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Taking the right business decisions; on course for a turnaround

Indostar reported an operationally healthy 3QFY22. Key highlights were: a) strong momentum with the highest-ever quarterly disbursements of INR14.6b, up 31% QoQ; b) sustained investments in branches (+65 branches in 3Q to 343) and employees (+395 in 3Q to 2,635), with the company further strengthening its presence in the North, East and North-East regions; c) improvement in reported NIMs by 110bp QoQ/180bp YoY to 6.4%; and d) elevated credit costs of ~190bp (second-lowest in the last five quarters) that impaired PAT, albeit, PPoP was up 14% QoQ.

Indostar reported 3QFY22 PAT of INR145m, which declined 63% QoQ.

Gross AUM was largely flat YoY but grew 18% QoQ to INR92.4b. Corporate loans dropped 32% YoY with its proportion declining to ~18%. Retail AUM was up 9% YoY/15% QoQ to INR76b with healthy growth across CV and Housing Finance segments.

Given its reinforced senior leadership team, hub-and-spoke model-driven smart branches, separate collection vertical, and healthy asset quality in incremental lending post-COVID, Indostar is poised for a steady improvement in its RoA/RoE profile.

Indostar has taken sound strategic business decisions especially in its sourcing/underwriting verticals. With a visibility on disbursement momentum, we estimate 40%/150% AUM/PAT CAGR over FY22-24 aided by healthy NIM (7.3%-7.8%) and benign credit cost (1.3%-1.4%) in the medium term. We remain positive on the long-term build-out of this franchise. We reiterate our BUY rating with a TP of INR320 (premised on 1x FY24E BVPS

Strong momentum in Retail disbursements; collections healthy

Disbursements continued to gain momentum and the company reported its highest-ever quarterly disbursement of INR14.6b v/s INR11.1b in 2QFY22. Disbursements were strong across CV and Housing Finance. CV Finance

Collections held up well and remained in excess of 140% all through the quarter. The company is building separate collections vertical to further improve its collections machinery and demonstrate a sustainable improvement in asset quality

Reported GS3 improved QoQ; deterioration seen in GNPA and Gross Stage 2

GS3 declined 40bp QoQ to 4.3% while NS3 was flat QoQ at 2.3%. In absolute terms, GS3/NS3 stood at INR3.6/1.9b respectively. PCR declined to 48% v/s 52% a quarter ago

Including the impact of the RBI circular, GNPA stood at 7.2% while Stage 2 increased to 27% (v/s 21% in 2QFY22). The elevated credit costs during the quarter were because of a conservative provisioning policy adopted by the company. Indostar does not foresee any economic losses because of the credit costs taken in 3QFY22 and the company expects to be able to deliver provision reversals in the coming quarters.

As on 9MFY22, the total amount restructured in retail loans stood at INR5.4b (flat QoQ) – 7.1% of gross retail AUM. CV/SME restructuring stood at 6.8/12.1% while the restructuring was minimal in affordable housing finance.

Healthy liquidity and strong capital adequacy; spreads improved 40bp QoQ

Liquidity on balance sheet remains healthy and CAR stood at 35%. Debt-toequity was at 1.5x

Reported CoB dropped 50bp QoQ to 9% and reported yields were down 10bp QoQ to 13.1%. Reported spreads improved 40bp QoQ to 4.1% driven by improving disbursement yields in the retail book.

Key highlights from the management commentary

Indostar is also entering into tie-ups with smaller NBFCs who have deep penetration in the Tier3/4 cities. It has already tied-up with an NBFC which has 24 branches in South India

About 90% of the book is in stage 1 for the fresh disbursements done postCOVID.

The company targets to grow to 380-400 branches by Mar'22 and expects to add another 150-200 branches in FY23

Valuation and view

With a focus on ‘retailization’, the share of Retail loans has increased to 82% from 69% over the last two years. It is likely to increase to more than 90% over the next 3-4 quarters. The proportion of the restructured book (7.1% of gross Retail AUM) is higher than its peers. Indostar has strengthened its senior leadership team and is investing in digital initiatives/smart branches to build a strong franchise. While the Corporate book will continue to run down, we expect the Retail book to start exhibiting strong growth from FY23 onwards. It has made conservative provisions on stressed loans and we expect credit costs to start turning benign over the next two years.

We believe that Indostar has made some sound strategic business decisions and it is on the cusp of a turnaround. Risk reward is favorable at 0.8x FY23E P/BV. With a visibility on disbursement momentum, we estimate 40%/150% AUM/PAT CAGR over FY22-24E aided by healthy NIM (7.3%-7.8%) and benign credit cost (1.3%-1.4%) in the medium term. We remain positive on the long-term build-out of this franchise. We reiterate our BUY rating with a TP of INR320 (premised on 1x FY24E BVPS), implying 31% potential upside.

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