Verdict: Prospects Shine Bright

IPO Snapshot:

Indostar Capital is entering the primary market on Wednesday 9^th May 2018 to raise Rs. 700 crore via fresh issue of equity shares of Rs. 10 each and an offer for sale (OFS) of up to 2 crore equity shares by promoter and 5 individuals, both in the price band of Rs. 570 to Rs. 572 per share. Representing 35.37% of the post issue paid-up share capital, total issue size is Rs. 1,844 crore at the upper end of the price band, of which, 62% is the OFS portion. Issue is scheduled to close on Friday 11^th May and listing is likely on 21^st May.

Company Overview:

Indostar Capital, a 7 year old Mumbai based NBFC, promoted by 4 PE funds (Everstone Capital, Beacon India, ACPI Investment Managers and CIDB Capital), provides structured term finance to corporates and loans to SMEs, which accounts for 77% and 23% of its Rs. 5,121 crore loan book (31-12-17) respectively. Company has recently diversified into affordable home loans and used vehicle financing. While affordable housing space is quite crowded, the opportunity itself is quite attractive, with 18% projected growth rate seen over next 2-3 years. Prospects of vehicle financing appear bright for the company, targeting the 3-5 year used CV space. Besides yielding couple of basis points higher margin in relation to new vehicle financing, company’s CEO is Mr. R Sridhar was the former MD of Shriram Transport Finance, which is India’s largest used asset financier, specializing in used CV space and commanding ~40% market share. His industry insight should come in handy as the company scales up this new vertical. Couple of key risks factor include diversification into retail lending (from pure corporate lending presently) may strain profitability in the near term and also high exposure to real estate sector (42% of loan book, as of 31-12-17), concentrated mainly in Mumbai geography.

Financial Performance:

Between FY14-17, company’s revenue has increased at 22% CAGR to Rs. 719 crore, while net interest income (NII) has jumped at 26% CAGR (or doubled in 3 years) to Rs.408 crore, from Rs. 203 crore in FY14. Net profit surged at 23% CAGR to touch Rs. 211 crore in FY17, resulting in an EPS of Rs. 26 for FY17. For 9MFY18, revenue stood at Rs. 580 crore, although disbursements were only Rs. 3,200 crore, as against Rs. 4,900 crore in FY17. NII and net profit for 9MFY18 are at Rs. 351 crore and Rs.18.82 crore respectively. While, company’s net interest margin (NIMs) have been rising, from 6% in FY15 to 6.9% in 9MFY18, it is still lower than many listed NBFCs like Bajaj Finance, M&MFin, Shriram City Union, Shriram Transport, Cholamandalam, as company’s average cost of borrowings are at 9.1%, is on the highest side. Although on an uptrend, asset quality is still under check, with net NPAs at 1.3% as of 31-12-17 versus 0.5% as of 31-3-15. Company’s net worth as of 31-12-17 stood at Rs. 2,077 crore, leading to BVPS of Rs. 264. FY17 RoE stood at 11.1%, as the company is under expansion mode. Capital adequacy is more than comfortable at 31.6%. Company’s financial strength can be termed as moderately healthy with balance of growth rates and bad loans.

Objects of Issue and Shareholding Pattern:

Fresh issue proceeds of Rs. 700 crore will augment capital base, in turn boosting lending. Promoter Indostar Capital, holding 90.12% stake in the company currently, accounts for major part of the OFS (92.5%) whose stake will decline to 57.71% post IPO. 5 other individuals are off-loading some shares via the OFS. Noted Dalal Street investor Prof S Mankekar holds 16.66 lakh shares in the company (1.8% of post issue capital), acquired at Rs. 300 a piece, in March last year. Based on this last transacted price, 90% jump in past 14 months seems stretched, as financials have not been supportive of such premium. However, one may argue on the liquidity (lock-in regulations) and nature of private placement to justify the lower price then. Nevertheless, company valuation, per se, is not aggressive, as elaborated below.

Valuation:

At Rs. 572 per share, company’s market cap will be Rs. 5,213 crore, which, on post-money basis, leads to PBV multiple of 1.8x, based on expected BVPS of Rs. 310, as of 31-3-18. On one year forward basis, the PBV multiple is only 1.7x which is one of the cheapest in the listed NBFC space. Most peers specializing in SME lending such as Shriram City Union and Capital First are ruling at PBV multiples of 2x and above, with comparable RoEs (in low teens), similar asset quality and growth rates. Even L&T Fin, with over 50% book made up of wholesale loans, is ruling at PBV multiple of 2.5x, with net NPAs of 2.34% and RoE of 15%. More well-established and bigger NBFCs such as Sundaram, Cholamandalam, M&M Fin, Shriram Transport are obviously ruling much higher, at 2.5x-4x range. Thus, valuation of Indostar Capital is attractive, and partly addresses the risk of higher real estate exposure and entry into newer verticals.

Conclusion:

Professional management, established presence in under-penetrated mid-market corporate loans, planned diversification in new verticals, reasonable valuation make the issue attractive. Hence, we assign a ‘subscribe’ to the issue.

Disclosure: No interest.