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Strengths
* Strong capitalisation
Capital structure is healthy, indicated by large consolidated networth and low gearing of Rs 3,969 crore and 1.8 times, respectively, as on September 30, 2020, as against Rs 2,681 crore and 2.5 times, respectively, as on March 31, 2020 (Rs 3,006 crore and 3.0 times, respectively, as on March 31, 2019). Capitalisation has strengthened with the capital infusion of Rs 1,225 crore by Brookfield in May 2020. While gearing has remained low in the past, it is expected to increase gradually to about 5 times over the medium term because of expansion in retail financing.
Overall capital adequacy ratio (CAR) was comfortable at 35.0% with tier 1 CAR of 35.0% as on September 30, 2020 (25.3% and 20.5%, respectively, as on March 31, 2020). A stronger capital profile will support expansion in the company's key retail segments over the medium term and also cushion against potential asset-side risks.
* Diversified product offerings
IndoStar, with consolidated AUM of Rs 9,084 crore as on September 30, 2020 (Rs 9,690 crore as on March 31, 2020), has a diversified range of product offerings across retail finance. Other than the flagship non-banking financial company (NBFC), IndoStar is present in affordable home finance, through its wholly-owned subsidiary - IndoStar Home Finance. While IndoStar was earlier a wholesale financier, it has steadily expanded its presence in retail segments in the past few years, and retail loans now constitute the key growth driver. Expansion in the retail segment was supported by acquisition of the CV finance book of IIFL Finance.
Retail loans stood at Rs 6,862 crore as on September 30, 2020 (Rs 7,099 crore as on March 31, 2020; Rs 7,208 crore as on March 31, 2019; and Rs 1,627 crore as on March 31, 2018). The share of retail loans in the overall portfolio has increased to 73% of AUM as on September 30, 2020, from 12% as on March 31, 2017, driven by growth in the retail book and contraction of the wholesale portfolio. Within retail lending, the company is present in CV finance (46% of the AUM), and is more focused on financing purchase of used CVs. Loans to SMEs accounted for 19% of the overall AUM, and mainly comprised secured loans against property. The company has ventured into unsecured SME finance and affordable housing finance (9% of the overall AUM). Going forward, the share of retail AUM is expected to increase further, mainly driven by CV and affordable housing finance.
The wholesale portfolio decreased to Rs 2,476 crore as on September 30, 2020 (Rs 2,869 crore as on March 31, 2020; Rs 4,527 crore as on March 31, 2019; and Rs 4,433 crore as on March 31, 2018). About 81% of this portfolio comprises construction and developer loans, and the remaining is large-ticket corporate loans. The company has identified 4-5 key developers in the Mumbai Metropolitan Region, which form a majority of the wholesale book. However, given the weak macroeconomic environment, primarily for the real estate segment, the management is reducing the book size by encouraging loan sell-down and prepayment. IndoStar plans to exit the wholesale finance business in the next 18-24 months.
* Experienced management team
The top management comprises experienced professionals, with proven expertise in retail and wholesale financing, who are expected to help scale up each of the key verticals - vehicle, housing and SME finance - while maintaining strong underwriting standards. Furthermore, the company benefits from the high involvement of the key institutional investors. The management and key institutional investors, including Brookfield, share a common vision and philosophy for IndoStar. This will enable IndoStar to grow its business, in line with its stated strategy, and adhere to its risk philosophy.
Weaknesses
* Asset quality susceptible to concentration risk; retail lending to bring granularity
Although the proportion of wholesale loans has decreased, asset quality remains vulnerable to concentration risk despite strong credit appraisal and risk management processes. As on September 30, 2020, the five largest loans accounted for nearly 42% of the wholesale portfolio and 11% of the overall loan portfolio. Furthermore, 81% of the wholesale book comprises real estate loans, a segment vulnerable to cyclical downturns. Nevertheless, steady increase in the proportion of retail AUM will induce granularity in the portfolio. Greater focus on small-ticket retail loans will support asset quality over the medium term though ability to underwrite and maintain strong credit practices across asset classes, amid intense competition from established players, remains to be seen.
Gross NPAs reduced to 2.9% as on September 30, 2020 from 4.8% as on March 31, 2020 (2.6% as on March 31, 2019), on account of sale of NPAs to ARCs in the first half of fiscal 2021. In the past two years, asset quality had weakened on account of slippages in the wholesale book and owing to the acquired CV book, which already had high NPAs. Also, IndoStar is in advanced stages to recover from the delinquent wholesale account in the current fiscal.
Nevertheless, most of the retail segments have been severely impacted due to onset of the Covid-19 pandemic, due to the sensitivity of such categories to underlying economic activity. Ability to grow the loan book organically and its performance across cycles will be closely monitored.
While IndoStar follows strong credit appraisal and risk management practices, especially in the real estate segment, given the funding access challenges since September 2018 and weak macroeconomic environment, IndoStar's loan portfolio has also been impacted, with slippages in a few accounts in the real estate loan book and stress in a few large accounts in the wholesale loan book. The company has proactively written off these accounts, which led to a sharp decline in profitability in fiscal 2020. Furthermore, the management made contingent Covid-19 related provisions of Rs 280 crore in fiscal 2020, in excess of the regulatory requirement, which also impacted profitability in fiscal 2020.
In fiscal 2020, the company reported loss of Rs 325 crore on total income (net of interest) of Rs 736 crore, against profit after tax (PAT) and total income (net of interest) of Rs 241 crore and Rs 642 crore, respectively, in fiscal 2019. For the half year ended September 30, 2020, PAT was Rs 79 crore on total income (net of interest) of Rs 303 crore, against PAT and total income (net of interest) of Rs 97 crore and Rs 412 crore, respectively, in the corresponding period of the previous fiscal.
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