Brokerage Initiates Coverage with ‘Buy’ Rating, Expects Sharp Profit Growth and Expanding Return Ratios

Shares of Aye Finance came into sharp focus after IIFL Capital initiated coverage on the stock with a “Buy” recommendation, highlighting strong long-term growth opportunities in India’s underpenetrated micro-MSME financing segment.

The brokerage expects the company to deliver robust loan growth, improving profitability, and stronger return ratios over the next few years, supported by operational efficiencies, branch maturity, and a gradual shift toward secured lending products.

Investor sentiment turned positive following the report, with Aye Finance shares rallying strongly during intraday trade.

IIFL Capital Sees Nearly 40% Upside

IIFL Capital has assigned a target price of ₹180 per share for Aye Finance, implying a potential upside of nearly 40 percent from current market levels.

According to the brokerage, the stock continues to trade at a meaningful discount compared to other listed MSME-focused lenders despite showing relatively better asset quality trends and a more secured loan portfolio than several microfinance peers.

Analysts believe the valuation gap could narrow gradually as the company improves profitability and scales its lending operations further.

Strong Presence in India’s Underpenetrated MSME Market

Aye Finance primarily focuses on lending to informal micro and small businesses that often remain underserved by traditional banking institutions.

The company operates in a niche segment positioned between:

• Traditional microfinance institutions (MFIs)

• Formal MSME lending businesses

This positioning allows the company to cater to small entrepreneurs, traders, and local businesses that require small-ticket financing but may lack extensive formal financial documentation.

IIFL Capital noted that Aye Finance has built a geographically diversified portfolio, reducing concentration risk. The company’s top five states contribute only around 57 percent of total assets under management (AUM), indicating balanced regional exposure.

Robust Loan Growth Expected

The brokerage expects Aye Finance to deliver approximately 27 percent compound annual growth in assets under management (AUM) between FY26 and FY29.

This growth is expected to be driven by:

• Expansion into new markets

• Rising credit demand from small businesses

• Increasing branch productivity

• Higher customer penetration

• Growth in secured lending products

India’s micro and small business segment continues to remain significantly underfinanced, creating long-term opportunities for specialised lenders focused on grassroots entrepreneurship and local business ecosystems.

Profit Growth May Outpace Loan Growth

While AUM is expected to grow strongly, IIFL Capital believes profit growth could accelerate at an even faster pace.

The brokerage estimates that profit after tax (PAT) may grow at nearly 44 percent CAGR during FY26–FY29, supported by:

• Lower credit costs

• Improving operating leverage

• Better branch efficiency

• Increasing share of secured loans

• Stabilisation in mature branches

Analysts expect the company’s return on assets (RoA) and return on equity (RoE) to improve significantly over the next few years as scale benefits begin to reflect more strongly in earnings.

Mortgage Portfolio to Play Bigger Role

One of the major drivers of future profitability is expected to be the company’s growing secured mortgage lending business.

According to the brokerage, the mortgage portfolio could contribute nearly 30 percent of Aye Finance’s overall loan book by FY29.

Mortgage loans generally offer:

• Higher average ticket sizes

• Longer repayment tenures

• Better customer stickiness

• Lower credit risk

• Improved operating efficiency

The brokerage also highlighted that the secured mortgage portfolio carries structurally lower credit costs compared to unsecured lending products.

This gradual portfolio shift could help the company improve margins and strengthen overall asset quality over time.

Branch Maturity to Improve Operating Efficiency

IIFL Capital noted that nearly 45 percent of Aye Finance branches are still in the early stages of maturity.

Historically, mature branches with operating history of more than four years tend to generate significantly higher average AUM compared to newly established branches.

As more branches mature, analysts expect:

• Better operating leverage

• Lower cost-to-income ratios

• Improved profitability

• Higher productivity per branch

This branch maturity cycle is likely to become an important earnings driver over the next several years.

Asset Quality Remains a Key Strength

Despite operating in the informal micro-business lending segment, Aye Finance has maintained relatively stable asset quality trends through:

• Cluster-based underwriting models

• In-house sourcing systems

• Multi-layer credit assessment

• Localised risk monitoring mechanisms

Analysts believe the company’s disciplined underwriting approach has helped it maintain healthier credit performance compared to several microfinance institutions operating in similar customer segments.

MSME Lending Sector Continues to Offer Large Opportunity

India’s MSME sector contributes significantly to employment generation and economic activity, yet access to formal credit remains limited for millions of small businesses.

The sector is expected to benefit from:

• Increasing formalisation of the economy

• Rising digital adoption

• Government support for small businesses

• Growing entrepreneurship in smaller towns

• Expansion of fintech-led lending ecosystems

Industry experts believe specialised lenders with strong distribution networks and disciplined underwriting models could benefit substantially from this long-term structural opportunity.

Outlook Remains Positive

Brokerages remain optimistic on Aye Finance due to its scalable business model, diversified lending strategy, and improving profitability profile.

While challenges such as competitive intensity and credit cycle risks remain, analysts believe the company is well-positioned to benefit from India’s expanding MSME credit market and increasing demand for formal financing solutions among small businesses.