INSUBCONTINENT EXCLUSIVE:
LKP Securities has a buy call on Indostar Capital Finance with a target price of Rs 593.
The current market price of Indostar Capital
Finance is Rs 425.45.
Time period given by the financial firm is one year when Indostar Capital Finance price can reach the defined
target.
Investment rationale of LKP:Indostar Capital Finance, is promoted by Mauritius based PE Everstone Group, one of the well-known India
Southeast Asia focused PE firm
It operates into the niche space of early stage financing to real estate developers largely in Mumbai region
Recently, the company has embarked upon strategy to diversify its business mix more towards the retail including housing, vehicle finance
from earlier concentrated corporate SME loan book
To grow these new segments, it has front-ended opex cost resulting in drop in ROAs 2.2 per cent levels in Q1FY19 from nearly 4 per cent
However, going forward, operating leverage benefits would be realized coupled with increase in the leverage of assets + improvement in the
We expect earnings to grow at of 46 per cent CAGR over FY19-22E period
Also, ROE to show marked progress from 11.1 per cent and 7.7 per cent in FY17 FY18 resp
to 14.8 per cent by FY22E
Diversification would reduce the cyclicality of the earnings and also give upper edge against the NBFCs who have monoline single product
The company has appointed R.Sridhar as CEO of the company, who was instrumental to the Shriram Transport Finance growth story
Strong management in place gives high hopes of better future performance of the company.
AUM to grow at rapid pace - The company has
strategized to bring diversity in business mix and increase the size of non-corporate loans sizeably going forward
Over the FY18-22E period, we anticipate AUMs to grow at 50 per cent CAGR which would be mainly driven by vehicle finance loans.
Operating
leverage set to play out in the longer run, boosting return profile of the company - To develop new lines of businesses, initial cost to
expand number of branches employees is required to build AUMs
Average cost/income ratio which was 18 per cent in FY17 is estimated to surge to 39 per cent in FY19E
However, in our view, once the branches become fully operational, achieve desired break-even and AUMs per branch increases, profitability
would get preferred boost
assets is estimated to fall to 2.2 per cent levels in FY22E vs
2.6 per cent in FY19E.
Margins would be sustained - The average margins of the company was nearly 6.3 per cent during FY14-18 period
Higher margins were resultant of high IRR drawn in the corporate loans
the VF loans also equally draw higher margins of 600-700 bps
all these factors put together would drive re-rating in the stock
At current pricing, it is trading at compelling valuations of 1.4x FY19E and 1.2x FY20E ABV
It is one the cheapest NBFC available currently
We initiate coverage on the stock with target price of Rs 593 giving upside potential of 36 per cent - according 1.7x multiple to its FY20E
