IPO Note: Indostar Capital Finance Ltd

Nikita Bhoota Nikita Bhoota 5th September 2018 - 03:30 am

Issue Opens: May 09, 2018
Issue Closes: May 11, 2018
Face Value: Rs10
Price Band: Rs570-572
Issue Size: ~Rs1,844cr
Public Issue: 3.22 Cr shares
Bid Lot: 26 Equity shares
Issue Type: 100% Book Building

% shareholding	Pre IPO	Post IPO
Promoter	91.56	58.95
Public	8.44	41.05

Source: RHP

Company Background

Incorporated on July 21, 2009, IndoStar Capital Finance Ltd (IndoStar), a leading Non-Banking Finance Company (NBFC), operates into four principal lines of business viz. corporate lending, SME lending, vehicle financing and housing finance. Corporate lending and SME lending constituted ~77% and ~23% of its total credit exposure for Q3FY18. Its total credit exposure as of December 31, 2017 stood at ~Rs5,172cr. It recently expanded its portfolio to offer vehicle finance and housing finance products. The company’s housing finance business commenced operations in September 2017 and retail housing business in March 2018. Banks, NCDs and Commercial Paper constituted ~42%, ~22% and ~34% of its sources of funds respectively for 9MFY18, whereas ~2% was from bank ODs.

Objective of the Offer

The existing shareholders i.e. Promoter (Indostar Capital) and other investors would offer 1.85cr shares and 0.15cr shares respectively for sale through this issue. Additionally, there is a fresh issue of shares ~1.22cr shares by the company to augment its capital base.

Financials

Consolidated Rs cr	FY15	FY16	FY17	FY18*
NII	270	355	407	468
Total Income	270	355	408	476
PPOP	229	297	335	345
PAT	149	192	211	219
NIMs (%)	6	6.5	6.8	6.9
P/BV# (x)	3.04	2.72	2.36	1.96
RoAE (%)	12.3	13.6	12.2	-
RoAA (%)	4.2	4.4	4.1	-

Source: Company, 5 Paisa Research; *FY18 Numbers are annualized; # P/BV(x) numbers doesn’t includes IPO dilution.

Key Points

The company’s growth is underpinned by its strong Net Interest Margin (NII), which over FY15 to 9MFY18 has improved by 90bps to 6.9%. Despite the aggregate portfolio, the yields declined over FY15 to 9MFY18, however the margins have improved, which is attributed to falling cost of borrowings over the similar period. The cost of borrowings has declined by 280bps over FY15 to 9MFY18 led by its diversified borrowing profile and strong credit rating. The company’s average corporate portfolio yields (14.1% in FY17) is on the higher side.

IndoStar has been able to maintain a high quality loan portfolio through itsrobust credit assessment and risk management framework. The company primarily provides secured loans to manufacturing and service companies, it does not intend to lend money to unsecured business. As on December 31, 2017, its credit exposure that is secured is 88.8%. The company lend to borrowers with proven track record and strong cash flow, besides it obtains sufficient collateral. Further, it actively monitors the performance of its loans and the quality of loan portfolio, which is reflected by company’s low rate of Gross NPAs (1.7% for Q3FY18) and Net NPAs (1.3% for Q3FY18).

Key Risk

The company, over the last one year has entered into new lines of business (Housing finance and Vehicle finance). If the company is unable to successfully run the new businesses profitably, the financial condition may be impacted.

As of December 31, 2017, the company has significant exposure in real estate sector lending. The total credit exposure to this particular sector as at December 31, 2017 is 41.6%. Any significant negative trend in this sector could increase the level of non-performing assets in its portfolio and may adversely affect its financial performance.

Conclusion

At upper range of the price band, the stock, post IPO dilution is available at a valuation of 1.8x FY18 P/ABV, which is attractive. According to us, once the company’s future growth strategy streamlines and balance sheet improves, the return ratios would further improve. We recommend SUBSCRIBE to the issue.

Research Disclaimer