| Indostar Home Finance Private 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 on the bank facilities and debt instruments of Indostar Home Finance Private Limited (IndoStar Home) continues on 'Rating Watch with Negative Implications'.
IndoStar Home is a 100% subsidiary of IndoStar Capital Finance Ltd (IndoStar; ‘CRISIL AA-/CRISIL A1+/Watch Negative’). The ratings on IndoStar Home factor in the expectation of strong financial, operational and management support from the parent, IndoStar, both on an ongoing basis and in the event of any distress. However, IndoStar Home's operations are in an early stage and its ability to successfully scale up the business needs to be demonstrated.
The rating action on IndoStar Home follows a similar rating action on IndoStar that was driven by the potential impact of the fiscal 2022 results on future fund raising and business of the company emanating from three key aspects (a) higher-than-earlier estimated impairment allowance at Rs 886 crore on the commercial vehicle 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 the liquidity of the company. Steps have also been taken to strengthen the management team of IndoStar. Brookfield has articulated its intent to continue to support the company in raising debt and equity as needed.
The ratings also factor in the comfortable capital position of the company, with an overall capital adequacy ratio of 34.1% and gearing of 1.8 times as on September 30, 2022.
Liquidity of IndoStar Capital is currently adequate. As on December 31, 2022, the company had Rs 873 crore of cash and cash equivalents, and Rs 260 crore on undrawn working capital bank limit, totaling Rs 1,133 crore. Regular collections should also support liquidity. Against this, the company had repayment of Rs 338 crore for the three months ended March 31, 2022.
The liquidity of IndoStar Homes is currently adequate. As on December 31, 2022, it had liquidity of Rs 192 crore (Rs 16 crore of cash and cash equivalents, Rs 65 crore of liquid investments, Rs 111 crore of unutilized working capital bank lines). Against the same, IndoStar Home has total debt obligations (principal and interest) of Rs 33 crore over the next three months.
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 (PAT) of Rs 113 crore and return on assets of 2.4% for the same period. Considering the improved asset and liability management (ALM) 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 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 the chief financial officer and chief risk officer.
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 analysed the standalone business and financial risk profiles of IndoStar Home and has factored in the benefits from the strong ultimate shareholders. |
Key Rating Drivers & Detailed Description Strengths:
IndoStar Home is expected to benefit from the majority ultimate ownership by Brookfield, given its strategic importance as a critical business growth driver for the mortgage lending business. The company is expected to add scale and granularity to the lending book of the parent. As the IndoStar group realigns its business model and underwriting, affordable housing is a key focus area. Therefore, Brookfield may be closely involved in the business operations of the company; it has been instrumental in the recent senior-level hiring and will provide any necessary support.
The parent infused equity of Rs 250 crore in IndoStar Home in fiscal 2022. Consequently, networth increased to Rs 499 crore as on March 31, 2022, from Rs 215 core a year back; networth stood at 529 crore as on September 30, 2022. Gearing and adjusted gearing (on-book borrowing + securitisation and direct assignment) stood at 1.4 times and 2.0 times, respectively as on September 30, 2022, against 1.5 times and 1.9 times on March 31, 2022 (3.0 times and 3.7 times a year ago). Gearing is expected to increase to a steady state of 6-7 times over the medium term as the loan book scales up.
Weakness:
With IndoStar Home’s operations having commenced from October 2017, the company is yet in the initial stage of operations, with loan portfolio remaining unseasoned. Overall assets under management was small at Rs 1,494 crore as on September 30, 2022, and Rs 1,406 crore as on March 31, 2022, (Rs 991 crore as on March 31, 2021). The company operates from 134 shared branches of IndoStar in eight states, but operations are expected to gradually expand across geographies with setting up of independent housing finance branches. Delinquencies remained stable, with gross stage 3 assets at 1.4% as on September 30, 2022, and 1.8% as on March 31, 2022 (1.9% as on March 31, 2021). Further, the company had ~1.18% of its book (as on September 30, 2022) under the Reserve Bank of India’s Resolution Framework for Covid-19-related Stress. Ability to maintain asset quality as the business scales up will be a key monitorable. |
Liquidity: Adequate The ALM profile shows positive cumulative mismatches in the up to 1 year bucket as on September 30, 2022 (including sanctioned and documented unutilised bank lines). As on December 31, 2022, it had liquidity of Rs 192 crore (Rs 16 crore of cash and cash equivalents, Rs 65 crore of liquid investments, and Rs 111 crore of unutilised working capital bank lines). Against the same, IndoStar Home has total debt obligations (principal and interest) of Rs 33 crore for the three months ended March 31, 2022. |
Rating Sensitivity factors Upward factors
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About the Company IndoStar Home, a wholly owned subsidiary of IndoStar, was incorporated in October 2017. The company offers various individual housing loans. It has operations across eight states, with substantial proportion of the total portfolio in the southern states of the country. Presently, the company operates from 109 locations, with a majority of them being shared with parent. However, it plans to increase the number of independent branches in the near future.
IndoStar Home reported PAT of Rs 34 crore on total income (net of interest expense) of Rs 96 crore in fiscal 2022 as against Rs 28 crore and Rs 77 crore, respectively, in the previous fiscal. For the half year ended September 30, 2022, PAT was Rs 29 crore on total income (net of interest expense) of Rs 81 crore. |
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)
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