From day one, the CV finance biz will be profit accretive: R Sridhar, IndoStar

R Sridhar, Exec VC & CEO, IndoStar, tells ET Now what makes the CV finance business of IIFL Finance such an attractive buy.

Edited excerpts:

Let us talk about your latest acquisition of the CV finance business of IIFL Finance. What is the rationale? What was the value consideration and is this acquisition EPS accretive? If so, from when?

IndoStar primarily started as a corporate lending company and in the last few years we have forayed into retail. In retail, SME and affordable housing were there but after I have joined about two years back, we have kept CV financing as the engine for retail.

We have opened about 160 branches. We recruited about 1,000 people and generated about Rs 1,000 crore in the first year itself. We focussed more on used vehicles and 30% will be the new vehicles. This is the business we have been doing and we have big aspirations. We have enough capital and as I have run this business for 30 years, there is a fantastic opportunity in CV financing and there are not many players in this space.


When this opportunity came -- IIFL wanted to exit the CV financing business -- we picked it up as it is a good franchise. They have been on it for about seven years and had developed about Rs 4,000 crore of book which consists of both new and used, 160 branches and 1,300-strong well trained team. They wanted to exit and focus on their core competence of affordable housing, gold loans and wealth management and other businesses.

It was an opportunity we thought that we should take it and we looked at it and we were satisfied and so we are acquiring it. From day one, it is profit accretive. EPS accretive and today we are doing about Rs 200 crore of disbursement per month. We are doubling the capacity. This portfolio gives us profit plus the capacity to do more business in the future. That is a big add-on.

You said there is sufficient cash on books. Is it early days or has it been decided what would be the price?

The price is someone is selling something which he has created over a period of time with the passion to build it big. We have valued that business and then arrived at a modest premium which this business deserves. It is more a bilateral deal. There is no process and in fact we have not had even a banker in this transaction.

Is it at a significant premium and a mark-up that you would be willing to pay for an asset like that?

No, it is not significant. I would say, it is very modest and…

About 10% premium?

Not even 10%.

So where would the total AUM for the CV business stand post this?

We have about Rs 1,000 crore and we are buying about Rs 4,000 crore. So, it becomes Rs 5,000 crore. What is very significant is that the mix -- wholesale and retail -- undergoes a substantial change. We were 42% retail and 58% wholesale before this deal. When you change this, we become 62% retail, 38% will be the wholesale. By FY20, when we reach March, the retail will become more and corporate will become about 25-30%.

IndoStar saw a little bit of pressure when it came to the margins in the third quarter. Do you think that this sort of pressure will continue? What is the outlook?

IndoStar will have to be looked at slightly differently with the other NBFCs because we have a combination of corporate and retail business. In the corporate business, everything happens in a particular month, it is lumpy disbursements and this quarter we have had a huge prepayments. So about Rs 502 crore of prepayments has come from our borrowers which had put our net interest income a little bit lower. Also, because of liquidity concerns, we were carrying a huge balance, there is a negative carry there also. Otherwise, net interest margin should be around 8%.

What is the overall growth strategy? Given the kind of rising concerns in NBFC space and some or the other liquidity crisis and crunch that snowball into something very big for the system per se, are these liquidity concerns genuinely on ground?

There is no liquidity concern. Government as well as the RBI keep saying that there is enough liquidity in the system. But what is not happening is disbursements to the NBFCs and HFCs, from mutual fund as well as from banks. Mutual funds have had exposures in some of these companies which were in problem recently. They are going little slow. For banks, there os the PCA issue and some of the private banks have had huge exposure as well.

Naturally the boards are saying that be cautious. We are talking very early into the crisis. It started in October. We are in February now, four months into it. I would say it has improved from October and money is coming. Only thing is it is 50-75 bps more. So if you are ready to pay, it is there. But do you want to take that money and disburse?

In our retail business, there is a growth.

But if you look at our corporate business -- both in real estate and non-real estate -- we are definitely going slow because all the players who are into corporate lending business, are not lending. If you happen to be the only lender, then you will feel a little bit concerned.

We have enough capital, asset quality is good, ALM is fine but this is a turbulence. So, you have to just wait and watch, go through the turbulence and history will show you that NBFCs have gone through this and have emerged successful. Today we have a Rs 30 lakh crore book so you cannot wish them away. It will come back.