Northern Arc

Equity Research

Dipasha Madye

Company Overview
Northern Arc Capital is a diversified financial services platform focused on addressing the
varied credit requirements of Indian households and businesses, particularly in underserved
segments. Since its entry into the financial inclusion space in 2009, the company has
facilitated financing of over ₹2.2 trillion, impacting more than 124 million lives across India
through both direct lending and partnerships with originators and retail lenders.
The company operates across six key sectors and has built a differentiated credit model
supported by proprietary technology, enabling strong asset quality and consistent risk-
adjusted returns through multiple business cycles. Its in-house technology suite includes:
 Nimbus: An integrated debt platform for end-to-end transaction processing.

 nPOS: A co-lending and co-origination solution leveraging APIs.

 NuScore: A machine learning–based underwriting tool for originator partners.

 Altifi: A retail investment platform offering access to alternative debt products.

Northern Arc’s business is structured around three channels:

1. Lending:

o Intermediate Retail Lending: Financing originator partners (NBFCs, fintechs,

institutions) through loans, guarantees, and debt investments, with over 350+
originators onboarded.

o Direct-to-Customer Lending: Serving households and small businesses

through 369 branches, 54 lending partners, and its subsidiary Pragati, with
~20 million active loans as of March 31, 2025.

2. Placements: Facilitates debt market access for originator partners through

securitisation, loan syndication, and structured credit products, often supported by
credit enhancement.

3. Fund Management & Investments:

o Northern Arc Investment Managers (NAIM): Established in 2014, managing

AIFs and PMS strategies with over ₹65,000 million in commitments.

o Altifi: A retail-focused digital platform offering bonds, securitised products,

and sovereign gold bonds to nearly 59,000 registered users, democratizing
access to debt capital markets.
Registered with the RBI as a systemically important non-deposit-taking NBFC, Northern Arc
has built a scalable, technology-driven model combining balance-sheet lending, debt capital
intermediation, and fund management to bridge India’s credit gap.

Industry Overview
The Non-Banking Financial Company (NBFC) sector plays a critical role in India’s financial
ecosystem, particularly in addressing credit gaps for segments underserved by traditional
banks. As of FY2024, NBFCs account for nearly 25% of total credit outstanding in India, with
strong linkages to microfinance, small and medium enterprises (SMEs), vehicle finance, and
affordable housing.

Growth Drivers

 Financial Inclusion Imperative: Despite rapid expansion of the banking system,

significant credit demand remains unmet, especially among rural households,
MSMEs, and first-time borrowers. NBFCs, with their specialized models, remain well-
positioned to serve these markets.

 Digital Transformation: Increased adoption of technology, digital platforms, and

partnerships with fintechs have improved underwriting, loan disbursement speed,
and cost efficiency.

 Policy & Regulatory Support: RBI and government initiatives, such as priority sector
lending targets and the digital public infrastructure (UPI, Account Aggregator
framework), have facilitated deeper credit penetration.

 Capital Market Access: Growing securitisation and co-lending arrangements

between banks and NBFCs are creating alternative funding avenues and lowering
overall cost of funds.

Key Challenges

 Funding Risks: Dependence on wholesale funding exposes NBFCs to liquidity

pressures, especially during macroeconomic volatility.

 Asset Quality Concerns: Exposure to higher-risk borrower segments increases

vulnerability to defaults in stressed economic conditions.

 Regulatory Oversight: The RBI has tightened supervision post the IL&FS crisis,
leading to higher compliance requirements and increased capital adequacy norms.

 Competition: Traditional banks, fintechs, and large NBFCs are intensifying

competition, particularly in the digital lending and retail credit space.

Outlook
The NBFC sector is expected to sustain a 10–12% CAGR in assets under management (AUM)
over FY24–27, supported by rising demand for MSME, microfinance, and consumer loans.
Firms with diversified business models, strong risk management, and robust technology
platforms are likely to outperform peers.

Within this landscape, Northern Arc Capital’s positioning—as a lender, placement platform,
and fund manager—enables it to address both sides of the credit ecosystem by supporting
originators as well as direct borrowers. Its technology-led approach and diversified channels
provide a competitive edge in navigating sector-wide challenges.

TAM & Potential Market Share

The total addressable market for credit to underserved segments in India is estimated to be
upwards of ₹25–30 lakh crore, spanning microfinance, SME loans, and personal lending.
Northern Arc, with its focus on enabling financial access to underbanked borrowers, is
strategically positioned to tap into this opportunity. Given its current scale (AUM of
~₹11,700 crore in FY24) and robust 30% growth rate, the company has potential to steadily
capture a larger share in niche segments, though it will remain a mid-sized player compared
to giants like Shriram Finance and Tata Capital.

Management Capabilities
Northern Arc is led by a seasoned management team with deep expertise in financial
services and structured finance. The leadership has demonstrated strong execution
capabilities, evident in the company’s rapid growth and ability to maintain superior asset
quality (GNPA of just 0.45% in FY24).

The company follows stringent governance practices, backed by a reputed board and
institutional investors. Transparency in disclosures, prudent risk management, and
adherence to regulatory norms have enabled Northern Arc to build credibility in the NBFC
ecosystem.

ESG Parameters
Environmental
While Northern Arc is primarily a financial services provider, it indirectly contributes to the
environmental agenda by financing companies and borrowers engaged in sustainable
businesses. Its emphasis on structured finance for sectors like renewable energy, clean
technology, and socially impactful enterprises strengthens its alignment with the broader
sustainability agenda.

Social
The company’s core business model is built around financial inclusion. By extending credit
to underbanked and underserved segments such as MSMEs, women entrepreneurs, and
low-income households, Northern Arc addresses a critical socio-economic gap in India. Its
partnerships with microfinance institutions and small business lenders enable a wide-
reaching social impact, contributing to job creation and livelihood improvements.

Governance
Northern Arc maintains a robust governance framework supported by reputed institutional
investors, an experienced board, and transparent disclosure standards. The company
adheres to RBI’s prudential regulations for NBFCs and maintains a strong capital adequacy
ratio. Its track record of asset quality management and responsible lending practices
underscore its governance strength.

Financial overview
Income Statement Highlights (₹ Cr)

 Revenue (FY25–FY30): Rising from ~2,296 Cr in FY25 to ~5,271 Cr in FY30.

 Profit After Tax (PAT): Positive throughout forecast, with improving margins.

Key Ratios

 Net Margin: Expands over forecast horizon, reflecting operating leverage.

 ROE / ROA: Stable, supported by efficient use of equity capital.

 NIM (where applicable): Maintained at competitive levels.

Balance Sheet

 Loan Book / AUM: Strong growth, in line with rising revenues.

 Borrowings: Increasing to support AUM growth, but within sustainable leverage.

 Equity & Reserves: Consistently rising, providing capital buffer.

Cash Flow

 Operating Cash Flow: Volatile, occasionally negative (common in NBFCs due to loan
disbursements).

 Financing Cash Flow: Positive, driven by borrowings to fund asset growth.

 Investing Cash Flow: Minimal impact relative to loan book growth.

Valuation
DCF Valuation (based on PAT and CFO forecast)

WACC: 15.27%

Terminal Growth: 5%
Implied Equity Value: 25374.17118

Target Price: 1570.773143

Relative Valuation

P/E EV/Sales EV/EBITDA

Implied Enterpise Value 7652.97 20969.70 18635.98
Net Debt 9785.00 9785.00
Implied Equity Value 7652.97 11184.70 8850.98
Share Outstanding 16.15 16.15 16.15
Implied Value Per Share 473.87 692.55 548.05

Investment Risks

 Funding Risk: Dependence on wholesale borrowings exposes to rising interest rates.

 Credit Risk: Deterioration in borrower quality can lead to higher NPAs.

 Regulatory Risk: Stricter RBI norms for NBFCs may impact growth and leverage.

 Competition: Intense competition from banks and large NBFCs.

Conclusion & Recommendation

Northern Arc Capital is well-positioned to capture India’s expanding credit market. With
robust revenue growth, improving profitability, and a scalable business model, the company
shows strong potential. Valuation analysis (DCF + relative) suggests upside from current
levels, though risks around funding and regulation must be monitored.

1. Growth

 Revenue: Doubles in ~5 years (₹2,296 Cr in FY25 → ₹5,271 Cr in FY30).

 PAT: Positive throughout, improving steadily.

➡️Indicates scalability and sustainable growth.

2. Profitability

 Net margins: Improving over time (a good sign for operating leverage).

 ROE / ROA: Reasonably stable, not very high like Bajaj Finance but respectable for a
mid-sized NBFC.

3. Balance Sheet

 Borrowings grow, but not excessively vs. AUM growth.

  Equity & reserves keep increasing, showing a buffer.
➡️Balance sheet looks safe; only a tiny mismatch (~₹0.1 Cr in FY30) which is just a
rounding/linking issue.

4. Cash Flow

 Negative CFO at times — normal for NBFCs since loan disbursements are shown as
cash outflows.

 PAT positive means core profitability is intact.

5. Peer Comparison

 Bajaj Finance, Muthoot, Shriram, Mahindra Finance all trade at healthy P/B multiples
(1.5–6x).

 Northern Arc’s book value will keep rising, and if you assume even a conservative
1.5–2x P/B, upside exists.

Strengths: Strong growth, improving margins, safe leverage.

Risks: Dependence on borrowings, competition, regulatory tightening.

Valuation: Based on your model → seems undervalued compared to peers.

👉 Based on this, I would recommend:

Recommendation: BUY
Target Price: 450-600
Time Horizon: 12–18 months.