Business Analysis 12: IndoStar Capital Finance Ltd
IndoStar Capital, the company which has recently turned around is playing in their respective sector although the whole industry is facing heat from the high base.
IndoStar Capital, the company which has recently turned around is playing in their respective sector although the whole industry is facing heat from the high base.
The company is into NBFC industry. And as you know the industry has faced several issues from time to time. They have two main segments. Standalone comprises of CV finance, SME finance, corporate lending, others and the rest is the Housing finance. Majority of their revenue comes from CV finance.
Although they are selling their housing finance segment, CV segment is doing fantastically well. We'll come to this later. Before that, let's look at some numbers. As you know, it's all about numbers in NBFCs.
Right now, as of Q2 FY25, corporate lending - 2% + Retail lending - 98%. Total AUM - 10112 cr, Disbursement - 1724 cr, Branches - 566 including housing finance spread across 23 states, 2.26x debt/EBITDA.
Their portfolio mix as of Q2 FY25,
CV finance - 69% + Home finance - 25% + SME finance - 4% + Corporate lending - 2% + Micro LAP - less than 1%
Of the total 10112 cr AUM, CV comprises 6964 cr, housing finance 2562 cr and the rest is for others such as SME, micro, and corporate. CV finance has disbursement mix of M & HCV with 37%, F4 with 39%, LCV & ICV with 11%, CE with 9% and Bus with 4%. Loan to value for CV finance is 73.2% with disbursement yield around 18.5%. AUM and disbursement for CV finance has been constantly growing for the last few years. After selling the housing Finance division they will focus more on this section.
On standalone basis, NPA has come down y-o-y from 4% in Q2 FY24 to 2.5% in Q2 FY25. Gearing ratio has improved from 1.5x in Q2 FY24 to 2.3x in Q2 FY25. NIMs are more or less stable at 5.2% as of Q2 FY25 whereas CRAR is 25.9% down from 32.8% in Q2FY24.
On affordable housing Finance side, NIMs have come down from 8.2% in Q2 FY24 to 6.9% in Q2 FY25. GNPA ia stable y-o-y at 1.4% in Q2 FY25, and CRAR at 55.7%. However, they have sold their housing finance business to EQT for 1750 cr because it's not doing much well. So, I'm not going into too much details.
Borrowing mix as of Q2 FY25,
NCDs - 41% + term loans - 22% + securitization - 23% + others - 15%
Banks hold 58.9% and non banks 41.1% of their borrowing mix. Further, they are going to increase financing from banking channels in a big way.
Revenue mix as of FY24,
CV finance - 62% + Housing Finance - 21% + SME finance - 7% + Corporate lending - 6% + Others - 4%
AUM as of FY24,
CV finance - 64% + Housing Finance - 26% + SME finance - 6% + Corporate lending - 4% + Others - less than 1%
Gross disbursement as of FY24,
CV finance - 77% + Housing Finance - 17% + Corporate lending - 6%
Some Positive Notes
They target to achieve 9000 cr AUM in FY25 and 12000 cr in FY26 excluding housing finance.
Used CV space has better yield that is why the are disbursing 99% of their CV loans to this space.
Funds are being raised at lower levels as the confidence of banks and other investors or lenders have improved over the last few years.
Incremental cost has come down from 12.7% in Q2 FY22 to 10.1% in Q2 FY25.
Microfinance segment isn't an issue for them now.
With receiving license from IRDAI on 19th Aug 2024, they have started to work in the insurance distribution space and will start to earn fees soon.
Credit cost will be in the range of 2% going forward.
The yields have started going up, cost of funds has gone down, NII will increase going forward, and the cost to income ratio will come down over a period of time.
Micro LAP share in their revenue will go from less than 1% to 5% in the near term.
Some of the high cost NCDs were repaid in Q2 FY25.
Issued 2.5 cr warrants to Brookfield and Florintree at ₹184 per share in FY24.
Considering the effect the new management is putting since 2022, the profitability has improved and is expected to improve going forward as well.
From the industry side, AUM for vehicle finance by NBFCs is projected to grow at 17% to 8.1 lakh cr by FY25 from 5.9 lakh cr in FY23 (CRISIL)
Also, Tractor financing will grow at 8-10% per annum.
Banks and NBFCs will address 56.24 lakh cr of the total 134.40 lakh cr funding requirement for 6.4 cr MSMEs in India
Financing of cars/ utility vehicles and 2/3 wheelers is protected to grow at 23-25% per annum due to rising sales of premium models and significant replacement volume anticipated for 2 wheelers.
Valuation
Book value is a very important figure to value an NBFC or a bank. Currently, on standalone basis, book value of IndoStar is ₹234 as of Q2 FY25. Because housing finance segment will be hived off, I'll value the company on standalone basis. Current market price - ₹254. It's almost around 1x on TTM basis. The peers are trading at much higher than their book value, on avg 2x their book value.
Even if I consider revenue multiple and PE, the company is trading around 2.5x and 43 respectively. Let's do a rough calculation. Assuming 30% growth in AUM, the topline would be 2400 cr with around 240 PAT at 10% net margin, historically they did more than 20%. Current market cap - 3500 cr. Then the company is trading at 14 PE. Majority of its peers is trading much above this number except L&T finance and Shriram Finance. Except they have to come down or the latter have to go up. So, IndoStar has good potential in future to go up. Also, Shriram Finance and L&T finance.
As soon as the interest rate goes down, these NBFCs will benefit first.
Thanks for reading
Take care
Rabi
Disclaimer: I'm not SEBI registered. This content is for educational purposes only. Do your own diligence.