Detailed Rationale

CRISIL Ratings has placed its ratings on the bank facilities and non-convertible debentures of IndoStar Capital Finance Limited (IndoStar) on ‘Rating Watch with Developing Implications’ and reaffirmed its ‘CRISIL A1+’ rating on the company’s commercial paper programme.

 

CRISIL Ratings has also withdrawn its rating on non-convertible debentures of Rs 50 crore in line with its withdrawal policy. (See Annexure 'Details of Rating Withdrawn' for details),  CRISIL Ratings has received independent verification that these instruments are fully redeemed.

 

The rating action follows IndoStar’s disclosure pertaining to certain observations and control deficiencies identified by the statutory auditors, primarily in the commercial vehicle (CV) loan portfolio of the company. The Audit Committee of the company had appointed an independent external agency, Ernst & Young LLP (E&Y) to carry out a detailed review of the CV loan book. E&Y has now shared their preliminary findings of loan portfolio review with the Audit Committee of IndoStar which pertain to control deficiencies with respect to deviations from credit policy and steps followed in restructuring of loans. They estimate that the company may require an additional estimated credit loss (ECL) provisioning between Rs 557 crore to Rs 677 crore.  Given that this an initial estimate with the loan portfolio review still ongoing, it is important to watch out for the final provisioning requirement along with an assessment of the impact on the capital position and profitability of the company. The company is expected to disclose the final impact in its audited financial statements for fiscal 2022.

 

CRISIL Ratings will monitor the impact of this development on the company’s credit risk profile. Further, the ability of the company to quickly improve collections from these affected accounts will need to be seen. CRISIL Ratings will resolve the rating watch once greater clarity emerges regarding impact of this development.

 

The ratings continue to reflect IndoStar's strong capitalisation, diversified product offerings and benefits from its ownership by Brookfield and its experienced management. These strengths are partially offset by the inherent vulnerability in asset quality.

 

IndoStar[1] did witness an inch up in overall delinquencies in the retail asset classes during past one year. The gross stage 3 (GS3) assets stood at to 4.3% as on December 31, 2021, compared to 2.8% as on December 31, 2020 (4.4% as on March 31, 2021). Under the RBI’s Resolution Framework for COVID-19-related Stress, restructured assets under management (AUM) was around 11% as on December 31, 2021. Though the collection efficiency has been improving over last few quarters, the company’s asset quality will remain a monitorable.

 

The company’s profitability was also impacted during this period on account of COVID-19 related provisioning and reduced interest income given the decline in loan book with the company reporting annualised ROA and ROE of 0.2% and 0.6% respectively for the nine months ended December 31, 2021. Credit cost (provisions plus write-offs) for the fiscal 2021 was Rs 487 crore (Rs 864 crore for fiscal 2020) which includes Rs 150 crore of management overlay. Consequently, the company reported a loss of Rs 214 crore and a return on assets (RoA) of negative 2.1% as against a loss and RoA of Rs 325 crore and negative 2.9% in the previous fiscal.

 

[1]financials are on consolidated basis.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of IndoStar and its subsidiaries, together referred to herein as IndoStar. This is because they have significant operational, financial, and managerial integration and also operate under a common brand.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Strong capitalisation

Capital structure is healthy, indicated by large consolidated networth and low gearing of Rs 3,678 crore and 1.5 times, respectively, as on December 31, 2021, as against Rs 4,005 crore and 1.8 times, respectively, as on December 31, 2020 (Rs 3,698 crore and 1.6 times, respectively, as on March 31, 2021). 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 35.1%on December 31, 2021 (34.6 as on March 31, 2021). However, impact of potential ECL provisioning on account of the recent development on control deficiencies reported by the company on its CAR and net worth will be a key monitorable.

 

Diversified product offerings

IndoStar, with consolidated AUM of Rs 9,236 crore as on December 31, 2021 (Rs 8,990 crore as on March 31, 2021), 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, including through portfolio acquisition, and retail loans now constitute the key growth driver.

 

Retail AUM stood at Rs 7,594 crore as on December 31, 2021 (Rs 7,040 crore as on March 31, 2021). The share of retail loans in the overall portfolio has increased to 82% of AUM as on December 31, 2021, 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 (49% of the AUM) and is more focused on financing purchase of used CVs. Loans to small and medium enterprises (SMEs) accounted for 20% of the overall AUM, and mainly comprised secured loans against property. IndoStar is also into affordable housing finance, through IndoStar Home Finance Private Limited, which is 13% 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 1,623 crore as on December 31, 2021 (Rs 1,910 crore as on March 31, 2021, 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 88% 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.

 

Benefits from majority ownership by Brookfield and experienced management team

IndoStar’s majority ownership by Brookfield has helped enhance its capital base and provides it with added financial flexibility. The senior 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. 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 is expected to enable IndoStar to grow its business, in line with its stated strategy.

 

Weakness:

Average asset quality

Overall asset quality remains average as reflected in gross and net stage 3 assets of 4.3% and 2.3%, respectively, as on December 31, 2021 (4.4% and 2.1%, respectively as on March 31, 2021). Under the RBI’s Resolution Framework for COVID-19-related Stress, restructured AUM was around 11% as on December 31, 2021. While asset quality earlier was susceptible to slippages in wholesale book, the retail segments have also been impacted due to Covid-19 pandemic.

 

Overall GS3 assets stood at ~5.1% in the retail book as on December 31, 2021. This is primarily contributed by higher slippages in the commercial vehicle loan book. GS3 assets of CV loan book stood at 6.2% as on December 31, 2021. SME and housing finance segments have also seen stress in asset quality with GS3 assets of 3.8% and 2.6%, respectively, as on December 31, 2021.

 

GS3 assets of wholesale book stood at 1.2% as on December 31, 2021, which is down from highs of 6.1% as on September 30, 2020. Wholesale loan book was impacted during fiscals 2020 and 2021, with slippages in a few accounts in the real estate loan book. The company had proactively written off these accounts, which led to a sharp decline GS3 assets in wholesale loan book. As on December 31, 2021, the five largest wholesale loans accounted for nearly 55% of the wholesale portfolio and 10% of the overall loan portfolio.

 

While retail segment will bring granularity to overall loan book and is a key focus area of the IndoStar, ability to scale up the business while improving asset quality needs to be monitored, amid intense competition from established players. Further, impact of loan portfolio review on the overall asset quality performance will remain a monitorable.

Liquidity: Strong

The company maintains minimum 15% of networth in the form of liquid investments such as fixed deposits and liquid funds, including undrawn bank lines. As a policy, it avoids an asset-liability mismatch, with the favourable trend of repayment and prepayment cushioning the overall asset-liability maturity profile.

 

IndoStar, on a consolidated basis, had liquidity of Rs 1,336 crore (Rs 88 crore of cash and equivalent, liquid investments of Rs 545 cr, fixed deposits of Rs 29 and Rs 674 crore of unutilised bank lines) as on April 30, 2022. Against this, it has debt obligation of Rs 1420 crore till July 2022.

 

The company raised Rs 3,327 crore during fiscal 2022 through bank funding, securitization and capital markets.

Rating Sensitivity factors

Upward Factors:

• Significant improvement in market position while improving asset quality
• Improvement in profitability, with return on assets (RoA) beyond 3.0% on a sustained basis

 

Downward Factors:

• Deterioration in the asset quality, with gross NPAs increasing to above 6% over an extended period, thereby impacting profitability
• Weakening of capitalisation metrics with higher than expected gearing on a sustained basis

About the Company

IndoStar Capital Finance Limited, incorporated in November 2011, is registered with the Reserve Bank of India as a systemically important, non-deposit taking NBFC. The company was founded and incorporated by private equity players (Everstone, Goldman Sachs Baer Capital Partners, ACPI Investment managers, and CDIB International) with an initial capital of around Rs 900 crore. In May 2020, Brookfield invested Rs 1,225 crore and became the largest shareholder and co-promoter. As on March 31, 2022, Brookfield held 56.20% stake, followed by IndoStar Capital Mauritius (owned by the Everstone group and other marquee private equity investors) at 30.47% and the Everstone group at 2.53%.

 

The company started its business as a wholesale financier in fiscal 2011, and then entered the SME finance (loan against property) segment in fiscal 2015. In fiscal 2018, the company started offering vehicle finance and housing finance (through its wholly owned subsidiary, IndoStar Home Finance Private Limited). In fiscal 2019, the company acquired the CV finance business of IIFL Finance Limited. IndoStar had 343 branches spread across 21 states as on December 31, 2021.

Key Financial Indicators

For the period ended December 31*	Unit	2021	2020
Total assets	Rs crore	9712	11437
Total income (net of interest)	Rs crore	441	469
PAT	Rs crore	17	103
GS3 assets	%	4.3	2.8
Gearing	%	1.5	1.8
Return on assets	%	0.2	1.3

*Consolidated

Any other information: Not applicable