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Making steady progress in its core vehicle finance segment

Asset quality largely stable

Indostar Capital Finance (Indostar) reported healthy business momentum in 2QFY25. Key highlights: 1) consolidated disbursements grew ~36% YoY to ~INR17.2b and retail AUM rose ~35% YoY to ~INR99b; 2) the company added 594 employees in 2QFY25, taking the total count to ~5,170; 3) the CV segment contributed ~87% to the retail disbursement mix; and 4) asset quality was broadly stable with standalone GS3 remaining steady at ~5% and standalone NNPA rising ~15bp QoQ to 2.5%.

Financial highlights:

* Indostar reported a consol. PAT of INR317m, which grew ~28% YoY. In 1HFY25, PAT declined ~11% YoY. We expect PAT to grow ~70% YoY in 2HFY25. NII grew ~41% YoY to INR1.1b.

* Opex jumped ~50% YoY to INR1.3b. Operating expenses were higher due to increased hiring at the Feet-on-Street (FoS) level, recruitment at senior management positions, and ongoing expansion of the branch network.

* PPOP stood at INR371m (PY: INR86m due to the one-offs). Credit costs were INR193m, translating into annualized credit costs of ~80bp in 2Q.

* Total consol. AUM (including Corporate) stood at ~INR101b, up ~31% YoY and ~6% QoQ. VF + HFC AUM grew ~52% YoY and 9% QoQ.

* Asset quality was largely stable, with standalone GNPA remaining steady at ~5% and standalone NNPA rising ~15bp QoQ to 2.5%. Management shared that it does not foresee any need to raise its credit cost guidance.

* With better visibility on disbursement momentum, we estimate a CAGR of 37%/47% in AUM/PAT CAGR over FY24-27, aided by a healthy improvement in NIM to 6.5%/6.9% in FY25/FY26E. Reiterate BUY with a TP of INR315 (premised on 1.2x Sept’26E BVPS).

Healthy disbursements leading to ~31% YoY growth in AUM

* Disbursements in vehicle finance (VF) grew ~3% QoQ. VF disbursements stood at INR14.5b (PQ: INR14.1b).

* The company expects AUM to scale up to ~INR90b and ~INR120b by FY25 and FY26, respectively. ~99% of its CV disbursements are in the used CV segment, which positions it well for higher yields.

Key highlights from the management commentary

* Indostar expects money from the sale of the housing finance business to be used in its core businesses – vehicle finance and small-ticket MSME loans.

* Management guided for stronger loan growth and improved profitability. Yields have started going up, incremental CoB has started coming down, and it has begun repaying some of its high-cost NCDs (~INR5b of high cost NCDs were paid down in 2Q).

Valuation and view

* Indostar has strategically prioritized the expansion of its loan book in the used CV segment. A reinforced management team, enhanced processes, and a favorable economic climate will serve as catalysts for growth in this segment.

* Corporate and SME segments now contribute only ~6% to the total AUM mix. The company has made conservative provisions on stressed loans, and we expect credit costs to remain benign in the near future. The risk-reward is favorable at 1x FY26E P/BV. Reiterate BUY rating on the stock with a TP of INR315 (premised on 1.2x Sep’26E BVPS).

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