IndoStar Capital Finance: Navigating a Retail-Led Transformation in Q2 FY26

IndoStar Capital Finance Limited has unveiled its Q2 FY26 performance, showcasing a strategic pivot towards a retail-centric model. The company's results reflect a period of significant transformation, marked by a focused divestment from non-core assets and a concerted effort to strengthen its retail lending segments. For the quarter ended September 30, 2025, IndoStar reported a Net Interest Income from continuing operations of ₹189.9 crore, marking a robust 15.7% year-on-year increase. Profit after tax from continuing operations stood at ₹10.5 crore. This performance underscores the company's disciplined approach amidst a dynamic macroeconomic environment.

Strategic Realignment and Segment Performance

IndoStar's strategic shift is evident in its decision to exit the Affordable Housing Finance business by selling its wholly-owned subsidiary, Niwas Housing Finance Private Limited. This move allows the management team to concentrate entirely on its core growth engines: Vehicle Finance and Micro LAP. The company's Vehicle Finance business, while experiencing an 8% sequential growth in disbursements this quarter, is also undergoing significant diversification. It is moving away from a heavy reliance on Medium & Heavy Commercial Vehicles (M&HCVs) to include Passenger Vehicles, Farm Equipment, and Construction Equipment, with M&HCVs now constituting only about one-third of total disbursements. This diversification strategy aims to build a more resilient and balanced portfolio.

The Micro LAP segment, launched in FY2024-25, is positioned as a key growth driver. Although currently a smaller portion of the overall portfolio, it is expected to grow by over 25% in FY26, driven by demand from self-employed borrowers and small businesses. IndoStar is strategically expanding Micro LAP operations, starting with Tamil Nadu and now extending to Andhra Pradesh and Telangana, with plans to establish a presence in 3-4 states this financial year by leveraging its existing vehicle finance branch network. This expansion is supported by the onboarding of experienced professionals, including Mr. Amit Khan as Chief Operating Officer for Micro LAP.

Strengthening Financial Health and Operational Efficiency

IndoStar's commitment to financial prudence is reflected in its improved asset quality and reduced cost of funds. Gross Stage-III assets have significantly decreased to 3.04% in Q2 FY26 from 4.97% in Q2 FY25, while Net Stage-III assets improved to 1.13% from 2.3% over the same period. This improvement is attributed to proactive credit policy adjustments and the adoption of data-driven recovery tools. The company has also implemented a policy to technically write off loans over 210 days past due, aiming to maintain a high-quality book and control headline Gross Non-Performing Assets (GNPAs), targeting a 3% level.

Furthermore, IndoStar has successfully reduced its weighted average cost of borrowing to 10.2% in Q2 FY26 from 10.8% in Q2 FY25, with incremental borrowing costs now in the range of 9%-9.25%. This reduction is a testament to its improving credit profile, strong lender confidence, and access to more competitive borrowing sources. The company maintains a robust capital adequacy ratio of 37.3% and a low debt-to-equity ratio of 1.4x, providing ample headroom for future growth.

Operational efficiency is being enhanced through digital tools such as the Indo Mitra app, scorecards, and connector apps, which streamline sourcing, underwriting, and collections. The company has seen a significant increase in customer self-service through eNACH, reaching 27% for vehicle finance and 95% for Micro LAP in September. Project LEAP (Lean, Efficient, Agile, Profitable) initiatives are also driving efficiency and operational discipline across the business.

Outlook and Future Trajectory

Despite a marginal dip in Asset Under Management (AUM) to ₹7,564 crore this quarter, partly due to an ARC transaction and policy tightening, IndoStar remains focused on growth. Management expects disbursements to pick up sequentially in the coming quarters, with H2 typically showing stronger momentum. The company is committed to balancing growth with prudent risk management and maintaining a high-quality portfolio. The ongoing expansion of Micro LAP and continued diversification within Vehicle Finance are expected to drive future growth.

IndoStar's journey reflects a strategic clarity and disciplined execution. By focusing on retail-led growth, strengthening asset quality, and leveraging technology, the company is positioning itself for sustained, profitable expansion in the Indian financial services sector. The management's emphasis on a strong governance framework, professional leadership, and a robust capital base instills confidence in its future prospects.