CARE Ratings has Reaffirmed its Rating on Indostar Capital Finance Limited

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The reaffirmation of ratings accorded to IndoStar Capital Finance Ltd (BO: INAC ) (ICFL) bank facilities and different instruments are based on ICFL's solid capitalization levels, good net worth basis, acceptable gearing levels, and strong liquidity position. The ratings also include the company's strong institutional sponsors, competent management, and growing share of retail advances, which adds granularity to the book.

The ratings are moderated by deterioration in asset quality, poor financial performance, concentration concerns in its wholesale book, and a lack of seasoning in its retail sectors. Because of the economic effect of COVID-19, as well as the overall deterioration of borrower profiles as a result of the pandemic, the asset quality and collection efficiency of the company will remain importantly monitorable.
 
RATING STRENGTHS
 
Strong capitalisation with a good net worth base and low overall gearing
Gearing levels increased from 3.3x on March 31, 2020, to 1.85x on March 31, 2021. Long-term gearing is anticipated to be approximately 4-5x in line with industry peers as the total book increases. The Capital Adequacy Ratio, which had increased from 25.3% on March 31, 2020, to 34.6% on March 31, 2021, remained comfortably at the same level as on June 30, 2021. With robust capitalisation, the company has enough cushioning to withstand any losses from asset-side risks.

Increased retail focus to provide granularity, but with a little seasoning
ICFL’s entire portfolio is separated into Retail advances (CV sector, SME segment, and Housing segment) and Wholesale advances (which consists of corporate loans).

As part of the group’s long-term realization strategy, the corporate loan book, which comprised 73% of AUM as of March 31, 2018, has been carefully reduced over a three-year period to 23% of AUM as of June 30, 2021. As of 30th June 2021, loans in the CV category accounted for 42% of the total AUM of Rs. 8,064 Crore, followed by 22% in the SME segment and 12% in affordable housing finance.

The acquisition of the CV portfolio from IIFL in FY20 resulted in a significant rise in the share of CV financing. In addition, this category received the highest percentage of payments in FY21 and Q1FY22. As it grows its book, the company intends to focus its disbursements more on the used CV market in the future.

Going ahead, the company expects faster growth in its existing affordable housing financing book, while the SME portfolio will expand more slowly than the other two retail portfolios. Increased retail concentration has undoubtedly added granularity to the overall portfolio, but the seasoning on the newly built book would remain low, thus asset quality would remain the primary monitorable, particularly in the CV segment.
 
KEY WEAKNESSES
 
Low profitability and moderation in asset quality
In Q1FY22, Interest income has declined both Q-o-Q & Y-o-Y given its lower AUM compared to earlier years. During the second wave, fleet owners, HCV's business has been affected and has reported a further rise in gross stage 3 in this segment. Accordingly, provisions were higher in Q1 which led to the loss of Rs. 37 crores.

In Q1FY22, stressed CV loans having a book value of Rs. 493 crores were sold to Asset Reconstruction Company. The cash received accounted for 15% of the total, with the remainder carried by the firm in the form of security receipts. Furthermore, collection efficiency with the late collection has increased, and management estimates that current billing collections will be about 85-90% in Q1FY22.

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