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Motilal Oswal
IndoStar Capital (Buy)
CMP: ₹415.8
Target: ₹525
IndoStar Capital Finance commenced operations in 2011 with a significant capital commitment (₹900 crore) by the promoter, Everstone Capital. The company started out as a wholesale lender, and over time utilised the profits from this segment to build new businesses — SME, housing and vehicle finance.
Over the next three years, IndoStar aims to make vehicle finance (VF) its key portfolio contributor. While it has organically built a VF portfolio of about ₹1,000 crore over the past year, it recently acquired the commercial vehicles (CV) portfolio (about ₹3,600 crore) of India Infoline Finance. With a special focus on it, vehicle finance book should grow at about 40 per cent CAGR over FY19-22, in our view.
·However, the near-term RoE (return on equity) is likely to be modest at 9-11 per cent due to a) heavy investment in branch expansion (150 branches opened in the past one year); and b) low leverage (Tier-I capital of 30 per cent). Over the medium-term, its RoE is expected to improve to 13-15 per cent as IndoStar’s branches mature, and its long-term sustainable RoE is likely to be 16 per cent. We believe that at the stock’s current valuations around 1.1x FY20E BV and 10x FY20E EPS, the risk-reward for IndoStar is favorable.
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