Rating firms keep watch on IndoStar Q1 earnings

After IndoStar Capital Finance’s statutory auditors raised questions over its ability to continue as a going concern, rating agencies and lenders are keenly awaiting the company’s first quarter results before taking a call on reviewing their credit ratings and loan disbursements, according to two people in the know.

The non-banking financial company is expected to announce its results on Sunday. Last week, in a qualified opinion on IndoStar Capital’s annual accounts, statutory auditors Deloitte Haskins and Sells LLP said its total liabilities had exceeded total assets maturing within 12 months by ₹2,206 crore, and for certain borrowings, gross non-performing assets (NPAs) and net NPAs had exceeded thresholds.

Crisil and Icra put the rating of the NBFC on “watch” with “developing” and negative” implications , respectively, in May, while Care Ratings downgraded its long-term instrument from AA- to A+.

In a 9 August report, Care ratings said gross non-performing accounts of IndoStar had touched 15.5% as of 31 March from 4.4% in the year ago, while net NPAs had touched 8.3% from 3.8% during the period under consideration.

The spike in NPAs was primarily due to control deficiencies in its ₹1,381 crore stressed commercial vehicle (CV) portfolio, where restructuring took place without complying with its internal or the Reserve Bank of India’s policies and impact of covid-19 on its borrowers, Care Ratings said in the report.

Meanwhile, the company’s management assured that the overall quantum of NPAs has come down as of 30 June after it sold ₹516 crore of NPAs from its stressed loan pool of ₹1,381 crore to an asset reconstruction company (ARC). According to the data shared by Care, the company has written off ₹369 crore and collected ₹94 crore till June, which is likely to reduce the CV stress pool to around ₹401 crore.

“Looking at the data available with us, it doesn’t look like IndoStar’s financial position is a matter of concern. Thanks to the backing of its promoter Brookfield, the company will be able to sail through the current crisis,” said one of the two people, a credit rating official, seeking anonymity.

That said, the non-bank lender’s financials remains weak with IndoStar reporting losses over the last three years. Its operating loss increased to ₹896 crore in FY22 on account of a sharp rise in credit costs, which increased to ₹1,158 crore.

“While the management expects future earnings to benefit from write-backs, Care believes that overall earnings will remain relatively lacklustre in the near term as it will take time for it to strengthen its risk controls and restore meaningful growth in the loan book amid potential rise in the funding costs,” Care added.

However, rating agencies are taking comfort from the support provided by Brookfield. As in June, Brookfield held a 56% stake in IndoStar. The group had invested ₹1,225 crore in the company in May 2020 to become the largest shareholder and co-promoter.

According to Care Ratings, Brookfield is actively involved in managing the day-to-day operations of IndoStar since January. It elevated IndoStar’s chief business officer Deep Jaggi as the chief executive in January.

First article