Published on 18/11/2020 12:02:47 PM | Source: HDFC Securities Ltd

Buy IndoStar Capital Finance Ltd For Target Rs.318 - HDFC Securities

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Buy IndoStar Capital Finance Ltd For Target Rs.318 - HDFC Securities

Our Take:

IndoStar Capital Finance Ltd (ICFL) has successfully refined its business model in the past couple of years to drive quality growth and produce superior return on equity. The company has established itself as a robust and diversified lending institution in India, and has sharpened its focus on retail lending. The company has strong capital adequacy, a comfortable liquidity position, a resilient operating model and increasing retail mix. The segments it caters to are pivotal in the long-term secular growth trajectory of the Indian financial services sector and are well prepared to capitalise on the opportunity to increase market share. With a strong capital and liquidity position after Brookfield capital infusion, IndoStar Capital Finance Ltd remains well poised to capitalise on favourable industry dynamics and multiple opportunities in play and to grow profitably. ICFL remains optimistic about the growth and outlook of its retail business verticals as the economic environment returns to the new normal of post-pandemic world. The company expects its growth to be driven by its retail business division viz. CV Finance and Affordable Housing Finance followed by SME Finance.

IFCL’s strong capitalisation, diversified product offerings and experienced management team partially offset the inherent vulnerability in its current asset quality, given the concentration risks. The segments in which the company operates, especially vehicle financing, SME and real estate, are facing challenges; thus it could be difficult for the company to grow its franchise in near term. The equity capital infusion would however, strengthen its ability to grow its loan book.


Valuations and View:

ICFL reported sharp improvement in retail collection efficiency in Q2FY21. However degrowth in its wholesale book will drag down its growth in AUM despite healthy capital adequacy ratio. Also ICFL keeps facing asset quality risks in its wholesale book as well as part of its retail book (CV financing, SME Financing). Inorganic growth may help ICFL to scale up its business at one shot. ICFL has restructured 1.4% of its retail book.

Though we remain optimistic on its new promoter strength and high capital adequacy, legacy issues can continue to haunt ICFL for some more time. We think the base case fair value of the stock is Rs.291 (1.05xFY22E ABV) and the bull case fair value is Rs.318 (1.15xFY22E ABV) over the next two quarters. Investors can buy the stock on dips to Rs.261-265 band (0.95xFY22E ABV) and add more on dips to Rs.234-238 band (0.85xFY22E ABV). At the LTP of Rs.295 it quotes at 1.07xFY22E ABV.


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