Indostar Capital Finance IPO

IPO Rating – 51 (Investment Recommended)* 

About the issue

Yet another NBFC plans to hit the market and expects to raise ~Rs.1840 – 1844 crore. The IPO comprises a fresh issue of equity shares aggregating up to Rs. 700 crores and offer of sale of up to 2,00,00,000 equity shares in which Indostar Capital is the major promoter selling its stake of up to 1,85,08,407 shares. The price band fixed for the issue is Rs. 570-572 per share with the face value of Rs. 10 per share. The minimum lot size of the issue is 26 shares and in multiple thereof. The stock will be listed on BSE and NSE. The issue opens on May 9, 2018 and closes on May 11, 2018.

Purpose of the issue

The primary purpose of the net proceeds of the IPO is to augment the company's capital base to meet future needs. The company also expects to gain benefits of listing the equity shares on the exchanges.

Company Background 

Indostar Capital Finance Limited is a leading non-banking finance company (NBFC) registered with the Reserve Bank of India. The company was incorporated in 2009 and is based in Mumbai, India. It provides structured term financing to corporates and loans to small and medium enterprises (SMEs) in India. Further, the company provides housing finance to the salaried and self-employed customers. However, the company has recently expanded their portfolio to offer vehicle finance and housing finance products. The company has four principal lines of business, namely corporate lending, SME lending, vehicle financing and housing financing. Housing finance has a capping of Rs. 30-50lakhs ticket size. Indostar Capital lends secured debt to companies and its lending is based on predictable cash flow, thus lowering its risk and also having collaterals provides a further cushion. The company claims to have a healthy portfolio in the corporate lending segment and has not seen credit loss. Recently, the company has ventured into vehicle financing and housing loan, and has put up a strong team with experience in underwriting. As of December 31, 2017, the company's Corporate Lending Credit Exposure amounted to Rs. 3,969.3 crore which is 76.7 per cent of the total lending, SME Lending Credit Exposure was at Rs. 1,173.3crore, which is 22 per cent of its total lending. Vehicle Finance Credit Exposure amounted to Rs. 14.3 crore and housing finance credit exposure amounted to Rs. 14.9 crore which is 0.3 per cent.

Industry outlook

NBFCs had a difficult 2017 with demonetisation and farm waiver impacting the asset quality and further recoveries. However, vehicle financing, retail and affordable housing have been sectors which have outshined other sectors. Generally, NBFCs have seen lower yields in 2017 and heightened competition. Though companies have been more stable in 2018. The year 2019 is expected to see some upward movement in credit growth with a focus on higher farm income, normal monsoon and expected rural growth.

Financial Performance

Indostar Capital has shown strong financial growth over the previous years. The company's total revenue has grown at CAGR of 31.4 per cent over FY13-17 to Rs. 719.9 crore in FY17 vs Rs. 241.5 crore in FY13. Further, for the nine months ended Q3FY18, the total revenue stood at Rs. 518 crore. The company has maintained strong NIMs (Net interest margin) over the years at 6.9 per cent in FY17 vs 6 per cent in FY15. The asset quality for the years has been declining over the years. The total GNPAs for the year FY17 stood at Rs. 72.7 crore vs Rs. 19.3 crore in FY14. But the GNPAs as a percentage to advances were decent and stood at 1.7 per cent in FY18 vs 0.8 per cent in FY14. While NNPA as a percentage of total advances stood at 1.3 per cent in FY18 vs 0.7 per cent in FY14. However, the company's Corporate lending NPAs have been increasing over the years, the total advances grew to Rs. 57.9 crore in FY17 vs Rs. 17.4 crore in FY14. Lastly, Profit after Tax has grown to Rs. 210.80 crore for fiscal 2017 from Rs. 90.09 crore for fiscal 2013, at a CAGR of 23.7 per cent. The company's capital adequacy also looks strong at 31.8 per cent as on Q3FY18.

However, looking at nine-month data, we see expense have spiked up and there is flattish net profit. This goes in line with the industry trend. Also, we expect higher interest cost and higher capital allocated to vehicle financing might lead to lower growth in first six months of FY19 and then recovery.

Valuation and peer comparison

Post this IPO, the company will be trading at P/BV of 1.8x on the book value of Rs. 312 per share as of Q3FY18, considering the upper price band of Rs. 572 per share, as compared to its peers which are trading at a little higher valuations like L&T Finance Holdings, Piramal Enterprises, Cholamandalam Investment & Finance Company are trading at P/B of 3.30x, 3.09 and 5.51, respectively.
 

*Post Issue at book value of Rs. 430/share
P/ B ratio is calculated as closing share price on April 6, 2018, quoted on BSE / NAV per share for the year ended March 31, 2017

Our view 

We recommend subscribe to the IPO considering its expansion plans in vehicle financing supported by higher asset quality in corporate lending and SME which are expected to remain stable. Company expects loan book to double in next couple of years. Due to higher operating expenses in FY19, PAT is expected to spike up in FY20.

1) Expansion in vehicle financing: Company is aggressively planning to build loan book in used commercial vehicle space. Company has opened 100 branches in last one year and has poached talent from industry leaders like Shriram and Chola. It is targeting from a low base the loan book to reach upto ~1250cr in FY19. Due to experienced team and less requirement for training, it is able to tap the opportunity at a quicker pace. Also, Esop based incentive structure makes employees part of the growth. Company plans no new capex and expects branches to break even in FY19. 

2) Corporate lending: Corporate lending is one of the major segments and out of which ~30-35% is to real estate sector. Company lends second stage financing to large to medium size real estate developers mostly Mumbai suburbs like Thane, Panvel, etc. The yields are high and repayment cycle is also less than 5 years. Though company has most exposure to resilent Mumbai market however lower launches and stable realty prices might not lead to higher growth and loan book is expected to grow at high single digit. This assures that the asset quality and risk are contained. 

3) SME lending- Company researches on a set of SMEs and explores opportunities for structured financing. In case of company facing industry headwinds with business prospects remaining intact, company offers financing solutions when credit lines from other sources starts shrinking. This helps company command higher yield and reduce risk of default. 
Company boasts of strong capital adequacy at CAR of 31.6 per cent, which gives strong growth confidence. IPO looks attractive at lower valuations as compared to its peers considering growth and better asset quality. Considering all these aspects, we recommend our investors to SUBSCRIBE for listing and capital gains.  

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment