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Disbursements recovering; share of corporate loans declines

* Indostar Capital Finance (INDOSTAR)’s 3QFY21 PAT was down ~25% QoQ to INR242m. While operating profit was up 42% QoQ owing to a stronger topline and lower opex, a spike in provisions (INR459m v/s INR87m) led to lower PAT.

* The quarter was characterized by improving disbursements, continued loan book run-down, and a stable GNPL ratio.

Key highlights for the quarter

* Total disbursements picked up to 75% of YoY levels to INR6.6b. Retail lending disbursements also improved to 80% of YoY levels to INR4.8b, led by housing and SME finance, while vehicle finance disbursements remained tepid.

* Collection efficiency (CE) improved to 137% in Dec’20 from 92% in Sep’20. As a result, the proforma GNPL ratio was largely stable QoQ at 2.8%. The company maintained 38% PCR on its GNPLs.

* INDOSTAR restructured 4% of its vehicle finance book and 3.8% of its SME book. No restructuring was seen in the affordable housing finance book.

* Liquidity has increased to 39% of borrowings.

Key concall highlights

* Stage 1 was 74% and Stage 2 was 23% (Stage 2 includes the restructured book). A very limited corporate book was reported in Stage 2. Pre-COVID, Stage 2 loans were far lower than current levels.

* Total provisions on the BS (incl. Stage 3) stood at INR5.5b. This includes INR2.55b management overlay provisions.

* ECLGS is INR2.25b thus far.

Other highlights

* Total AUM declined 3% sequentially to INR91b, led by 8% QoQ decline in corporate AUM to INR23b. The share of corporate AUM is at multi-year lows of 25%. INDOSTAR plans to reduce this to sub-10% by Mar’22.

* The spread on loans was largely stable at 3.7%.

* ICICIBC’s partnership AUM stood at INR6.5b. Cost of borrowings from ICICIBC has been reduced from 10.4% to 8.6%. Also, first-loss guarantee has been reduced from 8% to 5% on incremental loans.

* The C/I ratio stood at 51% v/s 40% YoY and 67% QoQ. CAR is steady at 35%.

Valuation and view

Over the past two years, INDOSTAR has focused on the ‘retailization’ of the loan book. The share of retail loans has increased from 61% to 75% over the past seven quarters and is likely to increase to 90%+ over the next 4–6 quarters. While spreads are averaging at 3.5–4%, higher liquidity on the balance sheet has impacted NIM. While the GNPL ratio has surprised us positively, the restructured book (3.6% of retail loans) is higher v/s most peers. Over the next two years, we expect AUM growth to be modest as the uptick in retail lending would be offset by run-down in the corporate book. We forecast 2% RoA / 5% RoE in FY23E. Maintain Neutral, with TP of INR355 (1x FY23E BVPS).

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