Indostar Capital Finance Ltd.

Transcription

1 Recommendation Subscribe BACKGROUND Price Band Rs. 570 Rs. 572 Incorporated in 2009, Indostar Capital Finance Limited (Indostar) is a Bidding Date 9 th 11 th May, 2018 Book Running Lead Manager Registrar Sector JM, Kotak, Morgan Stanley, Motilal Oswal, Nomura Minimum Retail Application- Detail at Cut off Price Link Intime NBFC Number of Shares 26 Minimum Application Money Rs. 14,872 Discount to retail No discount Financials (Rs Cr) FY16 FY17 Net Interest Income Pre-Provision Profit PAT Lower Upper Valuations Band Band Market Cap (Rs in Cr) EPS* P/E ratio* P/ABV* RoE (%)* 10.9% 10.9% * 9MFY18 annualised numbers (post issue) Post Issue Shareholding Pattern Promoters 59.0% Others 41.0% Offer structure for different categories QIB (Including Mutual Fund) 50% Non-Institutional 15% Retail 35% Post Issue Equity (Rs. in cr) 90.9 Issue Size (Rs in cr) Face Value per share (Rs) 10 Jehan Bhadha ( ) Research Analyst jehankersi.bhadha@nirmalbang.com professionally managed and institutionally owned, leading NBFC which is primarily engaged in providing structured term lending to corporates and loans to SME borrowers in India. The company has recently expanded their portfolio to offer Vehicle Finance and Housing Finance products. The Promoter of the company is Indostar Capital which is promoted by Indostar Everstone and Everstar Holdings Pte. Ltd. Details of the Issue: The public issue of Indostar consists of a fresh issue of equity shares aggregating up to Rs. 700 Cr and an offer for sale of Rs. 1,144 Cr. Objects of the Issue: The object of the issue is to augment the capital base to meet the NBFC s future capital requirements such as expansion and to comply with regulatory requirements for enhanced capital base. Investment Rationale: (a) Stable corporate book and on-boarding of industry leading personnel at senior and mid management level to pave way for strong growth in CV financing (b) Consistent track record of (i) growth (three year loan CAGR of 17%), (ii) stable asset quality (GNPA of 1.7%), (iii) optimum diversification of funding mix and (iv) robust capital base (c) Expansion of geographical footprint and sourcing platforms for products across India Valuation and Recommendation Indostar has demonstrated strong execution capabilities by initially building the corporate book (~77% of loans) and subsequently entering and successfully executing in SME financing (~23% of loans). Incremental growth is expected to be higher than previous years, driven mainly by CV financing followed by corporate, SME and housing finance. ROA is expected to be maintained in the % range going forward; combined with an increase in leverage from less than 3x currently to ~5x, we believe ROE is slated to increase and stabilize at higher levels compared to prior years. Indostar is being offered at trailing (Dec 2017) P/ABV of 1.9x & P/E of 23.8x on post diluted basis, leaving good scope for appreciation for investors and thus we recommend subscribing to the issue. Financial Snapshot FY15 FY16 FY17 9MFY18 -A Net Interest Income YoY growth (%) 24% 32% 21% 15% Pre Provision Profit YoY growth (%) 34% 29% 13% 3% PAT YoY growth (%) 33% 29% 10% 4% Rs x P/Adj. Rs x 9MFY18-A: Annualised on post issue basis 1 P a g e

2 Business Overview Incorporated in 2009, Indostar Capital Finance Limited (Indostar) is a professionally managed and institutionally owned, leading NBFC which is primarily engaged in providing structured term lending to corporates and loans to SME borrowers in India. The company has recently expanded their portfolio to offer Vehicle Finance and Housing Finance products. The Promoter of the company is Indostar Capital which is promoted by Indostar Everstone and Everstar Holdings Pte. Ltd. Indostar operates 4 principal lines of businesses, namely: 1. Corporate Lending Lending to mid-to-large sized corporates in Manufacturing, Services and infrastructure industries, by way of senior secured debt, structured financing, promoter financing and special situation funding and Lending to real estate developers (~42% of total advances), mainly for financing project level construction of residential and commercial building projects and take-out of earlystage equity investors. 2. SME Lending The SME lending business, which Indostar commenced in 2015, primarily involves them extending secured loans for business purposes to small and medium size enterprises, including businessmen, traders, manufacturers and self-employed professionals. The property securing these loans is typically completed and largely self-occupied residential and commercial property. 3. Vehicle finance The Vehicle Finance business primarily involves providing financing for purchases of used or new commercial vehicles, passenger vehicles and two-wheelers. The company has commenced their vehicle finance business in November Vehicle finance operations involves a relatively larger sourcing team as compared to their other businesses as it is based on employees experience of working with customers with limited credit history and their ability to effectively assess risks with financing used vehicles. 4. Housing finance: The housing finance business comprises 2 business lines, namely: o Affordable housing finance, which commenced operations in September 2017, and o Retail housing finance, which is expected to commence operations by March 2018 Exhibit 1: Segment-wise metrics Parameter Corporate CV SME Home AUM Mix FY14 100% 0% 0% 0% AUM Mix 9MFY % 0.3% 22.7% 0.3% Long-term Mix Projected 50.0% 25.0% 15.0% 10.0% Ticket Size (Rs Cr) cr Yields 14.1% 16-17% 11.1% 12-13% Sourcing In-house In-house Mainly DSA In-house Tenure (Years) Ongoing/W.Cap 10 Source: Company, NBRR 2 P a g e

3 Investment Rationale Highly professional and experienced management team incentivized via ESOPs Indostar has a highly professional and experienced management team which has led through changing regulatory and economic environment and consistently grown the business. Each member of the senior management team has over 20 years of experience in the finance/banking industry and possesses in-depth understanding of the specific industry, products and geographic regions they cover. Strong and experienced leadership has further enabled Indostar to attract capable and experienced top and mid level management employees. The senior and mid-level management team has been incentivized through ESOPs, thereby enabling a strong alignment of their interests in line with the company s performance. Many of Indostar s directors and key management personnel own sizeable shares of the company. The key addition to the management team has been that of Mr. R. Sridhar who joined the company as CEO in April He has three decades of experience in the financial services industry. He was previously associated with various entities forming part of the Shriram group, and held the position of MD of Shriram Transport between and prior to that was the President at the company from It was under his leadership that Shriram Transport underwent metamorphosis and experienced its golden period. Ownership by institutional investors ensures international corporate governance standards The promoter, Indostar Capital, which is part of the Everstone Group, is an India and Southeast Asia focused investor which was recognized as Private Equity Firm of the Year in India by Private Equity International for six consecutive years from 2011 to 2016, with approximately US$4.0 bn of assets under management. In addition to assisting the company with capital raising and obtaining strong credit ratings, the company also benefits from its relationship with the promoter with regards to access to best industry practices and international corporate governance standards. Well-established corporate lending business Indostar has established a strong corporate lending business, primarily providing secured loans to manufacturing and service companies by way of structured financing, promoter financing and special situation funding and to leading real estate developers for financing project level construction of residential properties and take-outs of early stage equity investors. Indostar has been able to scale up the book to Rs. 3,969 Cr as on Dec 2017, in a matter of seven years. The success of corporate lending business is underpinned on: (a) Experience and expertise in identifying and directly sourcing potential borrowers through our knowledge of local markets and customer centric approach, (b) (c) (d) Ability to offer customized solutions to address customers financial requirements, Ability to structure loan products to maximize returns, where initial fee accruals and average life of loans being less than the tenor of the loans have allowed the company to enjoy relatively higher internal rates of returns, Ensuring lending is done to borrowers with proven track record and strong cash flow and also obtaining sufficient collateral. 3 P a g e

4 Loan book mix shift towards Commercial Vehicle financing to create incremental value Indostar has been creating a robust launch pad to propel the company into the next phase of growth which will be led by CV (commercial vehicle) financing. Indostar initially established its corporate book and attained respectable size and cash flow generation post which it expanded into SME business (23% of loans). Over the course of last one year, Indostar has taken significant steps for expansion into CV financing. The company has made several top and mid management level recruitments with extensive industry experience in CV financing, Mr. R. Sridhar being one of the key recruits who held the position of MD of Shriram Transport between and led the transformation of the company. Indostar has already commenced 56 branches as on Feb 2018 and expects to reach a network of 100 branches by June The branch network is built on a hub and spoke model. Indostar shall focus on used CVs having age between 5-12 years while targeting 2 nd and 3 rd cycle buyers and avoid 1 st time buyers to reduce risks. As per the company, the addressable market for used CVs stands at ~60-70 lac vehicles while the financing penetration stands at barely ~40%. The CV financing book is likely to form ~25% of overall mix in coming years. Resultantly, although the corporate book shall continue to grow at a healthy pace, its mix shall decline from 77% as on Dec 2017 to ~50% in the long term. SME and housing would form the balance ~25% of the book in the long term. As the total retail mix of Indostar moves from 23% as on Dec 2017 to ~50% in coming years, the valuations commanded by the company shall witness an expansion to that extent. Proven track record of delivering results Indostar has experienced growth since the commencement of operations in 2011 and has a proven track record of delivering results. The loan book has grown at a CAGR of 20% since FY14. Loan growth has come off in 9MFY18 due to prepayment by a few clients (worth ~Rs. 700cr) who infused equity in their businesses and replaced the company s loans. This is an aberration and should correct itself soon. Indostar has been able to maintain its ROA at an attractive level of ~4.0% over the years. Exhibit 2: Loan CAGR of 20% over FY14-9MFY18; Robust ROA maintained over the years % 4.2% 2,572 3, % 4,265 5,145 5, % 3.8% 5.0% 4.5% 4.0% 3.5% 1000 FY14 FY15 FY16 FY17 9MFY18 3.0% Loan Book ROA Source: RHP, NBRR 4 P a g e

5 Expansion of geographical footprint and sourcing platform for products across India Indostar shall selectively expand its business operations in tier I, tier II and tier III cities in the northern, southern and western regions of India. It intends to grow its branches in 15 key states across India and expects to have approximately 130 branches by June 2018 out of which approximately 100 will be focused on vehicle finance business and remaining 30 for SME lending and housing finance business. Indostar will operate on a hub-and-spoke model in an effort to leverage common infrastructure and optimize operational efficiency. The branches would report to area corporate office, manned by sales and credit teams for each retail business, which will in turn report to the state level corporate office. The business will continue to be managed in a centralized way and the corporate headquarter will exercise overall control and supervision. This model would allow it to expand with lower marginal costs and increase profitability. High asset quality achieved through robust credit assessment and risk management framework Indostar actively monitors the performance of its loans and the quality of its loan portfolio is reflected by the company s low rates of GNPAs and NNPAs. Indostar has a robust and comprehensive credit assessment and risk management framework to identify, monitor and manage risks inherent in their corporate and retail lending operations. The corporate lending credit assessment and risk management framework comprises of a 4-stage framework, spanning across: (a) The Screening stage, where the credit and sourcing teams conduct an initial screening of their prospective borrowers; (b) The evaluation stage, where the credit team evaluates the prospective borrower s business and financing needs and investigates the prospective borrower s track record, market reputation and ability to repay any loans extended to it, before presenting the proposal to their corporate lending committee; (c) The approval stage, where the loan proposal is presented to the credit committee for final approval and loan disbursement; and (d) The sanction and monitoring stage, where their credit team regular monitors their loan portfolio to allow for early identification of problematic loans. Exhibit 3: Superior asset quality despite higher corporate mix 2.0% 1.6% 1.4% 1.7% 1.2% 0.8% 0.4% 0.0% 0.8% 1.4% 1.2% 0.6% 0.7% 0.5% 0.2% 0.2% FY14 FY15 FY16 FY17 9MFY18 GNPA NNPA Source: RHP 5 P a g e

6 Robust Capital Base A strong capital base is a pre-requisite for growth in the lending industry. In addition to a consistent financial performance, Indostar is well capitalised with a robust capital base to support continuous business growth within a strong risk management framework. As on Dec 2017, the Capital Adequacy Ratio stands at 31.6%, with a Tier I capital ratio at 31.3%, as compared to RBIs requirement of 15%. Fresh capital raised through IPO will further improve Capital Adequacy Ratio to 42.1% (based on Dec 2017 financials) which will support strong growth in coming years. Optimum diversification of borrowings has led to lower cost of funds Indostar has a well diversified funding profile that underpins its strong liquidity management system, strong credit rating and brand equity. Indostar has long-term relationships with lenders which include 14 public sector banks, 13 private sector banks, 21 mutual funds and 4 insurance companies and other financial institutions. Diversification of sources of funding has contributed to an overall reduction in cost of funds in recent years. Exhibit 4: Shift in funding mix towards low cost avenues 100% 80% 60% 40% 20% 0% 12% 24% 64% FY13 Banks NCD CP 34% 22% 44% Dec-17 Source: RHP Exhibit 5: Cost of funds have reduced faster than the decline in systemic rates Parameter FY15 FY16 FY17 9MFY18 Indostar - Cost of funds 11.8% 11.2% 10.3% 9.1% Reduction YoY 0.3% 0.6% 0.9% 1.2% RBI Repo Rate 7.5% 6.75% 6.25% 6.0% Reduction YoY 0.5% 0.75% 0.5% 0.25% Indostar Spreads 2.5% 3.3% 3.5% 4.2% Source: Company, NBRR 6 P a g e

7 Key Risk and Concerns Excessive focus on corporate credit raises concerns towards vulnerability of asset quality As of Dec 2017, 76.7% of advances consisted of corporate loans. Corporate loans are riskier vis-à-vis retail loans as ticket sizes range from Rs Cr and thus a few bad loans could lead to an adverse impact on the company. Also there is a risk of an increase in NPAs in certain industries if the economy glides back from its recovery path. Exposure to real estate & high client concentration Real estate comprises of 42% mix of total advances and the top 5/10/20 borrowers comprise of 31%/56%/85% of the total corporate book exposure. This leaves Indostar prone to asset quality shocks, in case, any of its large client defaults. Vehicle finance and housing finance business yet to be proven Considering the limited credit history and nature of CV financing business, risk of NPA looms high in this business having high cyclicality. Also, the operational performance of housing finance business needs to be monitored closely owing to the highly competitive landscape. Rising bond yields may increase cost of funds With the interest rate cycle having reversed in recent months and inflation heading higher, bond yields have spiked in recent months. This could lead to an increase in cost of funds and have an adverse impact on NIMs and profitability of Indostar. 7 P a g e

8 Valuation and Recommendation Indostar has demonstrated strong execution capabilities by initially building the corporate book (~77% of loans) and subsequently entering and successfully executing in SME financing (~23% of loans). Incremental growth is expected to be higher than previous years, driven mainly by CV financing followed by corporate, SME and housing finance. ROA is expected to be maintained in the % range going forward; combined with an increase in leverage from less than 3x currently to ~5x, we believe ROE is slated to increase and stabilize at higher levels compared to prior years. Indostar is being offered at trailing (Dec 2017) P/ABV of 1.9x & P/E of 23.8x on post diluted basis, leaving good scope for appreciation for investors and thus we recommend subscribing to the issue. In coming years, Indostar expects the corporate and commercial vehicle segments to form 75-80% of its advances with SME and housing segments forming the balance. We thus compare Indostar with NBFCs having similar exposures. Exhibit 6: Peer Comparison as on FY18 (9MFY18 in case of Indostar) Shriram Transport Cholamandalam Invest. & Fin. L&T Finance Holdings Avg Indostar Loan Book (Rs Cr) 95,306 42,879 75,963 71,383 5,147 Loan CAGR FY % 19% 20% 17% 17% Mix Corporate/Wholesale 2% 68% 77% Vehicles 95% 73% 12% 0.3% SME 13% 23% Housing 6% 11% 0.3% Other Retail 5% 6% 9% 0% Spread 5.4% 7.9% 4.1% 5.8% 4.2% NIM 7.7% 9.7% 2.7% 6.7% 6.9% Cost/Income 20.6% 41% 23% 28% 28% GNPA 9.2% 2.9% 5.5% 5.8% 1.7% NNPA 2.8% 1.7% 2.9% 2.5% 1.4% CAR 16.9% 18.4% 15.5% 16.9% 31.6% ROE FY % 16.6% 9.8% 12.8% 13.6% ROE FY % 18.1% 12.3% 14.0% 12.2% ROE FY % 20.8% 15.0% 16.3% 10.9% ROA FY16 1.9% 2.3% 1.6% 1.9% 4.4% ROA FY17 1.8% 2.6% 1.6% 2.0% 4.1% ROA FY18 1.9% 3.0% 1.8% 2.3% 3.8% P/BV Trailing (x) P/ABV Trailing (x) Source: Companies, NBRR 8 P a g e

9 Financials (in Rs Crs) Profitability (Rs. Crs) FY14 FY15 FY16 FY17 9MFY18 9MFY18-A Balance Sheet (Rs. Crs) FY14 FY15 FY16 FY17 9MFY18 Interest earned Borrowings 1,898 2,574 3,001 3,373 3,688 Interest expended Other liab and prov Net interest income Total liab. 2,025 2,706 3,152 3,586 3,968 Non interest income Equity capital Total income Reserves and surplus 1,067 1,217 1,468 1,824 1,998 Staff costs Net worth 1,136 1,285 1,542 1,903 2,077 Other Op Exp Total liab and equity 3,161 3,992 4,693 5,489 6,045 Total Op. exp Profit before prov Cash and bank bal Provisions Investments Profit before tax Advances 2,572 3,375 4,265 5,145 5,147 Taxes Fixed assets Net profit Other assets Growth Ratios FY14 FY15 FY16 FY17 9MFY18 9MFY18-A Deferred Tax Asset Advances growth 31% 26% 21% 0% Total assets 3,161 3,992 4,693 5,489 6,045 NII growth 24% 32% 21% 15% PPP growth 34% 29% 13% 3% Key Ratios FY14 FY15 FY16 FY17 9MFY18 PAT growth 33% 29% 10% 4% Yield Ratios Profitability Ratios FY14 FY15 FY16 FY17 9MFY18 9MFY18-A Yield on Advances 14.6% 14.3% 14.5% 13.8% 13.3% Cost / Income Ratio 16.8% 15.2% 16.4% 17.8% 27.6% 27.6% Cost of Borrowings 12.1% 11.8% 11.2% 10.3% 9.1% ROE 10.4% 12.3% 13.6% 12.2% 10.9% 10.9% Spread 2.5% 2.5% 3.3% 3.5% 4.2% ROA 4.2% 4.2% 4.4% 4.1% 3.8% 3.8% NIM 6.6% 6.0% 6.5% 6.8% 6.9% Valuation Ratios FY14 FY15 FY16 FY17 9MFY18 9MFY18-A Balance Sheet Ratios EPS Gross NPA 0.8% 0.6% 0.2% 1.4% 1.7% Post Issue EPS 24.1 Net NPA 0.7% 0.5% 0.2% 1.2% 1.4% BVPS CAR 41.5% 32.6% 34.2% 33.8% 31.6% Adjusted BVPS Tier % 32.3% 33.8% 33.4% 31.3% P/E Post issue P/E 23.8 Tax rate 33.7% 34.1% 34.6% 34.7% 34.3% P/ABV Number of employees Post issue P/ABV Number of branches Source: Company, NBRR * 9MFY18-A denotes: annualised 9 P a g e

10 Disclosure: This Report is published by Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL ) for private circulation. NBSPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH NBSPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. It is also a registered Portfolio Manager having registration no as INP NBSPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBSPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBSPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBSPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBSPL or its associates or Analyst or his relatives hold / do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBSPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBSPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBSPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I/We Jehan Bhadha, the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations P a g e 10

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