Buy Spandana Sphoorty; target of Rs 395: Motilal Oswal

Motilal Oswal's research report on Spandana Sphoorty

Spandana Sphoorty (SPANDANA)’s 3QFY25 loss stood at ~INR4.4b (vs. est. loss of INR4.6b), driven by elevated credit costs. 9MFY25 loss stood at INR6b. We expect the company to report another loss quarter in 4QFY25 as well. NII declined 13% YoY to ~INR2.7b (in line). PPOP declined ~67% YoY to INR784m. Total borrower count declined ~11% QoQ to 3m. Opex rose ~60% YoY to ~INR2.7b (~18% higher than est.), resulting in a costincome ratio of ~77% (PY: ~41% and PQ: 49%). Credit cost stood at ~INR6.7b, resulting in annualized credit cost of ~32% (PQ: ~21% and PY: ~3%). Credit cost was high due to many challenges, including borrower leverage, dilution of JLG model, poor center meeting attendance, and high attrition. Technical write-offs stood at INR6.8b and INR9.9b in 3QFY25 and 9MFY25, respectively

Outlook

We estimate SPANDANA to deliver FY26 RoA/RoE of 0.9%/3%. Maintain BUY with a TP of INR395 (based on 1x Sep’26E BV). Key downside risks: 1) sustained asset quality stress in the loan book spilling into FY26 as well, and 2) the inability to retain talent in the senior/middle management teams, similar to high attrition seen at the field officer and branch manager levels.