Near term headwinds
INDOSTAR’s 4Q performance was considerably below expectations as high credit costs on a/c of accelerated w/offs and COVID-19 related provisions wiped out profits. Asset quality was optically stable QoQ, aided by the accelerated write-offs. AUMs de-grew, led by the corporate book. The equity infusion by Brookfield is certainly a positive development, especially given the pedigree of the investor.) Not only does it augment the co.’s capital and liquidity buffers and its debt-raising ability but it also bolsters long-term growth prospects. However, near term challenges await- (1) AUMs are likely to de-grow in FY21E in the absence of adequate disbursal opportunities, (2) stress is likely to crystallise in view of broader economic circumstances and significant moratorium %, and consequent provisions will limit earnings. These underpin our reduce rating (TP of Rs 253, 0.9xFY22E ABV).
* Asset quality: GNPAs dipped 4.2% QoQ to Rs 3.65bn (4.5%), however, they were cushioned by the standstill classification impact and by accelerated w/offs. Corp GNPAs were flat at Rs 1.55bn (5.4%) and VF GNPAs dipped to Rs 1.8bn (5.6%). The co made significant w/offs in the corp book relating to previously identified stressed exposures (fitness, media and real estate co., refer table page 2). Given the significant proportion of the portfolio under moratorium (~90% by value), we expect GNPAs to reach 7.2% by FY21E, even as the mgt has indicated that collection efficiency has improved and that the proportion of loans under moratorium 2.0 is lower (vs. 1.0).
* Funding and liquidity: The co.’s performance on this front has improved considerably post the equity infusion announcement, as indicated by (1) CRAR, which has risen to ~41% (May-20) from 25.3% (Mar-20), (2) a QoQ rise in borrowings (5%), led by an increase in off-b/s financing (3) incremental funds of Rs 8.5bn raised in 4QFY20 (vs. Rs 4.5bn since the lockdown and Rs 4bn in 3QFY20) (4) liquid assets and undrawn bank lines of Rs 20.1bn which form ~21% of AUMs and the mgt indicated that this would suffice to meet all obligations for the year assuming no collections.
* COVID-19 related management commentary:
(1) The co. availed of moratorium on some portion of its bank borrowings,
(2) Moratorium was granted only in case of standard a/cs in the first phase,
(3) The mgt expects the % of book under moratorium to reduce drastically under the second phase and it has seen an increase in collection efficiency,
(4) The co. raised funds under both rounds of the TLTRO
(5) PSBs, the NHB and the SIDBI have been major sources of incremental funds, by way of securitization and otherwise,
(6) Incremental CoF was 9-9.5%,
(7) The management expressed its intent to bring down costs, by way of branch rationalisation (10% reduction in FY21E) and freezing new hiring.
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