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Northern ARC
Our verdict on Northern ARC isn’t the consensus take — see where we landed, and the one risk the bull case glosses over.
See the verdict — free →Does management do what it says?
The MSME business AUM grew by 34% YoY in Q1 FY26, surpassing the 30% target. (3 exceeded across 3 tracked commitments)
“We anticipate significant growth in MSME sector and are poised to become a key driver to Indian economy in the coming year and expect to grow our MSME lending business at an upward of 30%.”
The company reported no negative cumulative mismatches across any buckets as of June 30, 2025, adhering to internal and RBI guidelines. (3 met across 3 tracked commitments)
“So, I think, we should settle in this range of around 8.5% to 8.6% in the next few quarters. This is what we are giving guidance... And for the year, we should close in the range of around 8.5% to 8.7%.”
See the full cited Management analysis of Northern ARC
How durable is the business?
The funding mix is shifting toward lower-cost and more diversified sources. Cost of funds dropped to 9%, and the debt-to-equity ratio improved significantly to 2.9x. (4 expanding)
“Tangible net worth as on 31st March was INR3,434 crores. We have made significant progress in strengthening our balance sheet with our debt-equity ratio improving from 3.9 times in March 24 to 2.9x as on March 25.”
The consumer finance book has seen explosive growth, tripling in size over two years. It now accounts for 25% of total AUM, though credit costs have risen to 4.2% (excluding one-timers) as the model matures. (5 expanding across 2 engines)
“Consumer Finance Assets under Management Dec-25 4,266. Net Yield 15% - 16%.”
See the full cited Business Model analysis of Northern ARC
Where does growth come from?
Core operating profitability is accelerating significantly, with PPoP growing at a 35% CAGR since FY21, reaching INR 791 Cr for FY25. (3 accelerating, 2 decelerating across 5 signals, 1 leading indicator)
“90 Branches Added 17 branches in 9MFY26”
The consumer segment has seen explosive growth (3x in two years), though credit costs have spiked to 6% (4.2% excluding one-offs), leading to a more 'measured' outlook. (2 steady, 3 accelerating across 5 signals)
“# Customers ('000) ... Dec-25 1,988”
See the full cited Future Growth analysis of Northern ARC
What could break the thesis?
The company's overall credit costs have spiked sharply compared to the previous year, indicating that a larger portion of income is being diverted to cover loan losses. [BALANCE_SHEET]
“Credit Costs ... Q3FY26 130 ... YoY % 60%”
Credit costs in these segments remain elevated. Rural credit cost is at 7.7% and Consumer at 6.1% (4.8% excluding DLG accounting changes), significantly higher than the total company average of 3.0%. (2 intensifying, 2 easing, 1 high-severity)
“Consumer ... Q3FY26 [Credit Cost] 6.5%; Rural ... Q3FY26 [Credit Cost] 5.3%”
See the full cited Risk analysis of Northern ARC
Read the full thesis on Northern ARC
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