REDUCE on Indostar Capital Finance - Soft core; asset quality concerns galore - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

INDOSTAR's 3QFY21 earnings were ahead of our estimates aided by one-off gains on de-recognition of loan assets. The company witnessed improving business traction, with a broad-based rise in disbursals (~3x QoQ) - a comfortable capitalisation offers valuable dry powder for growth. Despite a reasonable asset quality performance with pro forma GNPAs at 2.8% (vs. 2.9% in 2Q), we are cautious in our outlook given the sizeable pool of GS-II (~20% of loans), underpinning our REDUCE rating (revised target price of INR309). In the near term, we will watch for steps towards compliance with promoter shareholding requirements and possible inorganic growth.

Weak core operating performance: Adjusted for one-off gains of INR300mn on de-recognition of loans in 3Q, PPOP dipped ~8% sequentially on the back of a 14.6% drop in NII (15.9% below our estimates). The significant sequential dip in NII was driven by a lower margins. We reduce our NIM forecasts over FY21-23E to 6.4% from 6.7% earlier.

Asset quality concerns : Pro forma GNPAs were just 2.8% and the company restructured ~3.7% of its retail portfolio. The corporate book, which has been the largest source of stress, witnessed no restructuring (except for DCCO extension in select projects). GS-II stood at ~20% and was significantly higher than pre-COVID-19 levels and peers (SHTF reported a GS-II of ~11% in 3QFY21) with retail businesses contributing disproportionately. We are cautious on asset quality as we build GNPAs of 4.8% in FY21E.

Business traction improving: INDOSTAR witnessed a sustained uptrend in disbursals in 3QFY21, clocking overall disbursals of ~INR6.6bn (~3x QoQ), led by the retail segment, which constituted ~72% of overall disbursals. However, overall AUMs de-grew 2.4% QoQ, driven by conscious de-growth in the corporate segment (-7.6% QoQ, part of a conscious strategy) and higher repayments in the VF segment (-3.7% QoQ). Although the company is comfortable on capitalisation (CRAR of ~35%), we build in an AUM CAGR of 8.8% over FY21-23E.

Shares of Indostar Capital Finance Ltd was last trading in BSE at Rs.327 as compared to the previous close of Rs. 341.85. The total number of shares traded during the day was 7014 in over 631 trades.

The stock hit an intraday high of Rs. 343.75 and intraday low of 326.5. The net turnover during the day was Rs. 2326633.

Source : Equity Bulls

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