Asset quality risks persist
INDOSTAR’s earnings were below estimates on account of worse-thanexpected operating performance. The company, like many of its peers, reported a sharp improvement in retail collection efficiency (~100% in October; incl. overdues). De-growth in the corporate portfolio will continue to weigh down on overall growth in the near term, and this portfolio could continue to pose asset quality risks. This drives our REDUCE rating (target price of Rs 303). In the near term, we will watch for steps towards compliance with promoter shareholding requirements and possible inorganic growth.
* Asset quality:
INDOSTAR sold VF GNPAs worth Rs 1.6bn to ARCs, and this contributed to the sharp reduction in GNPAs. INDOSTAR saw a .On the wholesale side, billing and collections were limited. However, the management remarked that two accounts had crossed 30dpd. The company expects significant recoveries from a singular developer NPA in FY20. So far, the company has restructured ~1.4% of retail AUMs. While we have lowered our GNPAestimates(6.2%in FY21E)to factorin salestoARCs and a significant improvement in retail collection efficiency, they remain elevated due to the risk of high corporate NPAs.
* Funding and liquidity trends:
Since the capital infusion by Brookfield, INDOSTAR has been quite well placed on these fronts. CRAR stood at ~35%, which will support strong growth (organic and possibly inorganic). Liquid assets at Rs 25.8bn, amounted to ~36% of borrowings. More recently, the company has been able to raise funds at rates between 8-8.8%.
Overall AUMs de-grew 15.2/7.4% due to 31.7/15.5% de-growth in the wholesale book. INDOSTAR intends to entirely run down its wholesale portfolio over the next 12-15 months. However, it is difficult to ascertain the period over which this could occur. On the retail side, the company looks to increase disbursals meaningfully. We expect the overall portfolio to de-grow 11% in FY21E, led by de-growth in the corporate portfolio. We build AUM growth of ~17.8% over FY22-23E
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