Deal focus: Brookfield lends a helping hand

The storm clouds that surrounded the collapse of Indian construction financier Infrastructure Leasing & Financial Services (IL&FS) are taking a while to disperse. Not even a year had passed when Dewan Housing Finance was thrown into bankruptcy court last November. With it sank any hope of a revival in sentiment among local banks that had become wary of lending to non-banking finance companies (NBFCs).

Meanwhile, promoters or majority owners of listed NBFCs have seen the market value of these businesses erode. IndoStar Capital Finance (ICF), which was launched by The Everstone Group in 2011, was no exception. Having peaked at INR586 after its IPO in May 2018, the company was trading below INR175 towards the end of last year. A resurgence in mid-January was followed two weeks later by Brookfield Asset Management offering to buy up to 40% stake for INR14.5 billion. As of February 11, ICF was trading at INR285.

Should the deal – which values ICF at INR36.3 billion ($510 million) – go through, it will not only bring relief to the company’s existing shareholders, it should also help lay the foundations for a brighter future.

“Brookfield bringing in capital is being seen positively not only by the markets but even by the banking and the lending community,” says Dhanpal Jhaveri, vice-chairman of Everstone India. “We wanted to make sure that we were making IndoStar future proof from any further shock that may come.”

The coming years should test what has been an unorthodox investment strategy by the Indian private equity firm. Unlike other GPs, it sought to enter the burgeoning NBFC space at a lower cost of capital by building its own platform rather than buying an existing asset. Even anointing Brookfield as a co-promoter – a condition of the new deal – is something of an unusual move.

“I don't think there have been many transactions where two large private equity funds have joined hands and become promoters of a company in India,” says Amit Thawani, head of India coverage at Nomura, which advised ICF on the transaction and will handle the open offer through which Brookfield hopes to accumulate its 40% stake.

Diversification drive

The incoming promoter might be reassured to learn that Everstone has been working to “future proof” the asset for a while now. ICF has reduced its exposure to risky assets related to infrastructure and corporate lending that face dimmer prospects in the near-term.

Back in 2011, it was a purely commercial lending operation – loans were issued to mid-sized companies and real estate developers. ICF now focuses on housing applicants in remote locations, small-and-medium-sized businesses (SME) and drivers seeking to purchase used vehicles. Retail finance constitutes nearly one-third of ICF’s INR64.5 billion loan book. Commercial vehicle loans account for INR15.9 billion.

Last year, the company acquired the transport finance business of India Infoline Finance (IIFL), increasing its branch network from 161 to 322. But given the inherent complexities of working with thousands of truck drivers and mortgage applicants – versus signing off large tranche loans at One Indiabulls Center in Mumbai, ICF’s headquarters – a bigger local footprint is required. Shriram Transport Finance (STF), the market leader in commercial vehicle finance, has 1,545 branches nationwide and its loan book is 54 times larger than that of ICF.

“You need expertise to evaluate used vehicles. You need to be in constant touch with the borrower,” explains an equity research analyst at an Indian bank that rates NBFCs. “These are ‘earn and pay’ borrowers. Today, they might get a good freight and make money, so you should be there to collect. They [ICF] need to expand more and then improve the productivity at these branches.”

Despite conceding that ICF has an attractive price-to-book valuation, the analyst recently downgraded his recommendation on the stock from buy to hold.

Institutional strength?

Jhaveri accepts that it could be challenging in the near term, but he firmly believes IndoStar is in good hands. In 2017, the company recruited R. Sridhar from STF as CEO. There is optimism within the ranks that Sridhar can execute a successful second act and guide ICF up the commercial vehicle finance rankings.

Everstone also claims to have strengthened the company’s governance framework, upgraded its IT systems, and provided strategic direction. The IIFL acquisition complements ICF’s existing network, Jhaveri says, as the branches are located in states where the company did not previously have a significant presence.

Furthermore, the current economic backdrop should allow ICF to pursue its long-term plan to create a diversified lending portfolio in a capital efficient manner. Brookfield’s reputation could help open new doors as well.

“To start any retail lending business from scratch is quite expensive because you need to build a lot of infrastructure and cover people costs,” he says. “On a low overhead and low cost base, the corporate lending business gave us good margins and profits.”

The IIFL business gives ICF a leg up in vehicle finance and it will now look to do the same in affordable housing finance, either organically or through acquisitions. However, Everstone is not alone in considering opportunities. Notably, last year Blackstone bought Aadhar Housing Finance for $378 million while Morgan Stanley Private Equity Asia recently invested in Centrum Housing Finance. These companies are now looking far and wide for new business, sometimes even going beyond India’s smaller cities.

“That's an area which is attractive for a lot of players because there is demand for housing at a lower price point and the government has also given tax incentives as affordable housing is an important theme for the country,” says Nomura’s Thawani.

How Brookfield will support IndoStar once it acquires its stake remains to be seen. The fact that a partnership has been inked, though, is a positive sign for the company and the wider industry. It could make a big difference for any PE-backed NBFC during a time of rapid consolidation.

“Few NBFCs will really grow to a size and scale that matter and IndoStar is targeting to be one of them,” Thawani says.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• South Asia
• Financials
• PIPEs
• India
• NBFCs
• Everstone Capital
• Brookfield Asset Management