MOSL: INDOSTAR CAPITAL FINANCE (INITIATING COVERAGE)-A New Beginning; Retail lending to be 75%+ of overall book by FY22
IndoStar Capital Finance (Initiating Coverage): A New Beginning; Retail lending to be 75%+ of overall book by FY22
(INDOSTAR IN, Mkt Cap USD0.5b, CMP INR411, TP INR525, 28% Upside, Buy)
- IndoStar Capital Finance (INDOSTAR) commenced operations in 2011 with a significant capital commitment (INR9b) by the promoter, Everstone Capital. The company started out as a wholesale lender, and over time utilized the profits from this segment to build new businesses – SME, housing and vehicle finance. It hired Mr Sridhar as Executive VC & CEO in 2017.
- Over the next three years, INDOSTAR aims to make vehicle finance (VF) its key portfolio contributor. While it has organically built a VF portfolio of ~INR10b over the past year, it recently acquired the commercial vehicles (CV) portfolio (~INR36b) of India Infoline Finance. With a special focus on it, vehicle finance book should grow at ~40% CAGR over FY19-22, in our view.
- As a result, the share of retail and SME finance will increase from the current 42% (9MFY19) to 77% by FY22. If this ‘retailization’ strategy is executed well, INDOSTAR will have a healthy mix of high-RoE businesses (corporate and vehicle finance) and highly scalable businesses (SME and housing finance). This strategy will also provide three key benefits: (i) improvement in credit rating, (ii) increasing pool of assets eligible for PSL sell-downs and (iii) ability to increase leverage.
- However, the near-term RoE is likely to be modest at 9-11% due to (a) heavy investment in branch expansion (150 branches opened in the past one year) and (b) low leverage (Tier-I capital of 30%). Over the medium term, its RoE is expected to improve to 13-15% as INDOSTAR’s branches mature, and its long-term sustainable RoE is likely to be 16%. We believe that at the stock’s current valuations of 1.1x FY20E BV and 10x FY20E EPS, the risk-reward for INDOSTAR is favorable. We, thus, initiate coverage on the stock with a Buy rating and a TP of INR525 (1.2x FY21E BV).
IndoStar Capital Finance Ltd. IndoStar Capital Finance Limited is an India-based non-deposit accepting non-banking financial company (NBFC). The Company is engaged in providing financing solutions to corporates and loans to small and medium enterprise (SME) borrowers. It offers vehicle finance and housing finance products. It operates four lines of business, namely corporate lending, SME lending, vehicle financing and housing financing. Its corporate lending business consists of lending to mid-to-large sized corporates in manufacturing, services and infrastructure industries, and lending to real estate developers. Its SME lending business involves providing secured loans to small and medium size enterprises, including businessmen and manufacturers. Its vehicle finance business involves providing financing for purchases of used or new commercial vehicles, passenger vehicles and two-wheelers. Its housing finance business comprises two business lines, namely housing finance and retail housing finance.
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