Motilal Oswal has initiated coverage on Northern Arc Capital (NACL) with a BUY call, citing its successful pivot toward a Direct-to-Customer (D2C) retail model, scalable technology backbone, diversified fee income streams, and disciplined risk management architecture. The company has structurally rebalanced its portfolio from an IR-heavy book to a granular, higher-yielding D2C mix, supporting margin expansion and earnings visibility. With AUM projected to grow at ~20% CAGR and PAT at ~34% CAGR over FY26–FY28E, and RoA/RoE expected to expand to ~3.2%/15% by FY28E, the valuation at 0.9x FY27E P/B appears compelling for medium-term compounding.

Investment Thesis: From Intermediary to Integrated Retail Credit Platform

Northern Arc Capital has evolved into a technology-led, diversified credit ecosystem targeting underserved MSME, consumer, and rural borrowers across India. The firm has facilitated nearly Rs 2 trillion in financing since inception and now operates through 368 branches, 357 originator partners, and over 1,400 investor relationships.

The structural transformation of the loan book is the centerpiece of this story.

D2C AUM expanded from Rs 10 billion in FY21 to ~Rs 85 billion by Dec’25, representing ~57% CAGR.

D2C now accounts for ~56% of total lending AUM, compared to just ~19% in FY21.

Management targets ~70% D2C mix by FY28.

This shift is not cosmetic — it structurally lifts portfolio yields and strengthens profitability metrics.

Growth Engine: D2C Scaling Across MSME, Consumer & Rural

The D2C platform operates through a “phygital” model combining proprietary underwriting tools with physical branch reach.

Segmental Highlights:

Consumer finance has been the fastest-growing vertical, scaling at ~104% CAGR over FY21–9MFY26, serving nearly 2 million customers.

Rural finance experienced stress in FY25 due to broader MFI headwinds; however, management deliberately reduced exposure and strengthened guardrails. Credit costs are expected to normalize to ~2.7–2.8% over FY27–28E.

Stable Counterbalance: Intermediate Retail & Fee-Based Ecosystem

While D2C drives growth, the Intermediate Retail (IR) vertical provides stability.

IR AUM stands at ~Rs 66b.

Portfolio yields hover around 12.5–13%.

Credit costs historically remained below 40 bps for 15 years.

Beyond balance-sheet lending, the fee-based ecosystem enhances earnings diversification:

Fund Management

AUM: ~Rs 32b across six active AIFs.

Historical funds delivered returns above target.

Net management fee ~110 bps.

Placement Platform

Rs 1.2 trillion cumulative debt facilitated since inception.

Rs 91b placements in 9MFY26.

For every Rs 1 disbursed from its balance sheet, ~Rs 2 facilitated via placements.

This diversified revenue model reduces earnings cyclicality and improves operating leverage.

Margin Expansion: D2C Mix Shift and Cost of Funds Optimization

The rebalancing toward higher-yield D2C segments has driven Net Interest Margin expansion.

Projected NIM trajectory:

FY26E: 10.7%

FY27E: 10.9%

FY28E: ~11.0%

Cost of funds declined ~45 bps during 9MFY26 (from ~9% to ~8.6%), supported by diversified borrowings and AA− (Stable) rating.

Funding mix (Dec’25):

~62% banks

~26% domestic/offshore DFIs

Balance from capital markets

This diversified liability structure mitigates concentration risks and supports scalable growth.

Technology Moat: Nimbus, nPOS, AltiFi & NuScore

Unlike traditional NBFCs, Northern Arc operates as a tech-enabled credit ecosystem.

Nimbus – Integrated debt processing backbone
nPOS – API-driven co-lending platform (15k–20k loans/day capacity; Rs 300–350b processed)
AltiFi – Retail bond platform (~85k users)
NuScore – Risk scoring engine (~0.25m assessments processed)

Importantly, nPOS is now monetized, earning 15–16 bps fee on disbursed volumes.

This proprietary stack reduces processing time, enhances underwriting precision, and builds operating leverage without incremental credit risk.

Risk Management: Data-Driven & Multi-Layered

Risk governance remains a cornerstone.

~100-member risk team.

Portfolio diversification across geographies and sectors.

FLDG coverage in partner lending (~5%).

CGFMU coverage in rural book.

Advanced analytics integrated into Nimbus for predictive modelling.

Collections infrastructure includes centralized call centers, field teams, legal enforcement (IBC, SARFAESI), and structured recovery mechanisms.

This architecture enables disciplined scaling while containing loss volatility.

Financial Outlook: Accelerating Earnings Compounding

Projected Financial Snapshot:

Key projections:

AUM CAGR: ~20% (FY26–28E)

PAT CAGR: ~34%

RoA expands to ~3.2%

RoE approaches ~15% by FY28E

Operating leverage improves as cost-to-income ratio declines toward ~44%.

Valuation & Target: Undemanding Multiple for a Re-Rating Story

At current levels:

~0.9x FY27E P/B

~7x FY27E P/E

Motilal Oswal assigns a target price of Rs 360, based on 1.2x FY28E P/BV, reflecting improving profitability, diversified earnings, and sustainable growth.

Given earnings visibility, structural mix improvement, and technology-enabled scalability, the current valuation appears undemanding.

Investment View

Northern Arc Capital represents a rare hybrid between a traditional NBFC and a fintech-enabled credit infrastructure platform. Its calibrated D2C expansion, stable IR backbone, scalable fee businesses, and disciplined risk architecture collectively position it for durable earnings compounding.

With margin expansion, improving RoA/RoE metrics, and valuation headroom, the BUY recommendation with a target of Rs 360 reflects both near-term re-rating potential and medium-term structural growth visibility.

For investors seeking a differentiated NBFC play with technology leverage and diversified income streams, Northern Arc Capital offers a compelling risk-reward profile.