A gravity-defying share price surge for an Indian shadow bank fueled by an equity investment may not last much longer as loan growth dries up and provisioning eats into earnings.
IndoStar Capital Finance Ltd. jumped 58% this year following a proposal by Canada’s biggest alternative asset manager to buy a 40% stake in the lender. The rally makes the Mumbai-based financing company the top-performer on the BSE Finance Index this year.
Yet IndoStar’s gains may not have much further to run. India is heading for its first full-year economic contraction in four decades as it emerges from one of the world’s strictest lockdowns, and new virus hotspots continue to pop up.
The lender is likely to see its loan book shrink and provisions spike as existing loans sour in the short term due to the difficult economic environment, Darpin Shah, an analyst at HDFC Securities Ltd. said in a note, while maintaining a sell rating with a price target of 253 rupees.
The investment by Brookfield Business Partners is making IndoStar the best capitalized publicly traded shadow bank in Asia’s third largest economy, according to an exchange filing. It helps the lender manage its liabilities at a time when that’s become essential for financing firms to survive. Housing Development Finance Corp Ltd., the nation’s biggest mortgage lender, announced plans to raise $1.8 billion through equity and debt last week.
“With uncertainty looming large, every non-banking financial company is trying to raise capital and strengthen its balance sheet," said R Sridhar, chief executive officer at IndoStar. “Liquidity stress and the impact of Covid-19 means that the non-bank financial companies that will survive should have a strong capital base, good credit rating, sound processes, and asset quality."