Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities and non-convertible debentures (NCDs) of IndoStar Home Finance Pvt Ltd (IndoStar Home) to ‘Stable’ from ‘Negative’ while reaffirming the rating at ‘CRISIL AA-’. The rating on the commercial paper programme has been reaffirmed at ‘CRISIL A1+’.

 

IndoStar Home is a 100% subsidiary of IndoStar Capital Finance Ltd (IndoStar Capital; ‘CRISIL AA-/Stable/CRISIL A1+’). The ratings on IndoStar Home factor in the expected strong financial and management support from the parent, IndoStar Capital, both on an ongoing basis and in the event of distress.

 

The outlook revision is driven by a similar revision in the outlook on the long-term rating of IndoStar Capital, which in turn factors in improving diversification in the funding profile owing to traction in fund raising from banks. Funding was impacted in the aftermath of control deficiencies identified by statutory auditors in the commercial vehicle (CV) portfolio in May 2022, post which sanctions of Rs 1,845 crore in fiscal 2023 were largely from one large foreign bank and domestic non-banks, amounting to Rs 1,720 crore. While funding improved to Rs 3,418 crore in fiscal 2024, the bulk (Rs 2,455 crore) was through high-cost NCDs from an institution. However, bank sanctions have seen a healthy uptick from Rs 325 crore in fiscal 2024 to Rs 475 crore till date in this fiscal. This included a sizeable drawdown from a large public sector bank in August 2024.

 

CRISIL Ratings has also noted the improvement in asset quality as seen from better performance of the newly originated portfolio (loans disbursed from April 2022 onwards), wherein the 90+ days past due (dpd) of the CV portfolio stood at 2.2%. The company undertook a series of corrective actions post May 2022, which include 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. Furthermore, several new appointments were made in leadership positions with the appointment of a new chief executive officer, chief financial officer, chief risk officer, chief compliance officer, credit and business heads, among others.

 

The ratings continue to factor in the expected continued support from the promoter, Brookfield Asset Management (Brookfield; rated 'A-/Stable/A-1' by S&P Global Ratings [S&P]), which played an instrumental role in arranging sizeable funds for IndoStar Capital through regular engagement with stakeholders as well as with the formation of the new management.

 

The ratings also factor in the company’s comfortable capitalisation, traction in disbursements and controlled asset quality of the new book. These strengths are partly offset by weak, albeit improving, asset quality of the book and modest earnings profile.

 

CRISIL Ratings will continue to monitor continued traction in fund raising by IndoStar Capital, especially from a diverse set of banks and other lenders as well as improvement in the earnings profile, including any potential impact on credit cost from the portfolio sold to asset reconstruction companies (ARCs). These will remain key rating sensitivity factors.

 

IndoStar Home commenced its lending operations in October 2017 and operates as an affordable housing financier with presence in tier 3 and 4 towns in southern and western states. As on June 30, 2024, the company’s loan book stood at Rs 2,395 crore, of which home loans accounted for 67% while the balance consisted of loans against property (LAP).

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of IndoStar Home and has factored in benefits from its strong ultimate shareholders.

Key Rating Drivers & Detailed Description

Strengths:

• Benefits from majority ultimate ownership of Brookfield: Brookfield, a Canada-based global alternative asset manager, is the largest shareholder with 56.20% stake. Brookfield made its first investment in the financial services space in IndoStar, with capital injection of Rs 1,225 crore in May 2020.

 

Besides direct equity funding, Brookfield has provided access to IndoStar to secure new debt financing through its relationships with various financial institutions. Brookfield has also actively supported in putting in place the new management team, talent and leadership at IndoStar, and positioned it to achieve growth and a steadily improving earnings profile.

 

IndoStar Home is expected to benefit from the 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 realigned its business model and underwriting, affordable housing was identified as a key focus area. Therefore, Brookfield has remained closely involved in the business operations of the company.

 

• Adequate capitalisation: Capitalisation remains comfortable with networth at Rs 592 crore as on June 30, 2024 (Rs 581 crore as on March 31, 2024). 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 crore a year earlier.

 

Gearing and adjusted gearing (on-book borrowing plus securitisation and direct assignment) stood at 2.6 times and 3.4 times, respectively as on June 30, 2024, unchanged from March 31, 2024, but higher than 1.6 times and 2.1 times, respectively, as on March 31, 2023. Gearing is expected to increase to a steady state of 4-5 times over the medium term as the loan book scales up. Overall capital adequacy ratio stood at 56.2% as on June 30, 2024, well above the regulatory requirement, which will support in increasing scale of operations.

 

Weakness:

• Early stage of operations with modest earnings profile: With operations having commenced from October 2017, the company is still in the initial stage of operations with a relatively unseasoned loan portfolio. Overall, assets under management stood at Rs 2,395 crore as on June 30, 2024, registering year to date growth of 22% (annualised) and grew 38% on-year to Rs 2,270 crore as on March 31, 2024.

 

Housing loans accounted for 67% of the loan book and the non-housing portfolio (mainly loans-against-property or LAP) accounted for the remaining 33%. Disbursement momentum increased to Rs 937 crore in fiscal 2024 from Rs 487 crore in fiscal 2023 owing to the overhang of issues at IndoStar Capital.

 

The company operates from 122 branches in 9 states but operations will likely expand across geographies, with the setting up of independent housing finance branches.

 

Average loan cycle is ~7 years and a complete cycle is yet to be witnessed; hence, asset quality is yet to reach steady state levels. Delinquencies remained range-bound, with gross stage 3 assets at 1.34% as on June 30, 2024 (1.13% as on March 31, 2024), compared with 1.9% as on June 31, 2023. Ability to maintain asset quality as the business scales up will be a key monitorable.

 

In initial stage of operations, earnings were constrained owing to high operating expenses because of heavy investments in setting up technology and branch infrastructure. The company broke even in fiscal 2020 with profit after tax (PAT) of Rs 14.2 crore, as against loss of Rs 19 crore in the previous fiscal. It reported PAT of Rs 44 crore and return on assets (RoA) of 2.0% in fiscal 2024 (Rs 38 crore and 2.3%, respectively, in fiscal 2023). Given the vulnerable borrower segment, the company has been able to risk-price its loan assets, as reflected in improvement in yield to 12.1% as on June 30, 2024, from 11.9% as on March 31, 2024, and 11.3% a year earlier. However, this risk is offset by higher borrowing cost (9.1% for fiscal 2024 versus 8.3% for fiscal 2023) and operating expenses (5.4% versus 5.3%). Credit cost remained low at 0.3% in the first quarter of fiscal 2025 (0.2% in fiscal 2024 versus 0% in fiscal 2023). CRISIL Ratings believes operational efficiency, healthy traction in funding from banks and National Housing Bank and controlled credit costs will be important to improve the company's earning profile in the near-to-medium term.

 

Ability to successfully and sustainably scale up the business will remain a key rating monitorable.

Liquidity: Strong

The asset liability management (ALM) profile showed positive cumulative mismatch in the up to one year bucket as on June 30, 2024 (including sanctioned and documented unutilised bank lines). As on July 31, 2024, the company had liquidity of Rs 407 crore (Rs 111 crore of cash and equivalent and Rs 296 crore of unutilised bank lines). Against the same, IndoStar Home has debt obligation (principal and interest) of Rs 140.2 crore for the six months ended January 31, 2025.

Outlook: Stable

CRISIL Ratings believes IndoStar Home will continue to benefit from strong financial and managerial support from IndoStar Capital.

Rating sensitivity factors

Upward factors

• Upgrade in the credit risk profile of the parent, IndoStar Capital, by one notch
• Significant improvement in the market position while maintaining asset quality and improving earnings profile (return on assets) on a sustained basis

 

Downward factors

• Downgrade in the credit risk profile of IndoStar Capital and/or material change in the shareholding or support philosophy
• Weakening in the asset quality, with gross non-performing assets increasing above 5% impacting profitability

About the Company

IndoStar Home, a wholly owned subsidiary of IndoStar Capital, was incorporated in October 2017. The company offers individual housing loans. It has operations across eight states with substantial proportion of its portfolio in the southern states. Currently, the company operates from 122 locations, being shared with the parent. However, it plans to increase the number of independent branches in the near term.

 

IndoStar Home reported profit after tax (PAT) of Rs 44 crore on total income (net of interest expense) of Rs 183 crore in fiscal 2024, compared with Rs 38 crore and Rs 144 crore, respectively, in the previous fiscal.

Any other information: Not Applicable