Buy Indostar Capital Finance Ltd For Target Rs.484 - Ventura Securities
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Pearl in an oyster
Indostar Capital Finance Ltd (ICFL) commenced lending operations in 2011 & became a public listed entity in May, 2018. In the recent past, ICFL had to undertake several course corrections in its business plans as it navigated multiple disruptions (such as demonetization, GST, IL&FS crisis & now COVID) which were hurdles to growth and asset quality. However, with a new leadership team under Mr. R Sridhar (ex Shriram Transport) & deep pocketed Brookfield now on board, as a co-promoter (along with Everstone), all legacy issues around ownership succession, asset quality & product market fit (transition to a retail lender) have been realized.
We believe that the focus verticals of CV finance, affordable housing and SME (all having multiple sectoral tailwinds) should help ICFL regain its growth trajectory without compromising on asset quality. ICFL’s innovative digital strategy will help overcome the challenges of verticals being high touch point businesses, aiding scalability and data enabled credit underwriting & control. We initiate coverage with a BUY for a price target of INR 484 (1.35x FY24 adj P/B) which represents a 88% from the CMP of INR 258 over the next 24 months. We believe that the market currently is not factoring in:
* 54.8% CAGR of the focused verticals AUM given the conscious rundown of its corporate book.
* balance sheet clean-up through complete provisioning for the legacy impairment.
* equity infusion of INR 12.3bn for a majority stake by marquee investor – Brookfield, which led to improvement in Tier I CAR to 34.6% in FY21
* expected improvement in return ratios- RoAA to 2.7% (+487bps) & RoAE to 12.1% (+1,886bps). By FY26, we expect cost to income to moderate at 33.4% and hence RoAA and RoAE should touch 3.6% and 20.3%.
At the current valuation of 0.7x FY24 adj P/B, ICFL quotes at a significant discount to its peers and warrants a re-rating. The paring of promoter stake from the current 88.2% to 75%, as required by SEBI listing norms, is an overhang on the stock price.
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