Reduce Indostar Capital Finance, target price Rs 253: HDFC Securities

HDFC Securities has given a reduce rating to Indostar Capital Finance with a target price of Rs 253. The share price moved up by 0.16 per cent from its previous close of Rs 285.45. The stock’s last traded price is Rs 285.90.

Indostar’s GNPAs dipped 4.2 per cent quarter on quarter to Rs 3.65 billion (4.5 per cent). However, they were cushioned by the standstill classification impact and by accelerated w/offs. Corporate GNPAs were flat at Rs 1.55 billion (5.4 per cent) and VF GNPAs dipped to Rs 1.8bn (5.6 per cent).

The company made significant write-offs in the corporate book relating to previously identified stressed exposures (fitness, media and real estate companies). Given the significant proportion of the portfolio under moratorium (~90 per cent by value), the brokerages expect GNPAs to reach 7.2 per cent by FY21E though the management has indicated that collection efficiency has improved and the proportion of loans under moratorium 2.0 is lower (vs. 1.0).

Investment Rationale

According to the brokerage, Indostar’s 4Q performance was considerably below expectations as high credit costs on account of accelerated write-offs and Covid-19 related provisions wiped out profits. Asset quality was optically stable quarter on quarter, aided by the accelerated write-offs. AUMs de-grew, led by the corporate book.

Source: HDFC Securities

The equity infusion by Brookfield is certainly a positive development, especially given the pedigree of the investor. Not only does it augment the company’s capital and liquidity buffers and its debt-raising ability but it also bolsters long-term growth prospects.

However, near term challenges await- (1) AUMs are likely to de-grow in FY21E in the absence of adequate disbursal opportunities, (2) stress is likely to crystallise in view of broader economic circumstances and significant moratorium percentage and consequent provisions will limit earnings. These underpin the brokerage’s reduce rating with a target price of Rs 253, based on 0.9 times FY22E ABV).

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 319.13 crore, down -12.75 per cent from last quarter sales of Rs 365.78 crore and down -6.43 per cent from last year's same quarter sales of Rs 341.06 crore. The company reported net profit after tax of Rs -421.35 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 60.62 per cent stake in the company as of March 31, 2020, while FIIs held 5.84 per cent, DIIs 17.23 per cent and public and others 16.31 per cent.