Detailed Rationale

CRISIL Ratings on the bank facilities and debt instruments of IndoStar Capital Finance Limited (IndoStar) continue on 'Rating Watch with Negative Implications'.

 

On August 12, 2022, CRISIL Ratings had revised its rating watch on the bank facilities and non-convertible debentures of IndoStar to 'Watch with negative implications' from 'Watch with developing implications'. Further, CRISIL Ratings had placed its ratings on the company’s commercial paper programme on ‘Watch with negative implications’.

 

The rating action was on account of the potential impact of the fiscal 2022 results on the future fund raising and the business of the company emanating from three key aspects (a) higher than earlier estimated impairment allowance at Rs 886 crore on the commercial vehicle (CV) portfolio with total impairment allowance of Rs 1,117 crore as on March 31, 2022, and total gross non-performing assets (NPAs) of 15.5% (b) qualified opinion issued by the statutory auditors Deloitte Haskins & Sells LLP on the audit report for the year ended March 31, 2022 (c) material uncertainty related to going concern noted in the audit report.

 

Nevertheless, the ratings reflect clear articulation and demonstration of support by the majority shareholder, Brookfield, which has been actively engaged in discussions with key stakeholders, and also arranged a sizeable funding line of Rs 770 crore through its global relationships; this has been instrumental in bolstering liquidity. Steps have also been taken to strengthen the management team of IndoStar. Brookfield has articulated its intent to continue supporting the company in raising need-based debt and equity.

 

The ratings also factor in the comfortable capital position of the company, with an overall capital adequacy ratio (CAR) of 34.1% and gearing of 1.8 times as on September 30, 2022.

 

Liquidity of IndoStar is currently adequate. As on December 31, 2022, the company had Rs 873 crore of cash and cash equivalents, and Rs 260 crore of undrawn working capital bank limit, totaling Rs 1,133 crore. Regular collections should also support liquidity. Against this, the company had repayments of Rs 338 crore for the three months ended March 31, 2022.

 

CRISIL Ratings has taken note of the company’s September quarter performance and management guidance on the key business metrics. The company has taken measures to reduce its gross NPAs through various initiatives including settlement with borrowers, and sale of NPAs to an asset reconstruction company. Resultantly, gross NPAs stood at 8.3% as on September 30, 2022, with net NPAs at 3.4%. On consolidated basis, the company has also written back provisions of Rs 22 crore for the half year period ended September 2022; the company reported consolidated profit after tax of Rs 113 crore and return on assets (RoA) of 2.4% for the same period. Considering the improved asset and liability management profile and liquidity, auditors have also removed the comment on going concern.

 

CRISIL Ratings has also taken note of corrective actions undertaken by the management. Indostar has revamped its business processes by strengthening its risk and controls management frameworks, governance mechanism. The company has been able to raise funds worth Rs 2,493 crore post May 2022 (including Rs 756 crore raised from securitisation transactions) from various banks and institutions between June and December 2022. Further, the management has appointed several heads in leadership positions such as chief financial officer (CFO), and chief risk officer (CRO).

 

However, CRISIL Ratings will continue to monitor the fund raising by the company as recent developments have impacted lender and investor confidence,  delaying return to normalcy in fund raising, and therefore business, for IndoStar.

 

CRISIL Ratings will continue to engage with the management for continuing to assess portfolio performance, likely ultimate losses from the identified portfolio, and also monitor progress on fund raising and return to business normalcy. The rating watch will be resolved once greater clarity emerges regarding these aspects.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of IndoStar and its subsidiaries, collectively referred herein as IndoStar. This is because they have significant operational, financial, and managerial integration and 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:

• Demonstrated support from majority shareholder, Brookfield

IndoStar’s majority ownership by Brookfield has helped enhance its capital base and provides added financial flexibility; post the infusion of Rs 1,225 crore in May 2020, Brookfield now owns 56% of the company’s equity.

 

The ratings factor in the clear articulation and demonstration of support by the majority shareholder, Brookfield, which has been actively engaged in discussions with key stakeholders, and also arranged a sizeable funding line of Rs 770 crore through its global relationships; this has been instrumental in bolstering liquidity of the company. Steps have also been taken to strengthen the management team and bringing in experienced people in key positions such as the CFO, CRO, Internal Audit Head and Head of CV Credit.

 

Brookfield has articulated its intent to continue supporting the company in raising need-based debt and equity, and this is a key rating sensitivity factor.

 

• Adequate capitalisation

IndoStar continues to have adequate capitalisation, even post the impact of the additional provisioning taken in the financial statements pertaining to fiscal 2022. Consolidated networth stood at Rs 3,050 crore as on September 30, 2022 (improved from Rs 2,929 crore as on March 31, 2022), while gearing remained low at 2.1 times. Overall CAR stood well above the regulatory requirement at 34.1% as on September 30, 2022. With retailisation of the portfolio, gearing is expected to increase from current levels over the medium term. However, the management should prudently manage the same.

 

• Retailisation of portfolio, though successful scale up to be demonstrated

Consolidated assets under management (AUM) stood at Rs 7,883 crore as on September 30, 2022, compared to Rs 9,663 crore as on March 31, 2022. Of this, the retail book accounted for Rs 6,642 crore (84% of AUM) as on September 30, 2022, against Rs 8,090 crore (84%) as on March 31, 2022. This is a significant change from earlier when IndoStar was a wholesale-focused lender; the company has been running down the corporate loan portfolio in the last few years.

 

Among retail product offerings, the company operates in CV finance (AUM worth Rs 3,612 crore), and SME (small and medium enterprises) finance (mainly comprised secured loans against property; AUM: Rs 1,541 crore) through IndoStar and affordable home finance (Rs 1,489 crore) through its wholly-owned subsidiary – IndoStar Home Finance Pvt Ltd. Disbursements slowed down in fiscal 2023 but later picked up, especially in CV segment, as the company returns to normalcy.

 

While there have been challenges in the CV portfolio, CRISIL Ratings notes the better performance of the recently originated portfolio (post November 2020), where the gross NPAs stood at 1.9%. Further, the company is reorienting its underwriting policies and shifting focus on the customer side to small fleet owners, resulting in greater granularity, and on the product side to used CVs, especially medium CVs and small CVs (from heavy CVs). Future growth is expected to be driven by these segments and affordable housing. Performance of the housing finance business remains better than other businesses.

 

Having said this, on-ground execution will be key and remain closely monitored.

 

Weakness:

• Weak asset quality, impacting earnings profile

Overall asset quality weakened as gross stage 3 (GS3) and net stage 3 assets increased sharply to 15.5% and 8.3%, respectively, as on March 31, 2022, from 4.3% and 2.3% on December 31, 2021. The increase in GS3 was the result of the staging policy adopted by the company in the light of control deficiencies identified primarily in the CV loan book and to some extent in the SME loan book.

 

As a result of the rising provisioning requirement, with credit costs increasing to Rs 1,158 crore in fiscal 2022 from Rs 487 crore in the previous fiscal, consolidated net loss also grew to Rs 737 crore from Rs 214 crore; however, pre-provision profits remained stable at Rs 262 crore in fiscal 2022, as against Rs 268 crore in the previous fiscal.

 

As on September 30, 2022, gross stage 3 assets reduced to 8.3% on account of sale of Rs 516 crore to an asset reconstruction company and write-offs of Rs 369 crore. Nevertheless, it will be important for the company to demonstrate improved asset quality metrics on a sustained basis, which should support profitability over the medium and long term.

Liquidity: Adequate

As on December 31, 2022, the company had Rs 873 crore of cash and cash equivalents, and Rs 260 crore of undrawn working capital bank limit, totaling Rs 1,133 crore. Regular collections should also support liquidity. Against this, the company had repayments of Rs 338 crore for the three months ended March 31, 2022

Rating Sensitivity factors

Upward factors

• Substantial improvement in fund raising on a steady state, and successful execution of planned business strategy
• Significant improvement in profitability, with RoA beyond 3.0% on a sustained basis
• Material and sustained improvement in asset quality

 

Downward factors

• Stake by Brookfield reducing below 51% and/or any reduction in expectation of support by Brookfield
• Delay in fund raising other than through the securitisation route, impacting business growth
• Further deterioration in capital adequacy levels
• Continued stress in asset quality and profitability

About the Company

IndoStar, incorporated in November 2011, is registered with the Reserve Bank of India as a systemically important, non-deposit taking non-banking financial company. 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 September 30, 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%.

 

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 Pvt Ltd). In fiscal 2019, the company acquired the CV finance business of IIFL Finance Ltd. Going ahead, the company plans to focus on used CV financing and housing finance.

Key Financial Indicators

For the period ended March 31 (consolidated)		2022	2021
Total assets	Rs crore	9,661	10,082
Total income (net of interest)	Rs crore	635	579
PAT	Rs crore	-737	-214
GS3 assets	%	15.5	4.4
Gearing	%	2.1	1.6
Return on assets	%	-7.5	-2.1

 

For the period ended September 30 (consolidated)		2022	2021
Total assets	Rs crore	8,995	9,815
Total income (net of interest)	Rs crore	314	270
PAT	Rs crore	113	3
GS3 assets	%	8.3	4.7
Gearing	%	1.8	1.6
Return on assets	%	2.4	0.1

 

Any other information: Not applicable

Annexure - Details of Instrument(s)^

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
NA	Commercial paper programme	NA	NA	7-365 Days	2000	Simple	CRISIL A1+/Watch Negative
INE896L08049	Non-convertible debentures	30-Jul-21	Linked to 3 M Treasury Bills	30-Aug-22	150	Simple	CRISIL AA-/Watch Negative
INE896L07793	Non-convertible debentures	3-Jan-22	7.80%	03-Jan-24	50	Simple	CRISIL AA-/Watch Negative
INE896L07843	Non-convertible debentures	29-Dec-22	Linked to repo	01-Jan-24	92.0	Simple	CRISIL AA-/Watch Negative
INE896L07827	Non-convertible debentures	29-Dec-22	Linked to repo	29-Mar-24	40.0	Simple	CRISIL AA-/Watch Negative
INE896L07819	Non-convertible debentures	29-Dec-22	Linked to repo	28-Jun-24	40.0	Simple	CRISIL AA-/Watch Negative
INE896L07835	Non-convertible debentures	29-Dec-22	Linked to repo	27-Sep-24	108.0	Simple	CRISIL AA-/Watch Negative
INE896L07801	Non-convertible debentures	29-Dec-22	Linked to repo	27-Dec-24	120.0	Simple	CRISIL AA-/Watch Negative
NA	Non-convertible debentures*	NA	NA	NA	825	Simple	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	23-Jan-24	62.17	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	31-Mar-26	81.25	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	07-Apr-25	41.67	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	29-Jun-25	62.37	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	31-Mar-22	75.00	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	31-Mar-24	228.13	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	30-Sep-23	37.50	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	11-Mar-24	31.25	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	30-Dec-24	37.50	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	31-Mar-24	31.25	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	30-Dec-24	53.33	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	25-Sep-23	117.19	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	31-Mar-25	31.25	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	31-May-23	15.00	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	31-Dec-25	125.05	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	10-May-24	116.50	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	20-Dec-23	12.50	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	31-Jan-25	446.92	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	31-Mar-24	54.95	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	01-May-25	58.33	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	23-Jun-24	770.00	NA	CRISIL AA-/Watch Negative
NA	Term Loan	NA	NA	23-Jul-24	52.78	NA	CRISIL AA-/Watch Negative
NA	Cash Credit & Working Capital Demand Loan	NA	NA	NA	370.00	NA	CRISIL AA-/Watch Negative
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	5088.11	NA	CRISIL AA-/Watch Negative

*yet to be issued
^As on December 31, 2022

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
IndoStar	Full	Holding company
IndoStar Home Finance Pvt Ltd	Full	Subsidiary
IndoStar Asset Advisory Pvt Ltd	Full	Subsidiary