Buy Indostar Capital Finance Ltd For Target Rs.325 by Motilal Oswal Financial Services Ltd
Healthy growth in VF AUM; credit costs high
Retail loan book grew ~37% YoY; PAT up ~64% YoY but down ~13% QoQ
Indostar Capital Finance (Indostar) reported a mixed quarter. While business momentum was reasonably good, lower collection efficiency and higher delinquencies in the VF portfolio led to higher credit costs in 3QFY25. Key highlights: 1) consolidated disbursements grew ~17% YoY to ~INR15.7b and retail AUM rose ~37% YoY to ~INR105b; 2) the company added 352 employees in 3QFY25, taking the total count to ~5,524; 3) the CV segment contributed ~81% to the retail disbursement mix; and 4) credit costs were high sequentially at ~INR480m (PQ: ~INR193m), translating into annualized credit costs of ~1.8% (PQ: 0.8%)
Financial highlights:
* 3QFY25 PAT stood at ~INR277m, up ~64% YoY but down ~13% QoQ. NII grew ~48% YoY to INR1.2b.
* Opex rose ~37% YoY to INR1.2b. PPOP stood at INR594m (PQ: INR370m). Credit costs were higher QoQ at ~INR480m (PQ: ~INR193m), translating into annualized credit costs of ~1.8% (PQ: 0.8%).
* Total AUM stood at ~INR106b, up ~32% YoY and ~5% QoQ. VF AUM grew ~51% YoY to INR73b (PQ: ~INR70b).
* Asset quality was largely stable, with standalone GNPA declining ~5bp QoQ to ~4.9% and standalone NNPA rising ~20bp QoQ to 2.7%. Management shared that credit costs were elevated due to a rise in delinquencies over the past 2-3 quarters. However, collections improved and delinquencies declined in the latter half of the last quarter.
* The company is confident of reducing its NPAs by Mar’25, as 2HFY25 is generally better in terms of collections.
* With better visibility on disbursement momentum, we estimate a CAGR of 30%/33% in AUM/PAT over FY24-27, aided by improvements in NIM to 6.6%/6.8% in FY26E/FY27E. Reiterate BUY with a TP of INR325 (premised on 1.3x Sep’26E BVPS).
AUM grew ~32% YoY; healthy growth in VF AUM
* Disbursements stood at INR15.7b in 3QFY25, up ~17% YoY. Vehicle finance (VF) disbursements grew ~18% YoY to INR12.7b (PQ: INR14.5b).
* The company is developing ancillary products such as tyre financing to provide comprehensive solutions to customers.
* Growth in disbursements was aided by strong focus on the retail segment. The retail strategy is successfully playing out for the company, with retail loans now constituting about ~98% of the entire loan book
Key highlights from the management commentary
* Indostar plans to allocate the proceeds from the sale of its HFC subsidiary to its core business segments, including MSME, micro LAP, and CV. These proceeds should be realized toward the end of 4QFY25 or early 1QFY26. 22 January 2025 3QFY25 Results Update | Sector: Financials Indostar Capital Finance 22 January 2025 27
* It aims to increase its borrowings significantly through the banking channel. In 3QFY25, the company raised ~INR9.9b, with 25% sourced from banks. The overall cost of borrowing was ~10bp lower than in the previous quarter.
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 ~5% to the total AUM mix. The company has sold stressed loans in ARC transactions and we expect the company to start FY26 on a clean slate. This should translate into better asset quality outcomes and robust execution, going ahead. The risk-reward is favorable at 1.0x FY27E P/BV. Reiterate BUY rating on the stock with a TP of INR325 (premised on 1.3x Sep’26E BVPS).
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