IndoStar Capital Finance Limited (INDOSTAR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Business Update Conference Call of IndoStar Capital Finance Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Viral Sanklecha from Orient Capital. Thank you, and over to you, sir.

Thank you, Davin. Good afternoon, everyone. I welcome you for the business update call of IndoStar Capital Finance Limited to discuss sale of IndoStar Home Finance Limited to EQT. We have from the management, Mr. Karthikeyan Srinivasan, Chief Executive Officer; Mr. Randhir Singh, Executive Vice Chairman; Mr. VinodKumar Panicker, Chief Financial Officer; Mr. Shreejit Menon, CEO, IndoStar Home Finance Private Limited; and Mr. Pushkar Joshi, CFO, IndoStar Home Finance Private Limited. Before we proceed with this call, I would like to mention that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. For more details, kindly refer to the filings made on company's website and stock exchanges. Without further ado, I would like to hand over the call to the management for the opening remarks, and then we'll open the floor for Q&A. Thank you, and over to you, sir.

Thank you. Thank you, Viral. Good afternoon, ladies and gentlemen. I'm Randhir Singh, Executive Vice Chairman of IndoStar Capital Finance. I welcome all of you to this conference call to discuss the sale of our Housing Finance subsidiary. Joining me today are Mr. Karthikeyan Srinivasan, our Chief Executive Officer; Vinod Panicker, our Chief Financial Officer; and Mr. Shreejit Menon, who is the Chief Executive Officer of the IndoStar Home Finance; and Pushkar Joshi, who is our CFO for IndoStar Home Finance. To begin, I would like to provide a brief overview of the transaction and then open up the call for the questions. On 19th September 2024, the Board of IndoStar Capital Finance Limited approved the sale of its subsidiary, IndoStar Home Finance Private Limited to EQT, which is a global private equity investor for INR 1,750 crores on a fully diluted basis. The transaction is subject to customary conditions precedent, RBI approval, consent from lenders and shareholders. Further, EQT plans to invest INR 500 crores into IHFPL upon or shortly after closing this the transaction and the Board of IHFPL has granted an in-principle approval for this infusion. The deal closure time line will depend upon the timing of the receipt of the required approval, especially the approval of RBI. And currently, we expect this deal to close by Q4 FY '24 or early FY '25. We believe that this sale contributes significantly to the value creation journey of the parent company for following reasons. Number one, the sale of HFC at a very attractive valuation, provides a significant inflow of liquidity for the business expansion at the parent level. Number two, this transaction unlocks the value of the parents investment as the business was not being adequately valued under some of the parts basis by the market. The premium receipt from the sale significantly improve the book value of the share by about INR 70 per share. Third, this monetization enables us to improve financial ratios such as ROA, CRAR, cost-to-income, return on equity, et cetera. Fourth, divestment of this subsidiary frees up the parent company from obligations of providing capital for future requirement of HFC, besides, of course, simplifying the cost structure and reducing managerial complexity. This enables the parent company to focus on its core business of vehicle finance and secured small business loans. This concludes my opening statement. I would now like to open up the call for the questions, which I and my colleagues will answer.

[Operator Instructions] The first question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.

Congratulations to you all on this successful transaction. I know it's a bit premature to ask, but would the profits from this be used to set off any loan losses and so on and improve your ratios significantly so that as and when recoveries come, you can just recognize it at that point of time? That's question number one. And question number two is that with so much additional capital cushion, would that result in your cost of borrowings come down? And could you just -- I mean, I know it's not related to the transaction, but is there any developments on the cost of financing? Those are -- because you recently concluded an IPO of debt, right? So that's why I wanted to ask this question.

I think Vinod can answer the cost of funding question. Vinod, please go ahead.

Yes. On the cost of funds, we believe that we are already in the phase where the cost of funds have been coming down quarter-on-quarter. And in fact, Vivek, actually in the last call also, we did mention about it. So that's a continuous process. This -- when the fund actually comes in, this will definitely help us reduce the cost further. So that is definitely going to be there. You asked about the other question about what -- whether we will use it to adjust any of the, I would say, other liabilities or other assets, which are currently on the books but not yielding. That's a call we will take possibly when we actually come closer to the closing of the transaction.

The next question is from the line of [ Satya from the Family Office ].

Congratulations to the team. Just had 2 small questions. One is you said that transaction will be closed by Q4 FY '24 was -- I think that was an error, but is it end of calendar year '24 or end of FY '25?

FY '25 or early FY '26.

Early FY '26. Got it. And the other quick question is, now we have access to this INR 1,700 crores. Will this be used? What I want to understand is, is the growth trajectory expected to accelerate significantly once we have access to this fund and is the demand generation side sorted? And do we have that in place once we have access to the funds?

See, we have been addressing this in the past also, Satya. Our growth will be dependent on market conditions, how the market is reacting on the overall side, based on which we will decide. This will give us an impetus to invest more into the vehicle business and the small business loans which we have just started off. We'll continue to that journey. As the deal comes to closure, we are able to realize funds, we'll give you more picture on how -- what we are going to do.

[Operator Instructions] We have the next question from the line of Kushan Parikh from Morgan Stanley.

I just had a small clarification. So when you say INR 1,750 crores on a fully diluted basis, does that include the INR 500 crores infusion from EQT or INR 1,750 crores is the total consideration that IndoStar will receive for the sale of the HFC business?

Kushan, it's the attestation that we will receive.

Understood. And then INR 500 crores will be separately infused by EQT into the subsidiaries once the transaction is completed? Sorry, am I audible?

Yes, yes, please. Your understanding is correct, INR 1,750 crores is the consideration that the parent company received and the INR 500 crores is what the HFC would receive, and that's separate.

[Operator Instructions] The next question comes from the line of Sweta Padhi from SBI Securities.

Sir, with this sale of the HFC, how do you expect the ROA of investor finance to move ahead because we expect that the SME and the vehicle finance are of higher ROA-generative business. So how do we see the trajectory going ahead?

Yes. So I think, Sweta, our analysis is that this is accretive to our ROA and ROE outlook for the next 2, 3 years because of following levers. One is, there is -- there would be at least an expectation of reduction in the weighted average cost of capital because for the simple reason that we'll borrow less given the cash in the balance sheet and that itself obviously does improve the ROA. And second is, when you borrow less, you obviously have better negotiation leverage with lenders because we have a sufficient supply of cash to fund the growth. So we see this as ROA accretive over the next 2, 3 years.

Sir, if you could specify a range or anything like quantitative in that sense?

I think we'll do that closer to sort of closing it because I think we are still -- like we indicated, I think it's about 6 to 8 months away. And this is -- this estimate is basis our experience of similar transactions that we've seen in the market. I think closer to that date because a lot of these calculations depend upon the situation at that point in time. We will surely provide you closer to the date and estimate. So we made a note of this. We will provide to you.

[Operator Instructions] We have the next question from the line of Jigar Jani from B&K Securities.

Sorry, I joined the call a little bit late. So I want -- I missed the utilization of the proceeds, so any likelihood that these proceeds could be through sort of progresses on our SR book or the asset quality on the stand-alone side? Or will this be more be from a growth perspective overall, if you have commented earlier, sorry, I missed it.

Yes, we did cover this. Please go ahead, Vinod.

What we told was, that we will take a call closer to the closing time. Right now, we have not decided how to use it.

Okay. And just a follow-up on this. So the cash, the investment on the books for the subsidiary is about INR 450 crores, if I'm not wrong, right? The current value of the investment?

Yes.

Yes. So the net proceeds will be closer to about INR 1,100-odd crores that we'll be getting post taxes...

Yes. I mean if you exclude, but really the net inflow is really the correct way to look at it, which is really INR 1,400 crores plus is what is expected.

Jigar, the flow will be that INR 1,700 crores, INR 1,750 crores, whatever you are talking about, minus any tax liability that would be there, because once we have invested the money, the balance amount will also come to us only because we already invested the money. So it will not be net of...

Yes. So what I was trying to understand the gain on the transaction would be closer to INR 1,100 odd crores because clearly tax is not...

Gain would be for INR 1,300 crores plus.

[Operator Instructions] We have the next question from the line of Jayesh S from ESAF.

I just want to know whether these funds are being utilized for acquisition of any of other new companies or any other new entities in the same segment?

There's no such plan.

Is it audible?

Yes. Could you hear me? We said there is no such plan.

[Operator Instructions] We have no further questions, ladies and gentlemen. I would now like to hand the conference over to Mr. Viral Sanklecha from Orient Capital for the closing remarks. Over to you, sir.

Thank you. I would like to thank the management for taking the time out for this conference call today and also thanks to all the participants. If you have any query, please feel free to contact us. We are Orient Capital, Investor Relations Advisors to IndoStar Capital Finance Limited. Thank you so much.

Thank you. On behalf of IndoStar Capital Finance Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.