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Soft core; asset quality concerns galore

INDOSTAR’s 3QFY21 earnings were ahead of our estimates aided by one-off gains on de-recognition of loan assets. The company witnessed improving business traction, with a broad-based rise in disbursals (~3x QoQ) - a comfortable capitalisation offers valuable dry powder for growth. Despite a reasonable asset quality performance with pro forma GNPAs at 2.8% (vs. 2.9% in 2Q), we are cautious in our outlook given the sizeable pool of GS-II (~20% of loans), underpinning our REDUCE rating (revised target price of INR309). In the near term, we will watch for steps towards compliance with promoter shareholding requirements and possible inorganic growth.

* Weak core operating performance: Adjusted for one-off gains of INR300mn on de-recognition of loans in 3Q, PPOP dipped ~8% sequentially on the back of a 14.6% drop in NII (15.9% below our estimates). The significant sequential dip in NII was driven by a lower margins. We reduce our NIM forecasts over FY21-23E to 6.4% from 6.7% earlier.

* Asset quality concerns : Pro forma GNPAs were just 2.8% and the company restructured ~3.7% of its retail portfolio. The corporate book, which has been the largest source of stress, witnessed no restructuring (except for DCCO extension in select projects). GS-II stood at ~20% and was significantly higher than pre-COVID-19 levels and peers (SHTF reported a GS-II of ~11% in 3QFY21) with retail businesses contributing disproportionately. We are cautious on asset quality as we build GNPAs of 4.8% in FY21E.

* Business traction improving: INDOSTAR witnessed a sustained uptrend in disbursals in 3QFY21, clocking overall disbursals of ~INR6.6bn (~3x QoQ), led by the retail segment, which constituted ~72% of overall disbursals. However, overall AUMs de-grew 2.4% QoQ, driven by conscious de-growth in the corporate segment (-7.6% QoQ, part of a conscious strategy) and higher repayments in the VF segment (-3.7% QoQ). Although the company is comfortable on capitalisation (CRAR of ~35%) , we build in an AUM CAGR of 8.8% over FY21-23E.

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