Moratorium rate down to 59% from 90%
* Indostar Capital Finance (INDOSTAR) reported 1QFY21 PAT of INR472m v/s net loss of INR4.2b in the prior quarter. The quarter was characterized by a stable loan book, healthy PPoP, and modest credit costs.
* During the quarter, Brookfield infused INR12.25b capital via preferential allotment and CCPS. Moreover, by the start of July, it had also completed the open offer. As a result, Brookfield now owns 54% of the company, which shall further increase to 57% post the CCPS conversion.
Loan book stable; 25%+ liquidity on the balance sheet
* AUM was largely stable sequentially at INR100b, with the share of retail lending at 70%. Within corporate lending, the share of non-real estate finance declined to a multi-quarter low of 16%.
* While spreads were largely stable YoY at 4%, cost of funds remains elevated at 10.4%. During the quarter, the company raised INR7.3b in fresh borrowings via banks and market borrowings. INDOSTAR now has INR18b liquidity on the balance sheet, amounting to 25%+ of borrowings.
Moratorium book down to 59% from 90%
* The key improvement in moratorium rate was driven by the retail lending book; the rate stood at 44% as of 31st July. Within the retail lending book, the moratorium rate was as follows – CV: 42%, SME: 58%, and Housing: 25%. However, in the corporate lending book, the moratorium rate remains elevated at 90%.
* Marginal improvement was seen in 1dpd+ in the Retail Lending segment from May to June – CV: 44% to 38%; SME: 15% to 11%; Housing: 1.9% to 1.5%. Also, retail collection efficiency was at 50% of pre-COVID-19 levels in July.
* The company continues to rationalize its branch network, which is down from 322 branches to 212 branches YoY.
* In the Corporate Lending business, yield declined 70bp QoQ to 13.6%.
* The GNPL/NNPL ratio was largely stable at 4.4%/3.5%.
* Post the deal with Brookfield, networth increased to INR40b from INR27b, and CRAR increased to 38% QoQ from 25%.
* It has INR7.2b vehicle finance AUM under the ICICI Bank partnership.
Key concall highlights
* ECL provisions – These were as follows: Stage 1: more than 0.4%; Stage 2: 6–8%; and Stage 3: 27% in CV, 20% in HFC, and 20–22% in SME. INDOSTAR has INR2.8b COVID-19 provisions over and above this.
* Incremental funding is at 8.5–9.5%.
Valuation and view
INDOSTAR’s plan to diversify its loan book has faced headwinds in the tough liquidity environment. On the asset quality front, two large corporate accounts that were stressed have been written off and are out of the books. The key concern pertains to asset quality trends post the lifting of the moratorium, especially since its moratorium rate is higher than that of most peers. While the company is very well-capitalized with a strong new parent, we expect modest growth over the next 12–18 months. Hence, RoE is likely to remain only in the mid-to-high single digits. Maintain Neutral, with TP of INR290 (0.9x FY22E BVPS).
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