INDOSTAR is at the beginning of its ‘second innings’ – the ongoing business diversification into retail lending will help drive growth, improve credit rating and enable it to enjoy higher leverage. While RoE is likely to be subdued at 10-11% in the near term, it is likely to improve to 13- 15% over the medium term. With capital adequacy ratio of 20%+, it is well capitalized and will not require any further dilution over the medium term. The key risk to our thesis lies in continued liquidity tightness leading to lower- than-expected growth in the vehicle finance segment. We maintain our estimates. Buy with TP of INR525 (1.2x FY21 BVPS).
However, the near-term RoE is likely to be modest at 9-11% due to (a) heavy investment in branch expansion (150 branches opened in the past one year) and (b) low leverage (Tier-I capital of 30%). Over the medium term, its RoE is expected to improve to 13-15% as INDOSTAR’s branches mature, and its long-term sustainable RoE is likely to be 16%. We believe that at the stock’s current valuations of 1.1x FY20E BV and 10x FY20E EPS, the risk-reward for INDOSTAR is favorable. We, thus, initiate coverage on the stock with a Buy rating and a TP of INR525 (1.2x FY21E BV).
Opportunistic and tactile lending by an astute mgt translated into (1) superior yields (~15% over FY13- 18), (2) astounding asset quality (G/NNPAs: 90/60bps), (3) efficient operations and (4) thus lofty RoAAs (4.7%, FY 13-18). Granular growth will de-risk the overall book, hereon. Further, the ability to increase leverage will drive RoAEs. At a little over ~1x trailing ABV, valuations are attractive even if we assume significant slippages (unlikely). Initiate coverage with a BUY (TP of Rs 549, 1.5xMar-21E ABV of Rs 366).