| IndoStar Capital Finance Limited | ||||||
| Ratings continues on 'Watch Negative' | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings continues its ratings on the long term bank facilities and debt instruments of IndoStar Capital Finance Limited (IndoStar) on ‘Rating Watch with Negative Implications’.
On April 24, 2022, Indostar Capital Finance Limited (Indostar) and JM Financial Home Loans Limited, announced that the companies are engaged in preliminary discussions to explore potential strategic options including combination and listing of the retail mortgage portfolio of JM Financial and the home finance business of Indostar Home Finance Private Limited (a 100% subsidiary of IndoStar) including other mortgage-backed business of Indostar.
CRISIL Ratings has taken a note of this announcement and has also noted that the discussions are currently at a preliminary stage and non-binding in nature and any transaction concerning Indostar and JM Financial will be subject to satisfactory due diligence, negotiation of commercial terms, execution of definitive agreements and receipt of all relevant regulatory and other approvals. CRISIL Ratings will continue to monitor the developments on an on-going basis.
On August 12, 2022, CRISIL Ratings had revised its rating watch on the bank facilities and NCDs of IndoStar to 'Watch with Negative Implications' from 'Watch with Developing Implications', and had placed its rating 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 fund raising and business of the company. Still, the ratings reflect the clear articulation and demonstration of support by the majority shareholder, Brookfield.
The ratings factor in the comfortable capital position of IndoStar, as indicated by overall capital adequacy ratio (CAR) of 33% and gearing of 1.8 times as on December 31, 2022.
IndoStar has adequate liquidity at present. As on March 31, 2023, the company had Rs 1106 crore of cash and equivalents, and Rs 135 crore of undrawn working capital bank limit. Regular collections should support liquidity. The company had debt obligation of Rs 909 crore over the six months ended September 30, 2023, of which Rs. 260 crore is in the form of Working Capital Limits and which is subject to roll over.
CRISIL Ratings has taken note of the company’s performance for the quarter through December 2022 and the management guidance on key business metrics. The company has taken measures to reduce its gross non-performing assets (NPAs) through various initiatives including collection, repossession and selling of the vehicles and settlement with borrowers. Gross NPAs stood at 9.1% as on December 31, 2022, with net NPAs at 4.1%.
On a standalone basis, the company reported profit after tax (PAT) of Rs 114.2 crore for the nine months through December 2022 against a net loss of Rs 1.9 crore in the corresponding period of the previous fiscal. During this period the Company wrote back Rs 517.3 crore of provisions (net of a write off of Rs 478.37 crore)
On a consolidated basis, the company wrote back provisions of Rs 520.72 crore of provisions (net of a write off of Rs. 485.06 crore), and had PAT of Rs 150 crore and return on assets (RoA) of 1.9% for the nine months through December 2022.
Considering the improved asset liability management profile and liquidity, auditors have removed comments regarding the going concern made in the second quarter.
CRISIL Ratings has also taken note of corrective actions by the IndoStar management. IndoStar has revamped its business processes by strengthening its risk and control management frameworks and governance mechanism. The company raised Rs 2,893 crore from April to December 2022 (including Rs 756 crore through securitisation transactions) from various banks and institutions. During the quarter ended March 2023, the Company raised Rs 650 crore through term loan and NCD issuance. The management has made appointments for several leadership positions such as chief financial officer (CFO) and chief risk officer (CRO) who has been elevated as Chief Executive Officer (CEO) since Feb 14, 2022.
CRISIL Ratings will continue to monitor fund raising by IndoStar as the developments of the previous period(s), which were reported in the first quarter of FY 2023 had impacted lender and investor confidence, delaying return to normalcy in fund raising, and therefore business. CRISIL Ratings will continue to engage with the company’s management to assess portfolio performance and likely ultimate losses from the identified portfolio, and to monitor progress on fund raising and return to business normalcy. The rating watch will be resolved once there is clarity regarding these aspects. Should the rating change, it is unlikely to be by more than a notch. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of IndoStar and its subsidiaries, collectively referred to herein as IndoStar, as the entities 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 Majority ownership by Brookfield has helped enhance the capital base and financial flexibility of IndoStar. Post infusion of Rs 1,225 crore in May 2020, Brookfield now owns 56.20% of IndoStar.
The ratings factor in the clear articulation and demonstration of support by Brookfield, which has been actively engaged in discussions with key stakeholders and arranged a sizeable funding line of Rs 770 crore through its global relationships. This has been instrumental in bolstering the liquidity of IndoStar. Steps have been taken to strengthen the management team and bring in experienced people in key positions such as the CFO, CRO, internal audit head and head of commercial vehicle (CV) credit.
Brookfield has articulated its intent to continue supporting IndoStar in raising debt and equity, which is a key rating sensitivity factor.
Adequate capitalisation IndoStar continues to have adequate capitalisation, even after the additional provisioning in the financial statements for fiscal 2022. Consolidated networth was Rs 3,086 crore as on December 31, 2022 (up from Rs 2,929 crore as on March 31, 2022), while gearing remained low at 2.8 times. Overall CAR stood well above the regulatory requirement at 33% as on December 31, 2022. With retailisation of the portfolio, the gearing is expected to increase 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 7,669 crore as on December 31, 2022, compared to Rs 9658 crore as on March 31, 2022. Of this, the retail book accounted for Rs 6,427 crore (84% of AUM) as on December 31, 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 past few years.
In the retail space, IndoStar operates in CV finance (AUM worth Rs 3,469 crore), and small and medium enterprises (SME) finance (mainly comprised secured loans against property; AUM: Rs 1,432 crore) and in affordable home finance (Rs 1,526 crore) through its wholly owned subsidiary, IndoStar Home Finance Pvt Ltd. Performance of the housing finance business remains better than other businesses.
While there have been challenges in the CV portfolio, CRISIL Ratings notes the better performance of the recently originated portfolio (post November 2020), as indicated by gross NPAs of 2.7%. The company is reorienting its underwriting policies and shifting focus on the customer side to small fleet owners, resulting in more granularity, and on the product side to used CVs, especially medium CVs and small CVs (from heavy CVs). Growth will likely be driven by these segments and affordable housing. That said, on-ground execution remains key and will continue to be closely monitored.
Weakness: Weak asset quality, impacting earnings 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%, respectively, on December 31, 2021. The GS3 increased because 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 fiscal 2021, consolidated net loss expanded to Rs 737 crore from Rs 214 crore. Pre-provision profit, however, remained stable at Rs 262 crore in fiscal 2022 vis-à-vis Rs 268 crore in the previous fiscal.
As on December 31, 2022, GS3 assets reduced to 9.1% on account of sale of assets of Rs 784 crore to an asset reconstruction company during the FY ended 2023 . Nevertheless, the company needs to demonstrate improved asset quality metrics on a sustained basis, which should support profitability over the long term. |
Liquidity: Adequate As on March 31, 2023, the company had Rs 1,106 crore of cash and cash equivalents, and Rs 135 crore of undrawn working capital bank limit. Regular collections should support liquidity. The company had debt obligation of Rs 909 crore for the six months ended September 30, 2023. |
Rating Sensitivity factors Upward factors
Downward factors
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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%.
IndoStar started business as a wholesale financier in fiscal 2011, and entered the SME finance (loans against property) segment in fiscal 2015. In fiscal 2018, the company started offering vehicle finance and housing finance (through wholly owned subsidiary, IndoStar Home Finance Pvt Ltd). In fiscal 2019, IndoStar acquired the CV finance business of IIFL Finance Ltd. The company plans to focus on used CV financing and housing finance hereon. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*yet to be issued |
Annexure – List of entities consolidated
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This Annexure has been updated on 28-Apr-2023 in line with the lender-wise facility details as on 21-Mar-2023 received from the rated entity
Criteria Details
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