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Morgan Stanley
IndoStar Capital
(Overweight)
CMP: ₹510.25
Target: ₹650
IndoStar Capital Finance, promoted in F11 by IndoStar Capital, had a ₹6,200 crore loan book as of March 2018, 74 per cent of which was corporate lending (structured finance and real estate finance),and the rest largely SME lending. It started vehicle finance (focusing on used commercial vehicles) and housing finance in 2HF18. We expect IndoStar to become one of India’s few NBFCs that is diversified across both wholesale and retail lending. We expect rapid retailisation, with the share of retail loans to double from 26 per cent in F18 to52 per cent in F20.
Valuation: The stock is among the cheapest NBFCs in terms of valuation. We forecast ROE to rise from 11 per cent in F18 to 13 per cent in F21 and 16 per cent+ in F23as operating and financial leverage set in. Our price target implies a re-rating to 1.7xF20 BV (MSe). Vehicle finance and wholesale finance will be IndoStar's key profitable segments.
Risks: Downside risks to our forecasts and valuation will depend on the CV cycle and state of the real estate industry. Other risks are a disruptive rise in rates and a sharp rise in bad loans.
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