Maintain REDUCE on Indostar Capital Finance - Stress yet to subside; balance sheet yet to stabilise - HDFC Securities

Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

INDOSTAR's 4QFY21 earnings were significantly below our estimates on account of elevated provisioning (~17% of AUM, annualised) as the asset quality continued to deteriorate. GNPA inched up to 4.4% (3QFY21 pro-forma at 2.8%), while the GS-II portfolio increased from 20% to 25% sequentially. Business growth continued to gain traction with disbursals growth at 31% QoQ. INDOSTAR is targeting high growth in the vehicle (46% of AUM) and affordable housing segments (12%), while running down its corporate book to sub-10%. We revise our FY22/FY23 earnings estimates downward by 10.6/10.3%, largely due to moderation in loan growth and higher provisioning for the incipient stress pool and maintain our REDUCE rating with revised TP of INR 285 (earlier INR 312).

Asset quality - no signs of stability: INDOSTAR's asset quality continued to disappoint on account of a sub-par vehicle finance (VF) back book (acquired in 2019). VF's GNPA shot up to 8%, along with a further ~32% in GS-II bucket, indicative of incipient stress in the portfolio. SME portfolio GNPA also increased to 2.6%, while impairment recognition in the corporate portfolio seems to be over (GNPA at 0%). With an elevated early-bucket pool (25% of AUM, including 4.7% restructured portfolio) and the likely impact from the second wave, near-term stress is unlikely to subside.

Accelerated provisioning could induce normalised provisions: Provisions were clocked in at INR 3.8bn (~17% of AUM, annualised) during the quarter. While the GS III PCR nearly doubled sequentially to 52%, provisioning on GS I and II rose to ~7% of AUM, reflecting a high proportion of assets in the GS- II bucket. We factor in provisions of 1.3% for FY22-23E.

Retail-driven growth, inorganic opportunities awaited: Retail disbursals grew by 78% QoQ, as INDOSTAR continues to rationalise its corporate loan book. The company continues its focus on vehicle finance and affordable housing (~INR 10bn AUM) for growth. However, with CAR of ~35% and promoter shareholding at 93%, we believe that the company could look at inorganic growth triggers to help enhance its return ratios and help achieve regulatory compliance on the shareholding pattern as well.

Shares of Indostar Capital Finance Ltd was last trading in BSE at Rs.354.55 as compared to the previous close of Rs. 357.55. The total number of shares traded during the day was 9656 in over 833 trades.

The stock hit an intraday high of Rs. 356.6 and intraday low of 338.35. The net turnover during the day was Rs. 3392517.

Source : Equity Bulls

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