Rating Rationale
February 08, 2018 | Mumbai
IndoStar Capital Finance Limited
Rated amount enhanced 
Rating Action
Rs.2000 Crore Commercial Paper Programme (Enhanced from Rs.1750 Crore) CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper of IndoStar Capital Finance Limited (IndoStar). The rating reflect the company's experienced management and high level of operational involvement of its key sponsors, and strong capitalisation with a conservative gearing philosophy. The rating also factors in healthy earnings profile, management's ability to appraise corporate loans, measured loan growth strategy, and conservative liquidity management policy. These strengths are partially offset by inherent vulnerability in IndoStar's asset quality, given the concentration risks, and short track record of operations.

Analytical Approach

For arriving at its rating, CRISIL has combined the business and financial risk profiles of IndoStar and its subsidiaries, together referred to herein as IndoStar.

Key Rating Drivers & Detailed Description
* Experienced management, active involvement of sponsors in operations and strategy decisions: Top management comprises professionals with proven expertise in the wholesale financing business, and have a combined experience of over 65 years across sectors such as infrastructure, real estate, and capital markets. Furthermore, the company benefits from the high level of involvement of its principal sponsors and their expertise in the segment. They oversee key areas of policy formulation, risk management, credit approvals, and regulatory compliance. The sponsors play a key role in the credit evaluation process for most new proposals. CRISIL also believes that the management and sponsors share a common vision and philosophy for IndoStar, supported by the relatively long horizon of investing entities. This will enable IndoStar to continue to grow its business in line with its stated strategy, and with continuing adherence to its overall risk philosophy.
* Strong capitalisation with a conservative gearing philosophy: IndoStar commenced operations with a healthy start-up capital of Rs 890 crore, infused through IndoStar Capital, Mauritius. This allows IndoStar to take large wholesale exposures as the sole/largest lender, and undertake independent credit evaluations. As of December 31, 20171, networth was Rs 2075 crore and gearing around 1.8 times, (vis-a-vis Rs 1,898 crore and 1.8 times, respectively, as on March 31, 2017). Capital adequacy ratio (CAR) stood at 31.6% as on December 31, 2017 (32.7% as on March 31, 2017). As per IndoStar's stated policy, it will maintain a minimum CAR of 20% on a steady state basis. Furthermore, the company intends to maintain gearing below 2.5 times over the medium term. Though CRISIL believes this could increase over the next few years, it will remain below 3.5 times on a steady state basis. Capital position is also supported by the ability to raise additional capital either through existing sponsors or new investors.
* Healthy earnings profile: Return on assets (RoA) exceeds the industry average, supported by fee income and steady improvement in funding profile. The company has been profitable almost since inception. RoA was around 3.8% for the nine-months through December 2017 (4.1% fiscal 2017).  The company earns an average interest spread of around 3.0% on its loan portfolio, with highest yields on its real estate loans. It has also been able to diversify its resource profile and reduce cost of borrowing over time.
Relationships with over 25 banks, mutual funds, insurance companies and other financial institutions, established in the past few years, should help diversify the funding profile. As on December 31, 2017, total borrowings stood at Rs 3686 crore, of which borrowings from banks accounted for almost 43%; short-term market borrowings accounted for 35%, and remaining were via non-convertible debentures. Any sharp deterioration in asset quality could, however, escalate credit costs and impact profitability.
* Conservative liquidity policy: The company maintains minimum 15% of networth in the form of liquid investments such as fixed deposits and liquid funds, including undrawn bank lines. It does not run an asset-liability mismatch, and the favourable trend of repayments and prepayments provides cushion to the overall asset-liability management position. Therefore, IndoStar will be better placed to withstand any liquidity pressure.
* Asset quality susceptible to concentration risks: Asset quality will remain vulnerable to concentration risks inherent in the wholesale lending business model, despite strong credit appraisal and risk management processes in place. As on March 31, 2017, the five largest loans constituted nearly 18% of the portfolio (22% as on March 31, 2015). Furthermore, around 42% of the portfolio comprises real estate loans, a segment that is vulnerable to cyclical downturns.
IndoStar follows strong credit appraisal and risk management practices, especially in the real estate segment. The company targets borrowers with a long track record of timely repayment. All loans have a minimum security cover of 1.5 times, with real estate loans having a minimum security cover of 2.5 times. The company mainly caters to reputed developers in the residential market. All project cash flows are escrowed and the loan is structured in a manner that enables mandatory prepayments, resulting in early repayment of loans. The company also sells down some part of the real estate loans originated.  It has had only three non-performing assets on the corporate book (gross non-performing assets of 1.7% as on December, 2017), of which two accounts are fully recovered.
While IndoStar will remain a wholesale financier, it is also catering to into SMEs, and commercial vehicle segments (from the current fiscal).  Indostar Housing Finance Pvt Ltd (wholly-owned subsidiary of Indostar), which received the housing finance company (HFC) licence in August 2016, has also started disbursements in retail self-employed mortgage segment. This will bring some granularity over the medium term.  However, inherent nature of the loan portfolio renders IndoStar vulnerable to economic stress. Any sharp deterioration in asset quality may also affect profitability and capital.
* Short track record of operations: Fiscal 2012 was the first full year of operations. The company had initially started operations focusing primarily on wholesale financing, and has gradually expanded operations into SME and retail financing. SME financing is currently carried out at 10 branches, and constitutes around 23% of the overall loan book as of December 2017.
Given the nascent stage of operations, the portfolio has seen limited seasoning, especially SME loans, and newer segments like mortgages and commercial vehicles financing. While asset quality has been healthy so far, performance of a portfolio of this nature would need to be seen through economic cycles.
About the Company

Incorporated as RV Vyapar Pvt Ltd in 2009, the non-banking financial company (NBFC) was rechristened IndoStar Capital Finance Pvt Ltd in November 2010. It was renamed as IndoStar on May 28, 2014. The company is registered with the Reserve Bank of India as a systemically important non-deposit taking NBFC.
IndoStar has been sponsored by financial institutions such as Everstone Capital, Goldman Sachs Group, Baer Capital Partners, ACPI Investments, and CDIB Capital International Corporation. The funds have been invested through IndoStar Capital, Mauritius (IndoStar Everstone holds 49.4% stake in the company), which holds 90.74% in IndoStar Capital Finance, while 9.26% is held by the employees (resident individuals including employees, directors). IndoStar offers term loans, short-term working capital loans, real estate loans against property, promoter funding against shares, as well as special situation loans such as acquisition financing. The company's housing finance subsidiary, IndoStar Home Finance Pvt Ltd, which received the HFC licence in fiscal 2017, will help the company diversify into the retail segment. As on December 31, 2017, outstanding loan book was Rs 5152 crore (Rs 5156 crore as on March 31, 2017). Total income and profit after tax were Rs 584 crore and Rs 165 crore respectively for the nine months ended December 31, 2017.

1December 31,2017 numbers are provisional and yet to be audited

Key Financial Indicators
As on /for the period ended March 31   2017 2016
Total Assets Rs crore 5489 4693
Total income Rs crore 720 644
Profit after tax Rs crore 211 192
Gross NPA % 1.4 0.2
Gearing Times 1.8 1.9
Return on assets % 4.1 4.4

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs. Cr) Rating Outstanding
with Outlook
NA Commercial Paper Programme NA NA 7-365 Days 2000 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  2000  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+   
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt

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