IndoStar Capital IPO recommendations: Analysts divided

IndoStar Capital Finance IPO is opening up today as first mainboard offer after a dry patch in April. The offer is priced in the rage of INR570 – 572 per share and investors can make applications in multiples of 26 shares. Several brokerage houses and analysts have come up with their research notes on the IPO and the recommendations are mixed. As we highlighted in our analysis, the company’s high exposure to real estate has not gone very well with some analysts. Here is a quick compilation of IndoStar Capital IPO recommendations by major brokerage houses.

Aditya Birla Money has taken a positive view on the upcoming IPO and has put a Subscribe rating on it. “It is noteworthy that Indostar is adequately capitalized with capital adequacy ratio of ~32%. As a means to further strengthen the liquidity management system, company maintains adequate cash and liquid investments of 15.0% of latest audited net worth as reserves, where at least ` 1000 mn is kept in cash or cash equivalents, to meet any potential liquidity requirements in the short-term. Valuations are reasonable with PE of ~23x on FY18E EPS and P/ABV of ~1.9x for the company having strong RoA, adequate capital, strong management pedigree and is expected to deliver steady earnings growth performance,” noted the brokerage house while adding that all four lines of business are poised for healthy growth.

IndoStar Capital IPO is a good fit for long term investors, opined SMC Global Securities which finds merit in proven track record of delivering results and a well diversified funding profile. Nevertheless, the brokerage house highlighted corporate lending business’ high concentration in real estate as a key risk. SMC Global has put 2.5 stars on the IPO, putting the offer between neutral and fair.

Angel Broking is positive on the prospects of the company given its recent diversification into retail lending. “At the upper end of the price band, ICFL is valued at 2.2x of Q3FY18 book value (Pre-IPO) and on post dilution basis at 1.9x of Book value. The strong sponsorship of Everstone and other shareholders, along with a well-capitalised balance sheet and an experience and focused management provide an excellent base for the next level of growth. Based on the above positive factors we assign SUBSCRIBE rating to the issue,” recommended the brokerage house in its research note.

Another broker positive on the IPO is Ajcon Global which has advised investors to subscribe to the offer. “At the upper end of the price band, the issue is valued at 2.2 times of Q3 FY18 book value (pre-IPO) and 1.9 times of book value on a post dilution basis which is at a discount to peers in listed space trading at a P/BV multiple of 3-5x. We believe that the discount in the valuation is also owing to lack of presence of the Company in retail segment. However, the Company’s recent focus on retail segments like vehicle finance and affordable homes is expected to support the yield and improve the asset quality in the future. With due consideration to factors like a) established strong corporate lending business, b) expanding portfolio to vehicle finance, c) continue to grow in SME lending and also entered housing finance business, d) growth in credit exposure and PAT at CAGR of 30 percent and 27 percent respectively, e) well diversified funding profile, f) robust risk management and high quality assets: only 2 NPAs in corporate lending, g) strong capital sponsorship of Everstone and other institutional investors. h) robust profitability metrics: NIMs of 6.9 percent and Cost/income ratio of 27.6 percent, i) superior return ratios with 3.8 percent of RoAA and RoAE of 10.9 percent, we recommend “SUBSCRIBE” to the issue,” said its research note.

IndoStar Capital IPO recommendations: Not everyone is impressed

Choice Broking has an Avoid rating on the IPO. “ICFL’s demanding valuation at Rs52,130.8 mn is valued at P/ABV of 1.9(x) to FY18 annualized adjusted BVPS. At this valuation, it may look cheap compared to well managed NBFCs, however, ICFS is presently a corporate lender and does not have presence in retail business. Expecting strong retail loan growth at this juncture is not logical as the segment is highly competitive and ICFS does not have experience in retail credit. Considering all these parameters, we assign ‘Avoid’ rating to the issue,” said analyst Satish Kumar, adding that the company will need to establish large retail network.

ICICIdirect is another brokerage house which is skeptical on the company’s prospects. “At the IPO price band of 570-572, the stock is available at a multiple of 1.8x FY18E annualised BV (post i ssue) and ~23.6 x 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,” said the research firm in its IPO note.

Unlike most recent IPOs, analysts have not flagged aggressive valuations in IndoStar Capital IPO recommendations; however, the company faces other concerns and a relatively short history in retail lending segment is among the prominent ones. Nevertheless, reasonable valuations offer some comfort here and a small premium in the informal grey market also helps. Head to our discussion page to check how other investors on the IPO street are receiving the offer.

Krishna Bagra

Coming from a family of investors and financial analysts, Krishna learnt wading through regulatory filings pretty early in her career. At IPO Central, Krishna plays twin roles of contributor and head of research desk. She can also be reached at +krishnabagra .

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