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Indostar Capital Finance (Indostar) reported an improvement in business momentum during the quarter. The key highlights: 1) 3QFY24 disbursements rose ~6% QoQ to ~INR13.5b; 2) it invested in human capital (added 185 employees in 3Q, taking the total count to ~3,700); 3) the CV segment contributed ~83% to the retail disbursement mix; and 4) asset quality improved with GS3 declining ~140bp QoQ (including sell-downs in SME).

Financial highlights:

-      Indostar reported a 3QFY24 PAT of INR169m, which declined 32% QoQ (PQ: INR248m). This decrease was attributed to a revenue loss of ~INR370m resulting from the ARC sale in both the corporate and SME portfolios.

-      Total AUM stood at ~INR80.4b and grew 4% QoQ. Corporate loans declined ~69% YoY, with their proportion at ~5% as of 3QFY24. Retail AUM grew 19% YoY/4% QoQ to INR76.6b. During the quarter, Indostar sold a portion of its SME loan portfolio, aggregating to a principal outstanding of ~INR2.9b to an ARC.

-      Asset quality improved with GS3/NS3 declining 140bp/90bp QoQ to 5.3%/2.4%.

-      Bolstered by a recent credit rating upgrade from CARE to AA-/Stable, along with plans to monetize SRs and a gradual improvement in the borrowing mix towards bank borrowings, the company is well-poised to demonstrate a consistent improvement in its RoA profile.

-      With better visibility on disbursement momentum, we estimate 34%/19% AUM/PAT CAGR over FY23-26, aided by healthy NIM (7.0-7.2%) and benign credit costs (~1.2%) over FY25-26. Reiterate BUY with a TP of INR245 (premised on 0.9x FY26E BVPS).

Disbursements in used CV continue to gain momentum

-      Disbursements were healthy across CV and Housing Finance. CV Finance disbursements for 3QFY24 stood at INR10.7b (PQ: 10b).

-      Indostar has strategically prioritized the Used CV segment, with ~83% of its 3QFY24 retail disbursements coming from this segment. A change in product mix towards the used CV segment will enable higher blended yields.

Key highlights from the management commentary

-      Management targets to scale up to an AUM of ~INR100b by FY24 and ~INR130b by FY25. We model an AUM CAGR of ~34% over FY23-FY26E.

-      It guided for an RoA of ~2.5% by FY26 with a leverage of 4.0-4.5x.

Housing Finance

-      HFC avg. yields of 16.1% and spreads to be maintained at 5.25-5.5%

-      The company launched an automated loan kit and streamlined processes for e-stamping and loan signing.

Valuation and view

-      Indostar has strategically prioritized the expansion of its loan book in the used CV and affordable housing finance segments. It anticipates that a reinforced management team, enhanced processes, and a favorable economic climate will serve as catalysts for growth in these segments.

-      With the sell-downs of stressed Corporate and SME loans to ARC, both of these segments now contribute only ~14% of the total AUM mix. It has made conservative provisions on stressed loans, and we expect credit costs at ~1.2 in each of FY25 and FY26.

-      Over the last two quarters, Indostar has made some sound business decisions, which can help this franchise make a turnaround. The risk-reward is favorable at 0.7x FY26E P/BV. We have a BUY rating on the stock with a TP of INR245 (based on 0.9x FY26E BVPS).

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