Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Support from the majority shareholder, Brookfield: Brookfield, a Canada-based global alternative asset manager, is the largest shareholder and promoter, holding 56.20% stake in IndoStar. Brookfield made its first investment in India's financial services space in IndoStar, with a capital injection of Rs 1,225 crore in May 2020. The infusion enhanced the capital base and financial flexibility of IndoStar.

In the fourth quarter of fiscal 2024, the board and shareholders approved fundraise of Rs 456.7 crore via preferential allotment of warrants to Brookfield Asset Management (through one of its private equity funds) and Florintree Tecserv LLP (Florintree). Of this fundraise, IndoStar has received Rs. 50 crore from Florintree (25% of their subscription) and Rs. 205 crore from Brookfield (80% of their subscription). The balance is expected to be received by the end of the current financial year. Following the fundraise, Brookfield will retain its shareholding in the company.

Besides direct equity funding, Brookfield has provided access to new debt funding through its relationships with various financial institutions, which aided growth of the retail lending business. This has been visible through fund raises through NCDs of Rs 900 crore and term loans of Rs 770 crore in fiscal 2023, and NCDs of Rs 2,455 crore in fiscal 2024, which supported growth in business.

Brookfield has also actively supported IndoStar in putting in place a new management team and leadership and has articulated its intent to continue supporting the company in raising funds, which will be a key rating sensitivity factor.

Comfortable capitalization: Capitalisation remains comfortable with networth of Rs 3,426 crore as on March 31, 2025, up from Rs 3,102 crore as on March 31, 2024. Gearing was moderate at 2.0 times as on March 31, 2025. Net proceeds from the sale of Niwas have also bolstered the capital position and remain available to fuel growth of business.

The capital adequacy ratio (CRAR) remains well above the regulatory requirement at 28.5% as on March 31, 2025, supporting growth. With retailisation of the portfolio, gearing is expected to increase over the medium term. However, the management is expected to prudently manage it.

Retailisation of the portfolio, though successful scale-up yet to be seen: While the company started operations as a wholesale financier, retail loans are now seen as the key growth driver with steady expansion in retail segment over the last few years.

The retail book accounted for Rs 7,806 crore (98% of assets under management [AUM]) as on March 31, 2025, as against Rs 7,450 crore (62% of the consolidated AUM) as on March 31, 2019. The company has strategically prioritised its focus on used vehicles while running down their corporate and large ticket small and medium enterprise (SME) books which now form just 2.0% and 4.4% of the AUM, respectively, as on March 31, 2025. This rundown has also been facilitated by sales to asset reconstruction companies (ARCs) through multiple transactions.

The company has stopped disbursements in the SME book and incremental disbursements in the corporate book are residual in nature for existing sanctions. Over the medium term, its focus will continue to be on used vehicle financing, while also gradually entering the micro loans against property (LAP) segment, though growth in the segment will remain modest in the near term.

Weaknesses:

Weak asset quality metrics : Asset quality (standalone) sharply weakened in fiscal 2022 as gross stage 3 (GS3) and net stage 3 (NS3) assets increased to 15.5% and 7.3%, respectively, as on March 31, 2022, from 4.4% and 2.1%, respectively, as on March 31, 2021. This was because of the staging policy adopted by the company in the light of control deficiencies identified in the commercial vehicles (CV) loan book and to some extent in the SME loan book.

The company undertook a series of corrective actions post May 2022, which included strengthening of risk and control management frameworks and governance mechanism and focusing on building a retail portfolio in a scalable manner. The company drafted new underwriting policies, strengthened collection and focused on better analytics. It also enhanced digitalisation and upgraded their technology systems across loan origination, credit appraisal, disbursal and collection. The company shifted focus on the customer side to first-time users / borrowers, resulting in more granularity, and on the product side to used CVs, especially medium CVs and small CVs (from heavy CVs).

As on March 31, 2025, GS3 now stands at 4.5%, compared to 4.9% as on March 31, 2024. Notably, GS3 for the new CV book (disbursed post March 2022) has inched up to 3.7% compared to 1.8% over the same period. As a result, after strong growth in disbursements in fiscal 2024 (Rs 4559 crore) from fiscal 2023 (Rs 1613 crore), the company has moderated disbursements in fiscal 2025 (Rs 5250 crore) and further tightened underwriting norms, increasing their mix towards tractor, farm equipments, SCV, pick up and cars, termed as ‘Focus4’. Disbursements are expected to remain moderate over the medium term as the company balances growth with asset quality.

The company also undertook an ARC sale of Rs 540 crore in fiscal 2025, comprising CV and corporate stressed assets. Total stressed assets, including investments in ARCs, continues to remain elevated at 19.5% as on March 31, 2025, compared to 18% as on March 31, 2024. The provision against these stands at ~30% as on March 31, 2025.

The wholesale portfolio of Rs 156 crore from the legacy book is running down. It is now concentrated towards two borrower groups, both of which are standard assets. The ability to manage timely repayments in this book is linked to the performance of the real estate projects where IndoStar was the sole lender. Hence, asset quality in this book has remained susceptible to lumpy slippages. The SME AUM is now down to Rs. 353 crore from Rs. 1,776 crore as of Mar-22. Furthermore, the quality of the SME assets that remain on-book remains weak with 21% of the book in the 30+ dpd bucket (as on March 31, 2025), on a declining book.

Crisil Ratings notes that the risk on the portfolio sold to the ARCs may have a bearing on the earnings profile in case of lower-than-expected recoveries, necessitating higher credit cost. The performance of the new book as the portfolio continues to season is also a key monitorable.

Moderate earnings profile: On a standalone basis, the company incurred losses in fiscals 2021 and 2022 owing to high provisioning for impairment on its loan portfolio, resulting in credit cost of 12.4% of average total assets in fiscal 2022. This was because of the Covid-19 pandemic and control deficiencies identified in the CV portfolio.

IndoStar reported a standalone profit after tax (PAT) of Rs 187 crore and return on assets (RoA) of 2.2% in fiscal 2023, on account of a writeback in credit costs (negative 0.5%) resulting from significant recovery during fiscal 2023, as against provisions incurred in fiscal 2022.

Post shift to the higher yielding CV segment, there was an improvement in lending spread and net interest margin. Consequently, yields on loans [1] improved from 13.4% for fiscal 2023 to 18.1% for fiscal 2025. However, profitability remained subdued in fiscals 2024 and 2025 with RoA of 0.8% and 0.5% respectively. This was on account of higher borrowing cost [2] (11.4% in fiscal 2025, as against 10.7% in fiscal 2024), high operating expenses (4.8% and 4.4%, respectively, of average managed assets), and credit costs incurred (1.4% and 0.9%, respectively, of average managed assets). Ramping up of business operations, investment in digital infrastructure and higher employee costs have led to elevated operating costs.

Going ahead, focusing on higher yielding businesses and some reduction in borrowing costs, given the lower interest rate environment, will benefit the earnings profile. However, the ability to improve operating efficiency and manage credit costs both on the new book as well as the security receipts portfolio will remain a key monitorable.

Cost of borrowing remains elevated, though gradual improvement in funding diversity is seen: Business and funding were severely impacted following identification of control deficiencies in the CV portfolio as on March 31, 2022. Due to the support of Brookfield and the management’s efforts to ensure active engagement with both lenders and investors, none of the lenders recalled any facilities and none of the NCDs have covenants that are in breach.

Majority of the incremental funding since 2022 has been raised through NCDs with a smaller quantum from existing relationships with banks. Subsequently, the company has taken steps to mobilise bank funding in fiscal 2025. IndoStar raised funds aggregating Rs 5,358 crore in fiscal 2025. Of this, 22% were through NCDs, commercial paper accounted for 25%, securitisation 19% and funding from banks 34% (working capital – 9% and term loans 25%). Weighted average cost of borrowings remains high at 10.78% p.a.p.m. as on March 31, 2025, as the company continues to hold some higher cost NCDs. Some of the proceeds of the Niwas sale are expected to go towards repayment of these borrowings, which should reduce overall funding costs for the company. The company has recently raised NCDs of Rs. 400 Cr in Jun-25 for tenor of 24 and 25 months at competitive XIRR of 9.50% per annum. Going ahead, the company’s ability to consistently avail funds at competitive rates while diversifying its borrowing mix will remain a key rating sensitivity factor.

[1] Yields on advances = interest income during the period divided by the average of outstanding loans and advances

[2] Borrowing cost = interest cost during the period divided by the average of outstanding borrowings