Arman Financial Q2 FY26: Profitability Recovery Masks Underlying Asset Quality Concerns

The stock surged 7.36% on November 14, 2025, to close at ₹1,747.55, reflecting investor relief at the return to black ink. With a market capitalisation of ₹1,758 crores, the small-cap NBFC now trades at a price-to-book value of 2.10 times, despite being classified as "Very Expensive" by valuation metrics. The company's profitability recovery comes against a backdrop of contracting revenues and margin pressures that warrant closer scrutiny.

The Ahmedabad-based lender's journey from loss-making to profitability within a single quarter provides welcome relief to investors who have endured significant volatility. Yet the company's ability to sustain this turnaround remains questionable, particularly given persistent revenue headwinds and an operating environment that continues to challenge profitability metrics across the NBFC sector.

Financial Performance: Sequential Recovery Amid Structural Decline

Arman Financial's Q2 FY26 results present a tale of two narratives. On a sequential basis, the numbers appear encouraging: net profit swung from a loss of ₹14.58 crores in Q1 FY26 to a profit of ₹7.99 crores, whilst revenue climbed 5.44% quarter-on-quarter to ₹159.21 crores. The PAT margin recovered sharply to 5.02% from negative 9.66% in the previous quarter, suggesting improved operational control.

However, the year-on-year comparison reveals a more troubling picture. Net profit declined 47.68% from ₹15.27 crores in Q2 FY25, whilst revenue contracted 12.28% from ₹181.49 crores in the same period last year. This represents the company's second consecutive quarter of year-on-year revenue decline, following an 18.13% drop in Q1 FY26. The operating margin of 42.71% in Q2 FY26, whilst improved from Q1's 27.48%, remains substantially below the 48.49% achieved in Q2 FY25.

Interest expenses declined to ₹49.61 crores in Q2 FY26 from ₹52.22 crores in Q1 FY26, providing some breathing room. Yet this 5.00% sequential reduction pales against the backdrop of a 23.99% year-on-year decrease from ₹65.26 crores in Q2 FY25. The company's profit before tax of ₹17.94 crores in Q2 FY26, whilst reversing Q1's loss of ₹11.17 crores, still represents a 19.58% decline from Q2 FY25's ₹22.31 crores.

The tax dynamics warrant attention. The company recorded a tax expense of ₹9.94 crores in Q2 FY26, translating to an effective tax rate of 55.41%—substantially higher than the typical corporate tax rate. This compares to a negative tax rate of 30.62% in Q1 FY26 when the company was loss-making, and 31.60% in Q2 FY25. The elevated tax rate compressed net profitability despite the operational improvements.

Asset Quality and Growth Balance: Warning Signs Emerge

For an NBFC, the interplay between asset quality and growth defines long-term sustainability. Arman Financial's current trajectory raises concerns on both fronts. The company's return on equity deteriorated sharply to 5.95% in the latest period from its five-year average of 14.71%, indicating diminished capital efficiency. This decline in ROE—a critical metric for financial services companies—suggests the business is generating lower returns on shareholder capital, potentially due to either lower profitability or higher equity base without commensurate earnings growth.

The balance sheet reveals a debt-to-equity ratio of 1.37 times as of the latest half-year period, down from 1.41 times on average. Whilst this reduction in leverage appears prudent, it comes alongside shareholder funds of ₹874.41 crores as of March 2025, up from ₹812.69 crores in March 2024. The company's current liabilities stood at ₹1,360.77 crores in March 2025, down from ₹1,836.57 crores a year earlier—a 25.91% reduction that suggests either deleveraging or slower business growth.

Cash flow dynamics present a mixed picture. Operating cash flow surged to ₹492.82 crores in FY25 from negative ₹302.00 crores in FY24, marking the highest annual operating cash generation in the company's recent history. However, this improvement came alongside cash flow from financing of negative ₹494.00 crores in FY25 versus positive ₹376.00 crores in FY24, indicating the company used internally generated cash to reduce borrowings rather than fund growth.

NBFC Sector Dynamics: Navigating a Challenging Landscape

The broader NBFC sector faces headwinds from tightening regulatory oversight and rising funding costs. The Reserve Bank of India's increased scrutiny on unsecured lending, particularly in the microfinance and small-ticket loan segments, has prompted many NBFCs to adopt more conservative underwriting standards. This regulatory environment particularly impacts companies like Arman Financial that focus on SME loans, two-wheeler finance, and loan against property—segments that require careful credit assessment and monitoring.

Asset quality management becomes paramount in this context. Whilst Arman Financial has not disclosed specific non-performing asset ratios in the quarterly results, the company's financial trend is classified as "Positive" based on factors including the lowest debt-to-equity ratio in recent periods and strong operating cash flow. However, the 12.28% year-on-year revenue decline in Q2 FY26 suggests either slower disbursement growth or potential stress in the existing loan book requiring conservative income recognition.

Relative to peers, Arman Financial demonstrates superior return on equity at 14.71% compared to the peer group average of approximately 7%. The company's price-to-book value of 2.10 times appears reasonable against peers like Mufin Green (7.02x) and Algoquant Fin (17.89x), though it commands a premium to SG Finserve's 2.02x despite similar leverage profiles. The debt-to-equity ratio of 1.41 times positions Arman Financial in the middle of the peer spectrum, below Mufin Green's 2.80x but above SG Finserve's 1.72x.

Valuation Analysis: Premium Pricing Despite Execution Challenges

At ₹1,747.55 per share, Arman Financial trades at a price-to-book value of 2.10 times against a book value per share of ₹558.41. The stock's valuation grade of "Very Expensive" reflects concerns about sustainability of earnings given recent volatility. With the company loss-making on a trailing twelve-month basis, traditional P/E multiples cannot be calculated, forcing investors to rely on price-to-book and other metrics for valuation assessment.

The stock's journey from ₹1,111.00 (52-week low) to near its 52-week high of ₹1,849.95 represents a 57.30% appreciation, suggesting significant optimism has been priced in. Trading just 5.54% below its 52-week high, the stock offers limited margin of safety. The valuation grade has oscillated between "Attractive" and "Very Expensive" over recent months, indicating high volatility in market perception.

The EV/EBITDA multiple of 11.85 times and EV/Sales ratio of 3.95 times suggest the market is pricing in expectations of improved profitability ahead. However, these multiples appear stretched given the 47.68% year-on-year profit decline in Q2 FY26 and persistent revenue headwinds. The company's enterprise value to capital employed ratio of 1.57 times indicates the market values the business at a 57% premium to its deployed capital base.

Shareholding Pattern: Stable Promoter Base, Modest Institutional Interest

Promoter holding remained largely stable at 22.00% in Q2 FY26, down marginally from 22.05% in Q1 FY26 and 22.07% in Q2 FY25. This consistency in promoter stake suggests confidence in the business, though the relatively low promoter holding of 22% for a small-cap company may raise governance questions for some investors. The promoter group, led by Namra Holdings And Consultancy Services LLP with 9.02%, has maintained steady ownership without significant pledging of shares.

Foreign institutional investor holding increased to 1.81% in Q2 FY26 from 1.42% in Q1 FY26, representing a 39 basis point sequential increase. However, this remains substantially below the 4.90% FII holding in Q2 FY25, indicating significant foreign investor exits over the past year. Mutual fund holding remained relatively stable at 2.06% in Q2 FY26, whilst insurance company holdings dropped to zero from 1.02% in Q2 FY25—a complete exit that merits attention.

The non-institutional shareholding of 71.37% in Q2 FY26 dominates the shareholder base, typical for small-cap companies but potentially limiting institutional research coverage and liquidity. Total institutional holding stands at just 6.63%, comprising 28 FIIs and 2 mutual funds. This limited institutional participation suggests the stock remains under the radar of major institutional investors, which could change if the company demonstrates sustained profitability improvement.

Stock Performance: Short-Term Momentum Masks Long-Term Underperformance

Arman Financial's stock has delivered robust short-term returns, surging 37.06% over the past year and generating 28.06 percentage points of alpha versus the Sensex's 9.00% return. The year-to-date performance of 40.58% substantially outpaces the Sensex's 8.22% gain, whilst the three-month return of 27.28% demonstrates strong recent momentum. The stock trades above all key moving averages—5-day, 20-day, 50-day, 100-day, and 200-day—indicating technical strength.

However, the medium-term picture reveals significant underperformance. The two-year return of negative 18.24% compares unfavourably to the Sensex's 30.23% gain, resulting in negative alpha of 48.47 percentage points. The three-year return of 11.01% lags the Sensex's 37.22% substantially. This divergence between short-term momentum and medium-term underperformance suggests the recent rally may represent recovery from oversold levels rather than fundamental improvement.

Technical indicators show a "Bullish" trend as of November 14, 2025, upgraded from "Mildly Bullish" the same day. The stock exhibits high volatility of 43.97% versus the Sensex's 12.26%, with a beta of 1.35 indicating 35% higher volatility than the broader market. This high beta classification means the stock amplifies market movements, delivering outsized gains in bull markets but potentially steep declines during corrections. The risk-adjusted return of 0.84 over one year compares favourably to the Sensex's 0.73, though the absolute volatility remains elevated.

Investment Thesis: Quality Concerns Limit Upside Despite Tactical Recovery

Arman Financial's investment case rests on several pillars. The company operates in attractive segments—SME loans, two-wheeler finance, and loan against property—that address genuine financing needs in the Indian market. The five-year sales growth of 26.14% demonstrates the company's ability to scale operations, whilst the recent quarter's return to profitability suggests management's capacity to navigate challenges.

However, significant concerns temper this optimism. The company's quality grade of "Average" reflects long-term financial performance that fails to inspire confidence. The ROE deterioration to 5.95% from a five-year average of 14.71% signals diminished capital efficiency precisely when investors should expect improving returns as the business scales. The valuation grade of "Very Expensive" suggests limited margin of safety, particularly given execution uncertainties.

The overall Mojo score of 64 out of 100 places the stock in "HOLD" territory, with the recommendation explicitly stating it is "not recommended for fresh buy" though existing holders "can continue to hold." This lukewarm assessment reflects the balance between near-term positive momentum and medium-term quality concerns. The company's institutional holding of just 6.63% suggests limited conviction from sophisticated investors who conduct deep due diligence.

Key Strengths and Risk Factors

Outlook: What to Monitor in Coming Quarters

The coming quarters will prove critical in determining whether Arman Financial's Q2 FY26 profitability represents the beginning of sustained recovery or merely a tactical improvement within a longer-term deterioration. Investors should closely monitor revenue trends, margin sustainability, and asset quality indicators. The company's ability to grow its loan book whilst maintaining credit standards will determine whether it can deliver the returns necessary to justify its current valuation.