Rating Rationale
February 28, 2020 | Mumbai
IndoStar Capital Finance Limited
Rating Reaffirmed 
 
 
Rs.2000 Crore Commercial Paper Programme  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 programme of IndoStar Capital Finance Limited (IndoStar).

The rating reflects IndoStar's strong capitalisation, diversified product offerings and experienced management team. These strengths are partially offset by the inherent vulnerability in asset quality, given the concentration risks.

On January 31, 2020, the Everstone group (Everstone), one of the promoters of IndoStar, announced that it has entered into an agreement with BCP V Multiple Holdings Pte. Ltd (BCP V Fund), a private equity fund managed by Brookfield Business Partners (Brookfield). Under this agreement, BCP V Fund will invest about Rs 1,225 crore in IndoStar via equity shares and compulsorily convertible preference shares. Further, Brookfield will acquire additional shares from IndoStar Capital Mauritius, and through the mandatory open offer. Post, the above capital infusion and secondary market purchases, Brookfield will hold at least 40% stake in the company, and be designated as a co-promoter along with Everstone.

Analytical Approach

For arriving at the 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
Strengths:
* Strong capitalisation
Capital structure is marked by a large consolidated networth and low gearing of Rs 3,095 crore and 2.1 times, respectively, as on December 31, 2019, as against Rs 3,006 crore and 3.0 times, respectively, as on March 31, 2019. Capitalisation is expected to further strengthen with the expected capital infusion of Rs 1,225 crore by Brookfield which will improve the net worth to about ~Rs 4200 crore and reduce the gearing to around 1.5 times. Gearing is expected to increase gradually to about 5 times, over the medium term, with expansion in retail financing.
 
Overall capital adequacy ratio (CAR) was comfortable at 27.6% with tier 1 CAR of 26.7% as on December 31, 2019 (24.0% and 21.7%, respectively, as on March 31, 2019). A stronger capital profile will support expansion in the company's key retail segments over the medium term. Moreover, capital position is supported by flexibility to raise additional capital. 
 
* Diversified product offering
IndoStar, with consolidated assets under management (AUM) of Rs 10,222 crore as on December 31, 2019, has a diversified range of product offerings, across retail as well as wholesale finance. Other than the flagship NBFC, IndoStar is also present in home finance, through its wholly-owned subsidiary ' IndoStar Home Finance. While the company has been primarily a wholesale financier, it has steadily expanded its presence in retail segments over the last few years, and retail loans are now seen as the key growth driver. Expansion in the retail segment was also supported by acquisition of the CV finance book from IIFL Finance.
 
Retail loans stood at Rs 7,057 crore as on December 31, 2019 (Rs 7,208 crore as on March 31, 2019; and Rs 1,629 crore as on March 31, 2018). Share of retail loans in the overall portfolio has increased to 69% of the AUM as on December 31, 2019, from 42% as on December 31, 2018, driven by growth in the retail book and contraction of the wholesale portfolio. Within retail lending, the company is present in commercial vehicle (CV) finance (44% of the overall AUM), and is more focused on  financing purchase of used CVs. Loans to small and medium enterprises (SME) accounted for 18% of the overall AUM, and mainly comprised secured loans against property. The company has now ventured into unsecured SME finance, and affordable housing finance, through IndoStar Home Finance (8% of overall AUM). Going forward, the retail AUM is likely to improve, mainly driven by CV finance.
 
The wholesale portfolio stood at Rs 3,165 crore as on December 31, 2019, as against Rs 4,527 crore as on March 31, 2019 (Rs 4,867 crore as on March 31, 2018). About 81% of this portfolio is towards construction and developer funding, and the balance is towards large-ticket corporate loans. The company has identified 4-5 key developers primarily in the Mumbai Metropolitan Region (MMR), which form a majority of the wholesale book. However, given the weak macroeconomic environment, primarily for the real estate segment, the management has been cautiously reducing the book size, by encouraging loans sell-downs and pre-payments. Going forward, the management expects to grow the book on only on a selective basis.
 
* Experienced management team
The top management comprises experienced professionals, with proven expertise in retail and wholesale financing, who are expected to help scale up each of the key verticals- vehicle, housing and SME finance, and also maintain underwriting standards. Furthermore, the company benefits from high level of involvement of the key institutional investors. Common vision and philosophy, shared between the management and key institutional investors, including Brookfield share a common vision and philosophy for IndoStar. This will enable IndoStar to further grow its business, in line with its stated strategy, and also adhere to the overall risk philosophy.
 
Weaknesses:
* Asset quality susceptible to concentration risk; retail lending to bring granularity over medium term
Asset quality will remain vulnerable to concentration risk inherent in the wholesale lending business, despite strong credit appraisal and risk management processes in place. As on December 31, 2019, the five largest loans constituted nearly 36% of the wholesale portfolio. Furthermore, around 81% of the wholesale book 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 corporate 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 flow is escrowed and the loan is structured in a manner that enables mandatory prepayments, resulting in early repayment of loans. The company also sells down a portion of the real estate loans originated. 
 
However, given the evolving liquidity situation for non-banks since September 2018, asset quality on exposures such as developer loans and large-ticket loans against property would be a key monitorable for all lenders, including IndoStar. Borrowers of such loan categories are more sensitive to an environment of prolonged liquidity tightness. Any sharp deterioration in asset quality, specifically in the wholesale lending book, will also impact profitability and capital, and hence, remains a key monitorable.
 
Such weakness was also visible in IndoStar's loan portfolio, with slippages recorded in a few accounts in the real estate loan book, and stress observed in few large accounts in the corporate loan book. The company has partly written off/provided for these accounts, which led to a sharp drop in profitability, with a profit after tax (PAT) of Rs 97 crore for the nine months ended December 31, 2019, ((Rs 167 crore for the corresponding period of previous year). Overall profitability is expected to remain muted in the near term as the company takes the credit costs for the remaining portion of these stressed accounts.
 
Overall gross NPAs increased to 4.4% as on December 31, 2019, from 2.6% as on March 31, 2019, mainly due to the slippages in the wholesale book and owing to the acquired CV book, which already had high NPAs. Although IIFL Finance has extended a capital loss protection of up to 9% of the portfolio,, which should reduce ultimate losses, sufficiency of the loss cover is yet to be demonstrated.
 
Nevertheless, steady increase in proportion of retail AUM will induce granularity in the portfolio. Greater focus on small-ticket retail loans will support inherent asset quality over the medium term, though ability to underwrite and maintain strong credit practices across asset classes, amid stiff competition from established players, remains to be seen.
Liquidity Strong

The company maintains minimum 15% of networth in the form of liquid investments such as fixed deposits and liquid funds, including undrawn bank lines. As a policy, the company does not run an asset-liability mismatch, with the favourable trend of repayments and prepayments providing further cushion to the overall asset-liability management position.

As on December 31, 2019, against the total debt of Rs 923 crore maturing till June 30, 2020, the company had liquidity of Rs 404 crore in cash and bank balance and other liquid investments, and unutilised committed bank lines of Rs 471 crore and securitisation bank lines (partial credit guarantee scheme) of Rs 1500 crore. Further, expected collection of around Rs 975 crore during this period, also supports liquidity.

The company has raised Rs 2,800 crore between April 2019 and January 2020, via bank funding and securitisation. Dependence on commercial paper (CP) borrowing was nil as on December 31, 2019, compared to 24% as on September 30, 2018.

Rating Sensitivity factors
Downward Factors:
* Deterioration in the asset quality, with GNPA increasing to above 8% over an extended period, thereby impacting profitability
* Weakening of capitalisation metrics with higher than expected gearing on a sustained basis
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 about Rs 900 crore.

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. From fiscal 2018 onwards, the company has started offering vehicle finance and housing finance (through WOS IndoStar Home Finance). As on December 31, 2019 the total AUM was Rs 10,222 crore, compared to Rs 7,748 crore in corresponding period of previous year. IndoStar has gradually expanded its network to 233 branches spread across 18 states as on December 31, 2019, (vis-a-vis 129 branches as on March 31, 2019).

In fiscal 2019, IndoStar reported  PAT of Rs 241 crore on total income (net of interest) of Rs 642 crore, against Rs 200 crore and Rs 463 crore, respectively, in the previous fiscal. For the nine months ended December 31, 2019, PAT was Rs 97 crore on total income (net of interest) of Rs 599 crore, against Rs 167 crore and Rs 480 crore, respectively, in the previous fiscal.

Key Financial Indicators
For the period ended December 31 Unit 2019 2018
Total assets Rs crore 9449 9189
Total income (net of interest) Rs crore 599 480
Profit After Tax (PAT) Rs crore 97 167
Gross NPA % 4.4 0.9
Gearing % 2.1 2.1
Return on assets % 1.2 2.7

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 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  2000.00  CRISIL A1+      07-02-19  CRISIL A1+  31-08-18  CRISIL A1+  13-10-17  CRISIL A1+  -- 
                08-02-18  CRISIL A1+       
Short Term Debt (Including Commercial Paper)  ST    --              18-08-17  CRISIL A1+  CRISIL A1+ 
                    08-05-17  CRISIL A1+   
All amounts are in Rs.Cr.
 
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt

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