at Rs.96 crore compared to Rs.81 crore in the previous quarter. Profit after tax for the quarter stood at Rs.13 crore compared to Rs.11 crore in the corresponding period last year. For H1 FY27, net total income stood at Rs.465 crore, while profit after tax stood at Rs.25 crore. While reported profitability continues to reflect the legacy portfolio and provisioning requirement, the underlying operating performance remains healthy. As the contribution of the newer book continues to increase and the legacy portfolio runs down further, we expect the benefit to be reflected in the lower credit cost and improved profitability over time. Overall, the balance sheet today is significantly stronger than it was a few years ago, improving customer quality, stable portfolio performance, a stronger liability for franchisee, healthy liquidity, and robust capital adequacy positions as well for the next phase of the growth. With that, we would be happy to take your questions. Thank you.

Operator

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles.

Operator

The first question comes from the line of Piran Engineer from CLSA.

Operator

Please go ahead.