Dar Credit & Capital Q3 FY26: Growth Momentum Masked by Valuation Concerns

The December quarter results underscore the company's ability to maintain growth momentum in its lending operations, with net sales (interest earned) reaching ₹12.56 crores, up 5.55% quarter-on-quarter and 25.10% year-on-year. This marked the seventh consecutive quarter of revenue expansion, reflecting sustained demand for the company's financial products across personal loans and MSME financing segments. The company's market capitalisation stands at ₹61.39 crores, positioning it firmly in the micro-cap category with limited liquidity and heightened volatility.

Financial Performance: Margin Expansion Drives Profitability

In Q3 FY26, Dar Credit & Capital demonstrated disciplined cost management alongside revenue growth, with operating profit before depreciation, interest, and tax (excluding other income) climbing to ₹8.83 crores, representing the highest level in at least seven quarters. The operating margin (excluding other income) expanded to 70.30% from 69.82% in the corresponding quarter last year, reflecting improved operational efficiency despite rising interest costs in the broader lending environment.

The company's net profit after tax margin stood at 20.06% in Q3 FY26, a marginal decline from 21.01% in Q2 FY26 but substantially higher than the 17.93% recorded in Q3 FY25. This year-on-year margin improvement of 213 basis points signals effective pricing strategies and controlled operational expenditure. Employee costs declined sequentially to ₹2.12 crores from ₹2.30 crores in Q2 FY26, though they remained elevated compared to ₹1.72 crores in the year-ago period, reflecting strategic investments in talent acquisition to support business expansion.

Interest expenses rose to ₹5.33 crores in Q3 FY26 from ₹4.96 crores in the previous quarter, indicating higher borrowing costs as the company scaled its loan book. On a full-year basis for FY25, interest costs totalled ₹19.00 crores, up from ₹16.00 crores in FY24, reflecting the capital-intensive nature of the lending business. The tax rate in Q3 FY26 stood at 24.78%, significantly higher than the 12.89% recorded in Q2 FY26, normalising after an unusually low tax incidence in the previous quarter.

Operational Challenges: Weak Return on Equity Constrains Investor Appeal

Despite consistent revenue growth, Dar Credit & Capital's return on equity remains a critical concern, averaging just 7.54% over recent periods and registering 7.04% in the latest reported period. This modest ROE significantly trails industry benchmarks for well-capitalised NBFCs, indicating suboptimal capital efficiency and limited ability to generate shareholder value relative to equity deployed. The company's balance sheet as of March 2025 showed shareholder funds of ₹73.52 crores against current liabilities of ₹149.08 crores, resulting in a debt-to-equity ratio of 1.54 times, which represents elevated leverage for a micro-cap NBFC.

The company's fixed assets declined to ₹7.44 crores in FY25 from ₹8.22 crores in FY24, suggesting minimal capital expenditure on infrastructure during the year. This lean asset base aligns with the NBFC business model, which relies primarily on financial assets (loan book) rather than physical infrastructure. However, the absence of disclosed data on gross non-performing assets (GNPA) and net non-performing assets (NNPA) in the provided information limits comprehensive assessment of asset quality, a critical metric for evaluating lending businesses.

Industry Context: Micro-Cap NBFCs Navigate Tightening Liquidity

The broader NBFC sector has faced headwinds from tightening monetary conditions and increased regulatory scrutiny on unsecured lending practices. Micro-cap NBFCs like Dar Credit & Capital operate in a particularly challenging environment, competing with well-capitalised peers for funding while serving borrower segments that may carry higher credit risk. The company's focus on personal loans and MSME financing positions it in growth segments, but execution quality and risk management capabilities become paramount differentiators.

Dar Credit & Capital's institutional holding stands at a mere 6.60%, with zero participation from foreign institutional investors (FIIs) and mutual funds as of December 2025. This minimal institutional presence reflects limited analyst coverage, poor liquidity, and potentially heightened concerns about the company's financial strength and governance standards. The absence of institutional investors also constrains access to lower-cost capital and limits the stock's visibility among mainstream investors.

Peer Comparison: Valuation Discount Reflects Quality Concerns

Within the NBFC peer group, Dar Credit & Capital trades at a price-to-earnings ratio of 8.60x, significantly lower than the peer average of approximately 20x (excluding loss-making entities). The company's price-to-book value of 0.61x also represents a substantial discount to book value, suggesting market scepticism about the true quality of the loan book or future earnings sustainability. In contrast, the company's ROE of 7.54% substantially exceeds the peer average of approximately 1.49%, though this comparison is skewed by the inclusion of weaker peers.

The valuation discount reflects several factors: limited scale (₹61.39 crores market cap versus larger peers), weak institutional backing, below-average ROE despite being highest in the peer set, and elevated leverage. While the low P/E and P/BV ratios might appear attractive on surface, they likely incorporate significant risk premiums for execution uncertainties, asset quality concerns, and the inherent volatility of micro-cap stocks.

Valuation Analysis: Attractive Multiples Offset by Fundamental Weakness

At the current price of ₹43.00, Dar Credit & Capital trades at compelling valuation multiples: P/E of 8.60x (trailing twelve months), price-to-book value of 0.61x, and EV/EBITDA of 19.87x. The company's proprietary valuation grade has been upgraded to "Very Attractive" from "Attractive" in August 2025, reflecting the significant discount to book value and reasonable earnings multiple. The dividend yield of 1.18% provides modest income, with the latest dividend of ₹0.50 per share declared with an ex-date of November 21, 2025.

However, the attractive valuation must be weighed against the company's weak fundamental strength. The average ROE of 7.54% falls well short of the 15% threshold typically expected from quality financial services businesses. The stock currently trades 34.85% below its 52-week high of ₹66.00 reached earlier in the fiscal year, though it remains 7.50% above the 52-week low of ₹40.00. This price action suggests investors have repriced the stock downward to reflect concerns about earnings quality and growth sustainability.

Shareholding Pattern: Institutional Disinterest Raises Red Flags

The shareholding pattern reveals concerning trends in institutional participation. Promoter holding remained steady at 69.14% in Q3 FY26, unchanged from Q2 FY26 but marginally higher than the 68.98% recorded in May 2025. This stability indicates continued confidence from the founding shareholders, led by Ramesh Kumar Vijay (15.91% direct holding) and family members across various entities.

The complete absence of FII and mutual fund participation as of December 2025 represents a significant negative. FII holding collapsed from 3.71% in May 2025 to zero by September 2025, whilst insurance company holdings similarly declined from 0.29% to zero during the same period. Other domestic institutional investor (DII) holdings also decreased sequentially from 7.73% to 6.60%, suggesting continued institutional selling pressure. The only bright spot came from non-institutional investors, whose stake increased from 23.13% to 24.27% quarter-on-quarter, though this category typically includes retail investors and high-net-worth individuals with potentially shorter investment horizons.

Stock Performance: Severe Underperformance Across All Timeframes

Dar Credit & Capital's stock performance has been disappointing across multiple timeframes, with the shares declining 22.17% over the past three months compared to a marginal 0.60% decline in the Sensex, resulting in negative alpha of 21.57 percentage points. The six-month performance shows an 11.34% decline versus a 4.64% gain in the benchmark index, translating to underperformance of 15.98 percentage points. Year-to-date, the stock has fallen 6.52% compared to the Sensex decline of 1.48%, underperforming by 5.04 percentage points.

The stock currently trades below all major moving averages, sitting at ₹43.00 versus the 5-day moving average of ₹43.94, 20-day average of ₹45.82, 50-day average of ₹46.49, and 100-day average of ₹50.20. This technical breakdown reinforces the negative fundamental narrative, with the stock establishing a clear downtrend since reaching its 52-week high. The delivery volumes have shown volatility, with recent delivery percentage at 66.67% on February 11, 2026, though the trailing one-month average delivery volume of 85.14% suggests relatively stable investor interest despite price weakness.

Investment Thesis: Growth Momentum Insufficient to Offset Structural Concerns

The investment case for Dar Credit & Capital presents a mixed picture across the four key evaluation parameters. The company's quarterly financial trend remains positive, with Q3 FY26 marking the seventh consecutive quarter of revenue growth and the highest net profit on record. However, the quality grade stands at "Below Average," reflecting weak long-term financial performance characterised by modest ROE of 7.54% and minimal institutional participation.

Valuation appears "Very Attractive" at current levels, with the stock trading at 0.61x book value and 8.60x trailing earnings. However, this valuation discount exists for valid reasons: limited scale, high leverage, institutional exodus, and below-average capital efficiency. The technical trend remains decidedly negative, with the stock trading below all moving averages and showing consistent underperformance versus the benchmark index across all measured timeframes.

Key Strengths & Risk Factors

Outlook: What to Watch

The forward outlook for Dar Credit & Capital remains clouded by the tension between operational momentum and fundamental weakness. Whilst the company has demonstrated consistent revenue growth and improving margins over recent quarters, the persistent challenges of low ROE, high leverage, and institutional exodus suggest deeper concerns about the sustainability of the business model. The micro-cap nature of the stock further constrains liquidity and increases volatility, making it unsuitable for risk-averse investors.

For the stock to merit a rating upgrade, management would need to demonstrate tangible improvements in capital efficiency, potentially through a combination of better asset pricing, improved loan book quality, and strategic deleveraging. Attracting institutional investors back to the stock would require greater transparency around asset quality metrics, enhanced corporate governance standards, and a track record of delivering double-digit ROE consistently over multiple quarters.