IndoStar Capital Finance Ltd. has received its first brokerage rating nearly a month after it listed on the bourses at a premium.
Morgan Stanley initiated coverage on the stock with an ‘Overweight’ rating and a price target of Rs 650—an upside potential of nearly 25 percent from current levels.
That comes even as there mixed recommendations from brokerages for the non-banking finance company’s maiden public offer.
Morgan Stanley initiated coverage based on four reasons:
Share Of Retail Loans
The investment bank expects the NBFC’s share of retail loans to double from 26 percent in the previous financial year to 52 percent in the year through March 2020.
Corporate lending (structured finance and real estate finance) constituted 74 percent of IndoStar’s loan book as on 31 March 2018, while the rest is mainly SME lending. It forayed into vehicle finance and housing finance in late 2017. Morgan Stanley expects IndoStar to diversify across wholesale and retail lending.
High Growth Prospects
Morgan Stanley expects IndoStar’s assets under management and revenue to grow at an annualised rate of 50 percent and 40 percent, respectively, by the financial year ending March 2021. The 100 branches the company has added since the last financial year will aid loan book growth, it said.
Higher Sustainable RoE In Long Term
IndoStar has a profitable wholesale book with return on assets of more than 4 percent. Its low leverage, however, has capped the return on equity ratio to the mid-teens, the brokerage said.
Morgan Stanley expects the increasing share of retail lending to help the company deliver a sustainable RoE of 18-20 percent in the long term. This may lead to markets assigning a higher valuation multiple to the stock, the brokerage said.
Morgan Stanley said IndoStar Capital is among the cheapest NBFCs in the coountry. The brokerage has assigned a price-to-book value multiple of 1.7 to its one-year forward estimates.
“At 1.4 times FY20 book value, the risk reward is good,” Anil Agarwal, equity analyst at Morgan Stanley, said in the note.
Shares of IndoStar Capital have lost 8.9 percent since listing on May 21. The company listed at a premium of 4.9 percent at Rs 600 apiece on the BSE over its issue price of Rs 572.
Most brokerages were divided on the offer. Aditya Birla Capital, Angel Broking, IIFL Wealth Management and Hem Securities advised subscribing to it, while Antique Broking, ICICI Direct and Choice Broking had an ‘Avoid’ rating on account of the concentration of corporate lending in its loan book.
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