Dar Credit & Capital Q2 FY26: Profit Surge Masks Underlying Quality Concerns

The company, which specialises in personal loans, unsecured MSME loans, and secured MSME loans, has demonstrated consistent growth momentum over the past several quarters. However, with an average return on equity of just 6.45% and a proprietary Mojo score of 44 out of 100, the company's fundamental quality remains a significant concern for investors evaluating long-term wealth creation potential.

Financial Performance: Accelerating Profitability Amidst Modest Revenue Growth

Dar Credit & Capital's Q2 FY26 financial performance showcases a company in expansion mode. Net sales of ₹11.90 crores in Q2 FY26 represented an 8.68% sequential increase from ₹10.95 crores in Q1 FY26 and a 15.31% year-on-year improvement from ₹10.32 crores in Q2 FY25. This marks the highest quarterly revenue in the company's recent history, continuing a positive trajectory that has persisted since June 2024.

More impressive than the revenue growth is the margin expansion story. The company's PAT margin surged to 21.01% in Q2 FY26, up from 18.45% in the previous quarter and significantly higher than the 16.38% recorded in Q2 FY25. This 256 basis point sequential improvement in profitability margins reflects improved operational efficiency and better cost management, particularly in the context of a lending business where margin pressure is often the norm.

The operating profit margin (excluding other income) stood at 66.13% in Q2 FY26, though this represented a sequential decline from 69.32% in Q1 FY26. The gross profit margin expanded to 25.63% from 24.47% in the previous quarter, indicating favourable net interest margin dynamics. Employee costs rose to ₹2.30 crores in Q2 FY26 from ₹2.00 crores in Q1 FY26, reflecting business expansion and team building initiatives.

Interest expenses remained relatively stable at ₹4.96 crores in Q2 FY26 compared to ₹4.93 crores in Q1 FY26, suggesting disciplined liability management. The effective tax rate of 12.89% in Q2 FY26 was significantly lower than the 18.55% recorded in the previous quarter, contributing materially to the bottom-line improvement.

The ROE Challenge: Weak Capital Efficiency Raises Long-Term Concerns

Despite the encouraging quarterly profit trajectory, Dar Credit & Capital faces a fundamental challenge that cannot be ignored: persistently weak return on equity. The company's latest ROE of 7.14% for FY25, whilst marginally improved from previous years, remains substantially below acceptable thresholds for wealth creation in the financial services sector. The five-year average ROE of 6.45% places the company in the "below average" quality category, signalling inefficient capital deployment.

For context, a healthy NBFC typically generates ROE in the range of 15-20%, reflecting the ability to profitably deploy shareholder capital in lending operations. Dar Credit's single-digit ROE suggests either conservative growth strategies, elevated credit costs, or structural challenges in achieving scale economies. The company's ROCE of 4.01% further underscores this capital efficiency concern, indicating that even operational returns remain subdued.

On the positive side, the company maintains a debt-free balance sheet with zero long-term borrowings as of March 2025. Shareholder funds stood at ₹73.52 crores, comprising ₹10.00 crores of share capital and ₹63.52 crores of reserves. This conservative capital structure provides financial flexibility but also raises questions about growth ambitions and the ability to scale operations meaningfully.

Growth Trajectory: Five-Year CAGR Tells a Story of Expansion

Taking a longer-term perspective, Dar Credit & Capital has demonstrated respectable growth momentum. The company's five-year sales CAGR of 27.50% reflects consistent business expansion, whilst the five-year EBIT CAGR of 57.25% indicates improving operational leverage. Annual net sales grew from ₹24.00 crores in FY23 to ₹40.00 crores in FY25, representing a 25.00% year-on-year increase in the most recent fiscal year.

Net profit has shown even more dramatic improvement, rising from ₹2.00 crores in FY22 and FY23 to ₹7.00 crores in FY25—a 133% increase over two years. The PAT margin expanded from 8.33% in FY23 to 17.50% in FY25, demonstrating the company's ability to convert revenue growth into bottom-line expansion. Operating margins (excluding other income) have consistently improved, rising from 62.50% in FY22-23 to 70.00% in FY25.

Industry Context: Navigating the Competitive NBFC Landscape

The NBFC sector in India has witnessed significant consolidation and regulatory scrutiny in recent years, with the Reserve Bank of India implementing scale-based regulations that favour larger, well-capitalised players. For micro-cap NBFCs like Dar Credit & Capital, the competitive landscape presents both opportunities and challenges. The company's focus on personal loans and MSME lending positions it in segments with substantial addressable markets but also significant competition from banks, fintech platforms, and larger NBFCs.

The current macroeconomic environment presents a mixed picture for lending businesses. Whilst credit demand remains robust, rising interest rates have compressed net interest margins across the sector. Asset quality concerns have emerged in certain unsecured lending segments, prompting greater regulatory vigilance. For a small NBFC with limited institutional backing (only 7.73% institutional holdings), building scale whilst maintaining asset quality represents a delicate balancing act.

The company's ability to maintain stable interest expenses despite business growth suggests effective liability management, though the lack of detailed disclosure on funding mix and cost of funds limits comprehensive analysis. The absence of publicly available data on asset quality metrics such as gross and net non-performing assets represents a significant information gap for investors evaluating credit risk.

Peer Comparison: Valuation Discount Reflects Quality Concerns

Dar Credit & Capital trades at a P/E ratio of 10.95x, which appears attractive on a relative basis compared to some micro-cap NBFC peers. However, this valuation discount must be understood in the context of the company's weak fundamental quality. The price-to-book ratio of 0.78x suggests the market values the company below its stated net worth, typically a red flag indicating concerns about asset quality or earnings sustainability.

Amongst the limited peer group of micro-cap financial services companies, Dar Credit & Capital's ROE of 6.45% stands out as a measurable metric, though not in a positive way. The company's zero debt-to-equity ratio provides financial stability but also suggests conservative growth strategies that may limit return potential. With a market capitalisation of ₹77.00 crores, the company ranks as the largest in its immediate peer group, though this reflects the extremely small scale of comparable companies rather than meaningful market leadership.

Valuation Analysis: Attractive Multiples Cannot Compensate for Weak Quality

Dar Credit & Capital's current valuation metrics present a paradox. The stock trades at a P/E ratio of 10.95x, significantly below typical NBFC valuations, and a price-to-book ratio of 0.78x, implying the market ascribes limited value to the company's equity base. The EV/EBITDA multiple of 20.53x and EV/Sales ratio of 4.40x reflect the capital-light nature of the lending business but appear elevated relative to the company's weak ROE profile.

The company's valuation grade has been classified as "Very Attractive" since August 2025, upgraded from "Attractive" in July 2025. However, this assessment focuses purely on price multiples without adequately weighing fundamental quality concerns. The stock's 52-week range of ₹48.00 to ₹66.00 shows significant volatility, with the current price of ₹55.50 positioned in the middle of this range.

The proprietary Mojo score of 44 out of 100 places the company firmly in "SELL" territory, reflecting the assessment that valuation attractiveness alone cannot compensate for weak fundamental quality. The score improved from 32 in August 2025 but remains constrained by the company's average ROE of just 6.45%, which represents the single largest factor limiting the overall assessment.

Shareholding Pattern: Promoter Dominance with Limited Institutional Interest

The shareholding structure of Dar Credit & Capital reveals a promoter-dominated company with minimal institutional participation. As of September 2025, promoters held 69.14% of the equity, a marginal increase of 0.16 percentage points from 68.98% in May 2025. The promoter group, led by Ramesh Kumar Vijay and family members, demonstrates strong commitment to the business through their concentrated holdings.

The most concerning aspect of the shareholding pattern is the complete exit of foreign institutional investors, whose stake declined from 3.71% in May 2025 to zero in September 2025. Similarly, insurance companies reduced their holdings from 0.29% to zero during the same period. This institutional exodus suggests sophisticated investors have limited confidence in the company's prospects, despite recent operational improvements.

The increase in non-institutional holdings from 19.54% to 23.13% indicates retail investor interest, possibly attracted by the low absolute share price and recent profit growth. However, the absence of mutual fund participation (zero holdings) and minimal DII presence (7.73%) reflects the company's inability to attract quality institutional capital—a significant red flag for potential investors.

Stock Performance: Volatile Trading with Limited Long-Term Data

Dar Credit & Capital's stock performance reveals a company with limited trading history and high volatility. The stock gained 2.78% on November 12, 2025, outperforming the Sensex's 0.78% gain by 200 basis points. However, the one-week performance shows a decline of 1.86% compared to the Sensex's 1.28% gain, resulting in negative alpha of 3.14 percentage points.

The three-month return of 14.43% significantly outperforms the Sensex's 5.34% gain, generating positive alpha of 9.09 percentage points. This recent outperformance coincides with the company's improving quarterly results and upgraded valuation grade. However, the absence of six-month, one-year, and longer-term return data limits the ability to assess sustained performance trends.

The stock trades below its 5-day, 20-day, and 50-day moving averages, all hovering in the ₹54-56 range, suggesting recent price weakness despite the longer three-month uptrend. The 52-week high of ₹66.00 represents 18.92% upside from current levels, whilst the 52-week low of ₹48.00 sits 13.51% below the current price, indicating the stock has traded within a relatively narrow band.

Investment Thesis: Growth Momentum Insufficient to Offset Quality Deficit

The investment case for Dar Credit & Capital rests on several conflicting pillars. On the positive side, the company has demonstrated consistent revenue growth, improving profitability margins, and a debt-free balance sheet that provides financial stability. The recent quarterly results show accelerating profit growth, with net profit rising 47.93% year-on-year in Q2 FY26. The company's five-year sales CAGR of 27.50% and EBIT CAGR of 57.25% reflect genuine business expansion.

However, these positives are overwhelmed by fundamental quality concerns. The company's average ROE of 6.45% and latest ROE of 7.14% remain far below acceptable thresholds for wealth creation in financial services. The ROCE of 4.01% suggests even operational returns are inadequate. The complete exit of FII and insurance holdings, combined with zero mutual fund participation, indicates sophisticated investors lack confidence in the company's prospects.

Key Strengths & Risk Factors

Outlook: What to Watch in Coming Quarters

The company's trajectory over the next 12-18 months will largely depend on its ability to translate profit growth into improved capital efficiency. Investors should monitor quarterly ROE trends closely—any sustained improvement above 12% would represent a meaningful quality upgrade. Conversely, stagnation in the 6-8% ROE range, despite revenue growth, would confirm structural limitations in the business model.