IPO Review

May 9, 2018
Rating matrix
Indostar Capital Finance Ltd
Rating : Avoid Price band | 570-572
Issue Details Indostar Capital Finance (Indostar) commenced operations in 2011. It is
Issue Opens 9-May-18 primarily engaged in providing structured financing solutions to corporate
Issue Closes 11-May-18 a well as SME borrowers in India. In 2017, it started providing housing
Issue Size (| Crore) 1840-1844 finance through its wholly owned subsidiary - IndoStar Home Finance Pvt
Price Band (|) 570-572 Ltd (IHFPL) and also began vehicle financing. The promoter of the
No of Shares on Offer (crore) ~3.22
company is Indostar Capital (pre-issue ownership - 91.55%), which is
QIB (%) 50
Non-Institutional (%) 15
promoted by Indostar Everstone and Everstar Holdings Pte Ltd.
Retail (%) 35 As on December 31, 2018, Indostar’s gross loan portfolio was at | 5171.7
Minimum lot size (No. of shares) 26 crore comprising | 3969.4 crore towards corporate, | 1173.4 crore
towards SME loans, | 14.6 towards housing finance and | 14.3 crore
Objects of the Issue towards vehicle finance. Gross NPA ratio was at 1.7% as on December
The objects of the offer are to achieve the benefits of listing the 31, 2018. For 9MFY18, NII was at | 285.8 crore while PAT was reported at
equity shares on the stock exchanges and for the fresh issue of | 164.1 crore. Return on equity was at 10.9% and RoA at 3.8%.
equity shares aggregating upto | 700 crores and offer for sale of Key business aspects
upto 20,000,000 shares
Strong corporate lending business
Shareholding Pattern Pre-Issue Post-Issue Indostar has a strong corporate lending business (| 3969 crore) and SME
Pre-Issue Post-Issue loans (| 1173 crore) and recently started vehicle finance and housing
Promoter & promoter group 91.6% 58.9% finance. Corporate wholesale book consists of (i) lending to mid-to-large
Public 8.4% 41.1% sized corporate in manufacturing, services and infrastructure industries,
by way of senior secured debt, structured financing, promoter financing
Financial Summary and special situation funding and (ii) lending to real estate developers,
| Crore FY14 FY15 FY16 FY17 9MFY18 mainly for financing project level construction of residential and
NII 167.6 207.5 274.8 331.7 285.8 commercial building projects (~| 1886 crore).
Other income 229.4 320.6 369.3 388.2 300.2 Better rating, thereby diversified low-cost funding, enable high margin
Operating Profit 170.6 229.1 296.6 335.4 258.5
PAT 112.1 149.0 191.7 210.8 164.1 Indostar has a well-diversified funding profile that underpins a strong
liquidity management system, healthy credit rating and brand equity. The
Valuation Summary (at | 572; upper price band) company has achieved a long-term debt rating of AA- and short-term
FY18* rating of A1+ within its very first year of inception of business. Currently,
(x) FY16 FY17 Pre Post the long-term debt rating is at CARE AA-; Stable and IND AA-/Stable,
P/E 21.4 19.9 20.5 23.6 respectively, from CARE and India Ratings & Research Pvt Ltd.
P/BV 2.7 2.4 2.1 1.8 Accordingly, better yields and lower cost of fund led to maintained
P/ABV 2.7 2.4 2.2 1.9 sufficient margins. NIM was at 6.9% as of December 31, 2017.
*FY18 EPS and BV are annualised
Highly motivated, efficient management personnel
Indostar has a highly motivated, professional and experienced
Research Analyst
management team, which contributed in growing their business since
Kajal Gandhi commencement of operations in 2011. With over 20 years of experience
kajal.gandhi@icicisecurities.com in finance and/or banking industry, senior management possesses an in-
Vishal Narnolia depth understanding of specific industry, products and geographic
vishal.narnolia@icicisecurities.com regions they cover, which enables business growth.
Vasant Lohiya
Concerns
vasant.lohiya@icicisecurities.com
 Concentration risk as corporate lending business, especially real
estate loan, are mainly in the Mumbai Metropolitan Region
 Disruption in funding may affect liquidity and financial position
 Risks attached to unsecured loans may adversely affect business
 Inability to manage interest rate risk may adversely affect business
Priced at 1.8x P/BV (post issue FY18 BV) on higher band
At the IPO price band of | 570-572, the stock is available at a multiple of
1.8x FY18E annualised BV (post issue) and ~23.6x PAT at the upper end
of the price band. Post issue market capitalisation is priced at ~| 5200
crore. Factoring in major proportion of wholesale portfolio with high real
estate exposure, we recommend AVOID on the issue.

ICICI Securities Ltd | Retail Equity Research

 Company Background
Incorporated as RV Vyapaar Pvt Ltd in 2009, Indostar Capital Finance Ltd
is a non-banking financial company registered with the Reserve Bank of
India. It is primarily engaged in providing Indian rupee denominated
structured term financing solutions to corporate as well as small and
medium enterprise (SME) borrowers in India. The company recently
expanded its product portfolio to include vehicle finance and housing
finance. Their promoter is Indostar Capital, which is promoted by Indostar
Everstone and Everstar Holdings Pte Ltd.
The company maintains long-term relationships with lenders and, as of
December 31, 2017, their lenders included 14 public sector banks, 13
private sector banks, 21 mutual funds and four insurance companies and
other financial institutions.
As of February 28, 2018, Indostar Capital Finance conducted its retail
operations through 71 branches spread across India and employed 548
in-house sales personnel and 948 third-party direct sales associates. Total
credit exposure was at | 5171.7 crore as on December 31, 2018, which
comprises | 3969.4 crore towards corporate | 1173.4 crore towards SME
loans, | 14.6 crore in housing finance and | 14.3 crore towards vehicle
finance. Gross NPA ratio was at 1.7% as on December 31, 2018. in
9MFY18, NII was at | 285.8 crore while PAT came in at | 164.08 crore.
The company has two subsidiaries viz. IndoStar Asset Advisory Pvt Ltd
(IAAPL) and IndoStar Home Finance Pvt Ltd (IHFPL). On April 6, 2018, the
company opened its 100th branch in Vadodara, Gujarat.

Shareholders include investors such as the Indostar Capital, Mission

Street Pte Ltd, Everstone Capital Partners, Sandeep Baid and Vimal
Bhandari. The company currently has 36 shareholders.

Exhibit 1: Exhibit 1: Top 10 shareholders pre-issue

Shareholders % share capital
Indostar Capital 90.12
Mission
Laxmi Street Pte.
Shivanand Ltd
Manekar, jointly with Shivanand Shankar Manekar, jointly with Kedar 2.87
Shivanand Manekar 2.11
Everstone Capital Partners II LLC 1.44
Sandeep Baid 0.95
Vimal Bhandari (Ex-employee|Director of Subsidiary) 0.55
R. Shridhar (Whole time Director and Executive Vice Chairman and CEO) 0.4
Prashant Joshi (Chief Operating Officer 0.34
Source: RHP, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 2

 Financial Performance
Indostar’s gross loan grew at 30% CAGR in FY13-17 to | 5235.8 crore. Of
this ~87.6% (| 4585.8 crore) is towards corporate while balance 12.4% is
towards SME loans. Vehicle and housing finance segment was introduced
in FY18. A steady improvement in margins is seen from 6% in FY15 to
6.9% in 9MFY18. Indostar earned PAT of | 210.8 crore as on FY17. Asset
quality has been prudent with GNPA ratio at 1.4% as on FY17. RoA has
remained above 4% while RoEs are >12% levels.
Exhibit 2: Trends in gross AUM

6000 43.6 50
45
5000 40
30.2 35
4000 24.4 30
25
| crore

3000 22.8

(%)
5236 5172 20
2000 4265 15
3429 10
2633
1000 -1.2 5
0
0 -5
FY14 FY15 FY16 FY17 9MFY18

Gross AUM Advances growth (%)

Source: RHP, ICICI Direct Research

Exhibit 3: Trends in net interest income Exhibit 4: Margin trends

350 332 40 6.9
275 286 7 6.80
300
7 6.60
250 207 7 6.50
20
200 168
| crore

6
(%)

150 124
6 6.00
100 0
6
50 6
0 -20 6
FY13 FY14 FY15 FY16 FY17 9MFY18 5
FY14 FY15 FY16 FY17 9MFY18
Net Interest Income NII growth (%)
NIM

Source: RHP, ICICI Direct Research Source: RHP, ICICI Direct Research

Exhibit 5: Asset quality trend Exhibit 6: Return ratios trend

100 2.0 16 13.6

1.7 14 12.3 12.2
80 10.9
1.5 12 10.4
1.4
60 10
(| crore)

1.0 8
(%)

(%)

89
40 0.8 72.7 6 4.2 4.2 4.4 4.1 3.8
0.6 4
0.5
20
2
19.4 19.4 10.00.2
0 0.0 0
FY14 FY15 FY16 FY17 9MFY18 FY14 FY15 FY16 FY17 9MFY18

GNPA GNPA ratio (%) RoE (%) RoA (%)

Source: RHP, ICICI Direct Research Source: RHP, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 3

 Key strengths and strategies:
Well established lending business; corporate lending as major business
Indostar began providing wholesale finance in 2011 and currently has a
well-established corporate lending business that primarily provides
secured loans to manufacturing and service companies by way of
structured financing, promoter financing and special situation financing to
leading real estate developers for financing project level construction of
residential properties and provides exit (take out) to early stage equity
investors. The company’s loan portfolio later expanded to include SME
loans, vehicle finance and housing finance.

Exhibit 7: Trends in AUM mix in last five years

5500
5000 650.07
4500
4000 223.21
3500 7.4
3000
(%)

2500 0
4585.8
2000 0 4041.8
3421.8
1500 2632.9
1000 1832.9
500
0
FY13 FY14 FY15 FY16 FY17

Corporate lending SME lending

Source: RHP, ICICI Direct Research

Corporate lending
Indostar’s corporate lending business primarily consists of (i) lending to
mid-to-large sized corporate in manufacturing, services and infrastructure
industries, by way of senior secured debt, structured financing, promoter
financing and special situation funding and (ii) lending to real estate
developers, mainly for financing project level construction of residential
and commercial building projects and take-out of early-stage equity
investors. As of December 31, 2017, the corporate book amounted to
| 3969.4 crore. In FY13-18, gross loans increased at a healthy pace of
25.8% CAGR from | 1832 crore in FY13 to | 4585.8 crore in FY17.
SME lending
The SME lending business began operations in 2015, and primarily
involves extending secured loans for business purposes to small and
medium size enterprises, including businessmen, traders, manufacturers
and self-employed professionals. The collateral securing these loans are
typically completed and largely self-occupied residential and commercial
property. As of December 31, 2017, SME lending book was at | 1173.4
crore. For FY15, FY16 and FY17 and 9MFY18, disbursement in SME credit
amounted to | 7.4 crore, | 265.5 crore, | 553.5 crore and | 839.09 crore
respectively.
Vehicle finance
The vehicle finance business commenced in November, 2017 and
primarily involves providing financing for purchases of used or new
commercial vehicles, passenger vehicles and two-wheelers. As of
December 31, 2017, vehicle finance credit exposure stood at | 14.3 crore.

ICICI Securities Ltd | Retail Equity Research Page 4

 Housing Finance
The housing finance business comprises two business lines, viz. (i)
affordable housing finance, which commenced in September 2017, and
(ii) retail housing finance, which commenced operations in March 2018.
Offered through subsidiary, Indostar Home Finance Pvt Ltd, as of
December 31, 2017, credit portfolio stood at | 14.6 crore.
Highly motivated, professional and experienced management team
Indostar has a highly motivated, professional and experienced
management team, which has contributed in growing the business since
the commencement of operations in 2011. Each member of the senior
management team has over 20 years of experience in finance and/or
banking industry and possesses an in-depth understanding of specific
industry, products and geographic regions. This enables them to support
and provide guidance to employees and grow business. Under the
management’s experienced leadership and professional expertise, total
credit exposure, revenue and profit grew in FY13-17 at CAGR of 30.0%,
31.4% and 23.7%, respectively.

Exhibit 8: Key management personnel

R. Shridhar, Executive Vice Chairman and CEO
Pankaj Thapar, Chief Financial Officer
Prashant Joshi, Chief Operating Officer
Former managing director at Shriram Transport Finance
Company Limited
Has 30 years of experience in Indian as well as international
entities like Everstone Capital Advisors, Dentsu Marcom and
Coca-Cola India.
Has 20 years of experience and has previously worked with
Deutsche Bank AG, Standard Chartered Bank and IDBI Bank.

Sanjay Athalye, Chief Risk Officer Previously worked with Reliance Capital Limited, Centurion
Bank of Punjab, ICICI Limited and IDBI Bank.

Shailesh Shirali, Managing Director and Head- Several years of work experience in financial services and
Corporate Lending and Markets has previously worked in Future Capital Holdings.

Source: RHP, ICICI Direct Research

Other key managers include Hansraj Thakur, A. Gowthaman, Prabhat

Kumar Tripathy, Shreejit Menon and Jitendra Bhati.
Robust, comprehensive credit & risk management framework
The company has a robust and comprehensive credit assessment and
risk management framework to identify, monitor and manage risks
inherent in corporate and retail lending operations. Credit assessment and
risk management framework comprises of four stage model which
includes, (i) Screening stage, to conduct an initial screening of
prospective borrowers, (ii) Evaluation stage, to evaluate the prospective
borrower’s business, financing needs, track record and ability to repay
loan before presenting the proposal to the corporate lending committee,
(iii) Approval stage, where the loan proposal is presented to the credit
committee for final approval and loan disbursement and;(iv) the Sanction
and Monitoring stage, in which the credit team consistently monitors the
loan portfolio to allow for early identification of problem. Quality of loan
portfolio is reflected from the low rate of gross NPAs (GNPA) and net
NPAs (NNPA). As of December 31, 2017, GNPA was at 1.7% of gross
advances while NNPA accounted for 1.3% of net advances.

ICICI Securities Ltd | Retail Equity Research Page 5

 Better ratings, thereby diversified low cost funding enable high NIM
Indostar has a well-diversified funding profile that underpins strong
liquidity management system, strong credit rating and brand equity.
Indostar achieved a long-term debt rating of AA- and short-term rating of
A1+ within first year of inception of business. Currently, long-term debt
rating stands at CARE AA-; Stable and IND AA-/Stable, respectively, by
each of CARE and India Ratings & Research Private Limited. CARE, ICRA
and CRISIL have rated commercial paper debt as CARE A1+, ICRA A1+
and CRISIL A1+, respectively, which is the highest rating for short term
debt instruments.
Long-term relationship is maintained with lenders. As of December 31,
2017, lenders included, among others, 14 public sector banks, 13 private
sector banks, 21 mutual funds and four insurance companies and other
financial institutions. Due to diversified sources of funding there has been
an overall reduction in company’s average cost of borrowings in recent
fiscals. For FY16, FY17 and 9MFY18, company’s average cost of
borrowing was 11.1%, 10.3% and 9.1%, respectively. Led by better yields
and lower cost of funds, healthy margins are maintained at ~6-7%. NIM
was at 6.9% as of December 31, 2017.

Ownership by institutional investors ensuring international corporate

governance standards
The company expects to continue to benefit from the strong capital
sponsorship and professional expertise of their promoter and other
institutional shareholders. The promoter, which is part of Everstone
Group, is an India and Southeast Asia focused investor that was
recognised as ‘Private Equity Firm of the Year in India’ by Private Equity
International for six consecutive years from 2011 to 2016, with ~ US$4.0
billion of assets under management. In addition to assisting the company
with capital raising and obtaining strong credit rating, the company also
gains from relationship with promoter by getting access to best industry
practices and international corporate governance standards.

Exhibit 9: Financial Summary

| Crore FY14 FY15 FY16 FY17 9MFY18
Net Interest Income 167.6 207.4 274.8 331.7 285.8
Pre Provisioning Profit 170.6 229.1 296.6 335.4 258.5
Net Profit 112.1 149.0 191.6 210.8 164.1
EPS (|) 16.3 21.7 26.8 28.7 254.9
ABV (|) 144.1 162.5 209.2 234.9 254.9
GNPA (%) 0.8 0.6 0.2 1.4 1.7
RoE (%) 10.4 12.3 13.6 12.2 10.9
RoA (%) 4.2 4.2 4.4 4.1 3.8
Source: RHP, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 6

 Key risks and concerns
Concentration risk as corporate lending business, especially real estate
loan portfolio operating mainly from Mumbai Metropolitan Region
As of December 31, 2017, 93.9% of real estate loans from Indostar’s
corporate lending business were disbursed in Mumbai Metropolitan
region (MMR), and hence depends on the performance of the operations
conducted in this region. In the event of a regional slowdown in the
economic activity in MMR or factors such as slowdown in sectors such as
real estate, there is high probability of experiencing more pronounced
effects on financial conditions and results of operations. As on December
31, 2017, 41.6%, of total credit exposure comprised loans towards real
estate, and 10.8%, 6.9%, 3.5% and 2.3% of total credit exposure
comprised of loans towards financial services, poultry products, digital
cable and energy sectors, respectively. Even though company also
operates in states such as Tamil Nadu, Madhya Pradesh, Karnataka,
Rajasthan, their business, financial condition and results of operations
have been and will continue to be largely dependent on performance of,
and the prevailing conditions affecting, the economy in MMR.
Disruption in funding may adversely affect liquidity and financial position
The liquidity and profitability of business depend largely on the
company’s timely access to, and the costs associated with, raising funds.
Ability to raise funds at competitive rates depends on various factors
including current and future results of operations and financial condition,
the company’s risk management policies, credit rating, brand equity,
regulatory environment and policy initiatives in India and developments in
international markets affecting Indian economy. Changes in economic,
regulatory and financial condition or any lack of liquidity in the market
could adversely affect ability to access funds at competitive rates, which
could adversely affect company’s liquidity and financial condition.
Risks attached to unsecured loans may adversely affect business
Some of the loans provided by the company are unsecured loans. As of
December 31, 2017 and March 31, 2017, ~11.2% and ~17.2%,
respectively, of total credit exposure were provided on an unsecured
basis. The company may be unable to recover these loans through
standard recovery proceedings. Unsecured loans present a higher risk of
loss in case of a credit default as compared to loans to customers in other
asset-backed financing products. In addition, there can be no assurance
that the company’s monitoring and risk management procedures will
succeed in effectively predicting right income levels of these customers
or that their loan loss reserves will be sufficient to cover any actual losses.
Inability to manage interest rate risk may adversely affect business
Indostar’s results of operations depend substantially on the level of net
interest income. Any change in interest rates would affect the interest
expense on floating interest-bearing liabilities as well as net interest
income and net interest margins. Any increase in the cost of funds may
lead to a reduction in net interest margin, or can require increasing
interest rates on loans disbursed to customers in the future to maintain
net interest margin. Fluctuations in interest rates may also adversely
affect treasury operations.

ICICI Securities Ltd | Retail Equity Research Page 7

 Financial Summary
Exhibit 10: Profit and Loss Statement
(| Crore) FY14 FY15 FY16 FY17 9MFY18
Interest Earned 359.5 465.4 564.0 643.6 514.8
Interest Expended 191.9 257.9 289.3 311.9 229.1
Net Interest Income 167.6 207.5 274.8 331.7 285.8
growth (%) 23.8 32.4 20.7 -68.8
Non Interest Income 37.5 62.7 80.0 76.3 71.1
Operating Income 205.0 270.2 354.8 408.1 356.9
Staff cost 25.2 28.1 39.5 48.2 56.5
Other Operating expense 9.2 13.0 18.7 24.5 41.9
Operating profit 170.6 229.1 296.6 335.4 258.5
Provisions 1.4 3.0 3.4 12.3 8.6
Exceptional items
PBT 169.2 226.1 293.2 323.0 249.9
Taxes 57.1 77.0 101.6 112.2 85.8
Net Profit 112.1 149.1 191.7 210.8 164.1
EPS (|) 16.3 21.7 26.8 28.7 20.9
Source: RHP, ICICI Direct Research

Exhibit 11: Balance Sheet

(| Crore) FY14 FY15 FY16 FY17 9MFY18
Sources of Funds
Capital 68.3 68.4 73.4 78.4 78.7
Reserves and Surplus 1067.3 1216.9 1468.4 1824.4 1998.2
Networth 1135.6 1285.2 1541.8 1902.8 2076.8

Borrowings 1358.4 1957.8 2258.3 2697.2 229.8

Other Liabilities & Provisions 666.8 748.6 893.2 888.8 3738.4
Total 3160.8 3991.6 4693.3 5488.8 6045.1

Applications of Funds
Fixed Assets 1.1 0.9 3.3 8.8 25.9
Investments 60.8 54.6 0.0 187.0 711.6
Advances 2586.4 3392.1 4283.9 5160.6 5168.0
Other Assets 512.5 544.1 406.1 132.4 139.7
Total 3,160.8 3,991.6 4,693.3 5,488.8 6,045.1
Source: RHP, ICICI Direct Research

Exhibit 12: Key Ratios

(Year-end March) FY14 FY15 FY16 FY17 9MFY18
Valuation
No. of Equity Shares (Crore) 7.8 7.8 7.3 7.8 7.8
EPS (Rs.) 16.3 21.7 26.8 28.7 20.9
BV (Rs.) 146.3 164.8 210.3 242.8 266.3
ABV (Rs.) 144.1 162.5 209.2 234.9 254.9
P/E 35.0 26.3 21.4 19.9 27.4
P/BV 3.9 3.5 2.7 2.4 2.1
P/ABV 4.0 3.5 2.7 2.4 2.2
Yields & Margins (%)
Net Interest Margins 6.60 6.00 6.50 6.80 6.90
Yield on Average interest-earning assets 14.60 14.30 14.50 13.80 13.30
Cost of borrowing 12.10 11.90 11.10 10.30 9.10
Quality and Efficiency (%)
GNPA 0.80 0.60 0.20 1.40 1.70
NNPA 0.70 0.50 0.20 1.20 1.30
ROE 10.4 12.3 13.6 12.2 10.9
ROA 4.2 4.2 4.4 4.1 3.8
Source: RHP, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 8

RATING RATIONALE
ICICI Direct Research endeavours to provide objective opinions and recommendations. ICICI Direct Research assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong
Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as
the analysts' valuation for a stock.

Subscribe: Apply for the IPO

Avoid: Do not apply for the IPO
Subscribe only for long term: Apply for the IPO only from a long term investment perspective

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research Page 9

ANALYST CERTIFICATION
We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research
report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s)
or view(s) in this report.

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ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,
publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities
described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and
to observe such restriction.

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