indiabulls housing - rakesh jhunjhunwala...indiabulls housing finance ltd (ihfl) has transformed...

Mortgage focus to drive returns

Indiabulls Housing

Initiating Coverage | 24 June 2014Sector: Financials

Alpesh Mehta ([email protected]); +91 22 3982 5415

Sunesh Khanna ([email protected]); +91 22 3982 5521

Indiabulls Housing Finance

24 June 2014 2

Indiabulls Housing Finance: Mortgage focus to drive returns

Page No.

Summary ........................................................................................................ 3-4

Mortgage to remain focus area .................................................................... 5-7

Asset quality trend to remain stable ............................................................ 8-9

Lowest net gearing to aid dilution free growth ...................................... 10-11

Market share gains, stable spreads to drive PAT growth ........................ 12-13

Healthy return ratios; +8% dividend yield ............................................... 14-15

Company description .................................................................................. 16

Housing Finance Insustry: Business insights ........................................... 17-20

Financials and valuations .......................................................................... 21-22

Investors are advised to refer through disclosures made at the end of the Research Report.

Prices as on 23 June 2014


24 June 2014 3

Mortgage focus to drive returns AUM and earnings growth to remain healthy

Indiabulls Housing Finance Ltd (IHFL) has transformed from a diversified lender to a focused mortgage player. Mortgage focus has yielded returns, with RoE/RoA improving from 3%/0.8% in FY09 to +27%/3.8% in FY14.

IHFL has devised a unique strategy – 74% of the book forms mortgage/LAP (which keeps asset quality under check) and 26% of book forms commercial credit and commercial vehicles (supports blended spreads of +350bp), thereby enabling sound asset quality with superior returns.

Mortgage to remain focus area, market share gains to drive AUM growth of +23% for next three years. Lowest levered HFC (5.3x) to support growth without dilution.

Asset quality trend to remain stable. Improved borrowing profile and liquidity buffer help maintain healthy spreads.

Consistent outperformance on key parameters relative to sector. FY14 RoE at 27%; average three-year RoE at 25% and is the best among the peer group.

Superior return ratios, +8% dividend yield, Initiate coverage with Buy rating and target price of INR445 (2x FY16E BV).

Mortgage to remain focus area; AUM to grow at 23% for next 3 years IHFL has emerged as the fourth largest housing finance company (HFC) in last five years with AUM CAGR of 39% over FY10-14. Mortgage loans form (74% of AUM), 47% is towards housing loans, while 27% is LAP (mainly self-employed customers). Despite being the fourth largest HFC, IHFL has a market share of ~3%. With increasing branch penetration (branch network of 205), healthy capitalization (CAR of +19%), we expect IHFL to deliver +23% AUM growth over next three years and continue to gain market share.

Asset quality trend to be stable; GNPAs to remain in 70-90bp range Post the rundown of unsecured portion of the book in FY10, asset quality has been improving. IHFL’s headline GNPAs are among the lowest in the industry at ~0.9/0.4%, partly due to mortgage lending. We expect GNPLs to remain at 70-90bp, while NNPAs to be at 30-50bp. Improved borrowing profile, liquidity buffer aid to maintain spreads Strong capitalization and continuous improvement in business is reflected in continuous upgrade in credit ratings since FY08 by Crisil. IHFL had a rating of AA- in FY08, which was upgraded to AA in FY11 and AA+ in FY13. Improvement in borrowing profile was driven by reduced dependence on short term loans for funding; proportion of CPs to total borrowings came off to 11% from 42% in FY10. Bank loans account for 63% of total borrowings, against 48% in FY10. IHFL maintains a liquidity buffer of ~20% of loans in the form of cash/cash equivalents (cash equal to debt repayment of six months). This strategy has helped it meet any sudden funding shortage of funds in the market; moreover it reduces the volatility in the funding cost and helps maintain stable spreads.

Initiating Coverage | Sector: Financials

Indiabulls Housing Finance CMP: INR355 TP: INR445 Buy

BSE Sensex S&P CNX

25,031 7,493

Stock Info

Bloomberg IHFL IN

Equity Shares (m) 334.1

52-Week Range (INR) 407/166

1, 6, 12 Rel. Per (%) -13/26/-

M.Cap. (INR b) 118.6

M.Cap. (USD b) 2.0

Financial Snapshot (INR b) Y/E March 2015E 2016E 2017E Net Fin. Inc. 24.4 30.5 37.1

PPP 28.4 35.2 42.6

PAT - Post MI 19.4 24.0 29.0

EPS (INR) 55.6 66.4 80.3

EPS Gr. (%) 18.8 19.3 21.0

BV/Sh. (INR) 195.0 222.4 254.2 RoA on AUM %)

3.7 3.8 3.8

RoE (%) 31.0 32.4 33.7

Payout (%) 60.4 60.4 60.4

Valuation

P/E (x) 6.4 5.3 4.4

P/BV (x) 1.8 1.6 1.4

P/BV (x) 1.8 1.6 1.4

Div. Yield (%) 8.1 9.7 11.8

Shareholding pattern (%)

As on Mar-14 Dec-13 Sep-13

Promoter 41.8 41.5 41.1

Dom. Inst. 3.4 3.4 3.5

Foreign 38.3 38.3 39.2 Others 16.5 16.8 16.3

Stock Performance (1-year)


24 June 2014 4

Low gearing of 5.3x to support growth without dilution IHFL is the lowest levered HFC with a net gearing of 5.3x. It has a high capital adequacy ratio of 19.1%, with tier 1 capital at 15% as of FY14. Strong capital base, augurs well for healthy AUM growth over next three years without any dilution. Market share gains, stable/improving spreads to drive PAT growth After establishing a strong presence in mortgage market, IHFL is poised to gain further traction hereon. Healthy AUM growth led by market share gains, stable/improving spreads and margins, improving productivity (continuous decline in CI ratio) along with lower loan loss provisions will drive 23% PAT growth over the next three years. Average three-year RoE at 25% is best among peers; +8% dividend yield Healthy profitability coupled with high dividend payout boosted FY14 RoE at 27% and RoA to 3.8%. Average three-year RoE stands at 25% and is notably one of the best among peer group. IHFL has been one of the better dividend paying companies, with an average payout ratio of +50% in the past three years and an average dividend yield ratio of 8-10% for the similar period. Management has guided that given adequate capital buffer and healthy profitability, company will maintain a healthy payout ratio of ~60% for the next three years. Valuation and view IHFL trades at 1.6x FY16E P/B and 5.3x FY16E P/E. Though the stock has got re-rated over the last few months, we believe a strong positioning in mortgage segment, potential for market share gains, healthy margins and return ratios, good asset quality and healthy dividend yield would drive further re-rating. We initiate coverage with Buy rating and a target of INR445 (2x FY16E P/B).

Re- rating driven by sharp improvement in RoEs

Source: Bloomberg, MOSL

IHFL has best dividend yield among Indian financial space

0.6 0.9 1.4 1.4

2.4

8.1

Repco GRUH HDFC LICHF DHFL IHFL

Dividend Yield (%)

Source: Company, MOSL

1.8

1.2

2.0

0.70.0

10.0

20.0

30.0

0.6

1.0

1.4

1.8

2.2

Aug

-09

Feb-

10

Jul-

10

Dec

-10

May

-11

Oct

-11

Apr

-12

Sep-

12

Feb-

13

Jul-

13

Dec

-13

Jun-

14

P/B (x) Avg(x) Peak(x)Min(x) RoE (RHS, %)


24 June 2014 5

Mortgage to remain focus area AUM to grow at CAGR of 23% over next 3 years

Among top four housing finance companies with AUM of INR411b. Increasing distribution network and market share gains to drive growth. IHFL is one of the biggest players in LAP; expect to +25% CAGR over next three to five

years.

IHFL has transformed from a diversified lender to a focused mortgage player. It has devised a unique strategy with 75% of the book forming mortgage/LAP (which keeps asset quality under check) and 25% of book forming commercial credit and commercial vehicles (supports blended spreads of +350bp), thereby enabling sound asset quality with superior returns. Company is in the retail mortgage finance business over the past nine years. However, the portfolio has seen sizable growth only in the past five years. IHFL has emerged as the fourth largest HFC with AUM of INR411b as in March 2014. It posted 39% CAGR in its AUM between FY10-14. Mortgage loans form 74% of AUM, 48% is towards housing loans, while 26% is LAP (mainly self-employed customers). Further, within the housing segment, 72% of loans are to salaried customers, while 30% is for self-employed customers.

AUM clocks CAGR of 39% over last 5 years


AUM mix: Home loan and LAP forms 74% of AUM

Home Loan48%

LAP26%

Commercial21%

CV5%


Increasing network, market share gains to drive 23% AUM CAGR Despite being the third largest HFC, IHFL has a market share of ~3%. However, with increasing branch penetration (branch network of 205) and continuous market share gains and healthy capitalization (tier 1 of 15%), we expect the company to deliver 23% AUM CAGR over the next three years. The composition of AUM is likely to remain the same over medium term. Loans to salaried class constituted 72% of total home loans company is targeting to maintain an ideal mix of 75:25 of salaried and self-employed in its home loan portfolio. Within home loans, IHFL is increasing focus on the sub INR2.5m salaried segment; the proportion of salaried borrowers in IHFL’s home loan portfolio is increasing with the ticket size at INR1-5m. In the LAP segment, company

110 198 275 344 412

23.4

79.8

38.8

25.1 19.6

FY10 FY11 FY12 FY13 FY14

AUM (INR b) YoY Gr. (%)


24 June 2014 6

predominantly caters to self-employed non-professional customers. More than 65% of the LAP portfolio is in the ticket size below INR10m. Market share: IBHL has ~3% market share in mortgage market


Loan against property: IHFL a pioneer in segment; expect +25% growth Loan against property (LAP) has emerged as the fastest growing retail segment for NBFCs over the last four years and NBFCs expect it to be a key growth driver in the near to medium term. LAP has been a growth driving profitable product for most new players who registered aggressive growth in assets. Even the larger and established players have a significant presence in this market, with non-bank entities being major players. The LAP product is different from mortgage loans in various facets. Market size of retail LAP is INR1t, (Source: CRISIL) of which HFCs have 30% share and NBFCs 70% share. AUM mix: Mortgages now form 74% of AUM; the mix is expected to remain same

64 71 71 72 74

2121 21 21 2186 8 7 572


Mortgages Corporate CV PL


IHFL is one of the biggest players in LAP with an AUM of over INR100b and controls almost 10%+ of the market (among NBFCs & HFCs). The product has been offered since 2005 by IHFL. Despite a strong growth over the years, LAP has the potential to post 25%+ CAGR over the next three to five years. The risk factors in LAP products are much lower, contrary to perception, given shorter average duration (5-7 years for LAP v/s +15 years for home loans), higher yields capturing risk profile (+15% LAP yields v/s 10-11% for home loans) and lower LTVs at origination (<50% v/s nearly 70-75% for home loans). Hence, the inherent credit risk is much lower for LAP products v/s home loans for lenders.

HDFC15%

LICHF10%

SBI16%

ICICI10%

Axis5%

Other Banks34%

Others HFCs7%

Indiabulls3%


24 June 2014 7

We believe mortgage loans and LAP products will sustain a growth rate of 18-20% in the medium term. LAP constitutes 27% of the loan book for IHFL and offers better growth prospects with least credit risk. Moreover, with capex recovery in sight, we expect competition from banks to reduce in this segment, which will benefit incumbents like IHFL. Company should benefit on the volume front as its market share in home loans is ~3%, and with rising distribution/tie-ups, it should sustain the AUM growth at +23% over the next three years.

Key features of mortgage loans and LAP (Industry) LAP Mortgage loans Tenure at origination 5 years in most cases, 10 at most 15-20 years in most cases, 25 at most Loan rates (%) 13-18 10-12 Maximum LTV offered at origination 70% 80% Average ticket sizes INR6m INR2-2.5m Nature of customers Mostly self-employed (85%) Mostly salaried class End Use Business needs and other purposes Buying the residential real estate Tenure (Years) 10 years 15 years-20 years Segment Primarily self-employed Primarily Salaried Geographical spread Primarily Metros All Pre-payment penalty 2%-5% None Sourcing Primarily direct selling agents All Valuation of property Estimated Transaction value Credit assessment Subjective Objective as primarily based on reported salary

Key business segments

Segment Description % of AUM

Average ticket size

(INR m)

LTV (%)

Tenure (Years)

Yields (%)

Home Loans 70% of focus on salaried segment in Tier I, Tier II and Tier III cities mainly in North and West India. Business-wise top 10 cities in India constitute 60% of retail loan book. 30% of loans are to self- employed segment. All these loans are floating rate loans. 95% of properties held as collateral are self-occupied.

48 2.4 68 13 11.5

LAP IHFL has been a pioneer in LAP segment and currently has 10% market share in this segment. Business-wise top 10 cities constitute over 70% of LAP book. 90% of properties held as collateral are self-occupied residential properties and remaining are commercial.

26 6.5 48 7 15.5

CV IHFL has stopped incremental lending to this segment, due to the underlying stress in the segment.

5 1.2 80 3 15

Commercial 75% commercial lending is towards lease rent discount in Bangalore, Chennai and NCR. 20% of focus is on residential projects in Mumbai, Delhi & other metros.

21 N.A 50 10-15 years

15.5


24 June 2014 8

Asset quality trend to remain stable Headline GNPA/NNPA - one of the lowest in industry

Shift in focus towards mortgage segment has strengthened asset quality. Asset quality risks are mitigated by in-house sourcing model (75% in-house), focus on

cash flow-linked lending for non-home loans. Adequate collateral, ~ 2x, for non mortgage loans.

IHFL exited unsecured loans in FY10 and shifted focus towards secured assets (mortgage and LAP), which de-risked the book and resultant asset quality witnessed continuous improvement. Company has not only de-risked its book by running down unsecured portion, it also improved the risk management. Hence, asset quality has largely been improving. IHFL’s headline gross/net NPLs are among the lowest in the industry at ~0.8/0.4% due to mortgage lending.

Asset quality has been improving since FY10


Limited concerns exist on asset quality as major focus is on the salaried segment, which tends to have stable cash flows. LTVs for all segments are conservative (average LTVs are 68%, 48%, 80% and 50% for home loan, LAP, CV and commercial loans respectively). IHFL has stopped CV lending as the segment was under stress. Credit cost to average AUM is under control


Asset quality risks are mitigated by in-house sourcing model (~75% in-house), with focus on cash flow-linked lending for non-home loans and more than adequate collateral ~2x for non mortgage loans. We expect IHFL’s NPLs to remain in the range of 70-90bp as +75% of the book is now backed with collateral.

1.9

1.00.8 0.8 0.80.9

0.4 0.3 0.3 0.4


GNPA (%) NNPA (%)

3.1

1.6

0.9

0.40.8


Credit Cost / Avg AUM (%)


24 June 2014 9

Asset quality remains healthy in home loan, LAP (74% of AUM)


Strong underwriting and recovery process IHFL’s credit appraisal process is system driven and decentralized. Disbursements for salaried borrowers with a loan size up to INR2.5m are authorized by the branch, while disbursements for self-employed borrowers with a loan size up to INR7.5m are authorized by master service centres. The acceptance rate for salaried home loan application is ~60% of total loan applications, while it is ~45-50% for LAP segment. The entire collection and recovery process of IHFL is handled in-house. Collection teams are divided into three categories: 0-90 (dpd bucket), 90-240 (dpd bucket) and 240+ (dpd bucket). Company has a sound recovery process which starts once a borrower’s cheque has bounced. If the borrower fails to make the payment, then the field officer/manager makes a visit to the borrower and notes the reason for delinquency. The recovery head at the branch and branch manager decide when to start legal proceedings for an overdue contract.

0.3 0.3

1.61.4

0.2 0.3

1.7

2.2

0.3 0.3

2.0

3.1

Home Loan LAP Commercial CVs

FY12 FY13 FY14


24 June 2014 10

Lowest net gearing to aid dilution free growth Credit rating improved from AA- to AA+; Maintains +20% liquidity buffer

Strong capitalization and shift to secured business model led to continuous upgrades in credit ratings from AA- in FY08 to AA+ in FY13.

Company maintains a liquidity buffer of 20% of loans in the form of cash/cash equivalents; this helps reduce volatility in funding costs thereby maintain spreads.

IHFL has reduced dependence on short term bonds for funding; dependence on CPs came off to 10% in FY14 from 42% in FY10.

Low gearing & continuous improvement in business led to ratings upgrade Strong capitalization and continuous improvement in business is reflected in continuous upgrade in credit ratings since FY08 by CRISIL. IHFL commanded a rating of AA- in FY08 which was upgraded to AA in FY11 and AA + in FY12. Company has reduced its dependence on short term bonds for funding; dependence on CPs came off to 11% from 42% in FY10. Bank loans now account for 63% of total borrowings, against 48% in FY10.

Improved borrowing profile; short term funds ~10% of borrowings


Liquidity buffer helps reduce volatility in funding costs IHFL maintains a liquidity buffer of 20% of loans in the form of cash/cash equivalents. Company has a policy of maintaining cash equal to debt repayment of six months. This strategy has helped it to meet any sudden funding shortage of funds in the market; moreover it reduces the volatility in the funding cost and spreads.

IHFL maintains liquidity buffer of +20%; which helps maintain stable spreads

52.3 59.8 71.9 73.4

27.1 23.7 23.0

20.7

FY11 FY12 FY13 FY14

Cash & Cah Equivalent (INRb) Cash & Cah Eq. as % of borrowings (%)


4869 65 62 63

10

20 25 30 2642

11 10 8 11


Banks (%) NCDs (%) CPs (%)


24 June 2014 11

IHFL’s prudent asset-liability management (ALM) policy will ensure that it continues to raise long term funds to match the increasing share of long term assets. Moreover NCDs and banks borrowings which forms 90% of liabilities are rated AA. NCDs and Bank loans carry AA ratings Instruments Amount (INR b) Ratings Non-Convertible Debentures 93 CRISIL AA/Stable Subordinated Debt 5 CRISIL AA/Stable Bonds 10 CRISIL AA/Stable Long-Term Bank Loan Facility 143 CRISIL AA/Stable Proposed Long-Term Bank Loan Facility 74 CRISIL AA/Stable Cash Credit 49 CRISIL AA/Stable Short-Term Bank Loan Facility 10 CRISIL A1+ Short-Term Debt Programme 80 CRISIL A1+

Source: CRISIL

Net gearing of 5.3x lowest among HFCs, to aid growth without dilution IHFL’s capital adequacy ratio remained comfortable at 19.1% (as against minimum requirement of 12% for HFCs), with Tier I capital ratio at 15% as in FY14. Company has given a guidance of maintaining minimum CAR at 17.5% at any point in time and does not plan to raise funds for the next three to four years. It has 27.5m warrants of INR225 per share outstanding with public shareholders, which we have assumed to be converted into equity in FY15/16. Hence, the equity capital is expected to increase by 8.2% over next two years.

Healthy capitalization with tier 1 of 15%

32.4 20.1 18.9 18.5 19.1

32.4

19.9 18.215.0 15.0


CAR (%) Tier 1 (%)


Lowest levered HFC with net gearing of 5.3x


3.23.7 3.7 3.9 4.1 4.3 4.5 4.7

5.1 5.1 5.3 5.3

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14


24 June 2014 12

Market share gains, stable spreads to drive PAT growth Operating leverage can boost profitability

Market share gains and leadership position in LAP to drive AUM growth. +53% of AUM comprise of high yielding assets and will help maintain superior yields;

63% of bank borrowings will aid improve margins and spreads. Scope to improve fee income and further improvement in productivity will boost

profitability.

Healthy growth, stable spreads will support PAT growth IHFL is expected to deliver 23% net profit CAGR over FY14-17, driven by healthy AUM growth (led by market share gains). We expect company’s AUM growth of 23% over FY14-17 v/s industry mortgage market growth of ~18% in the same period. Faster growth will be due to (besides favorable demographics) IHFL’s ability to gain market share, as it expands distribution network and strategic tie-ups. Company, as on date, has nearly 3% market share in home loans and the LAP market is likely to witness 20-25% CAGR over the next 3-5 years. Positive bias for spreads, margins IHFL has 63% of liabilities from banks which help maintain/improve spreads in case of fall in interest rates. Margins could get further boost from warrant conversion of INR27.5m shares in FY15/16. Moreover, average spreads should also sustain driven by well-diversified mix between low yielding and high yielding assets. IHFL has 53% share of higher yielding assets like LAP, commercial and CV loans, and had high spread and NIM of 3.5% and 5% (calculated) respectively in FY14.

Significant proportion of high yielding assets

14.1 13.5 13.6

10.1

10.2

10.1

FY12 FY13 FY14

Yields (%) Cost of funds (%)


Margins and spreads

4.0 3.4 3.5

6.7

5.4 5.0

FY12 FY13 FY14

Spreads (%) Margins (%)


Moreover, company maintains 20% liquidity in its balance sheet at any point in time, thereby it did not have to raise borrowings at a very high cost in the event of sudden surge in rates. Moreover, IHFL plans to maintain the proportion of higher yielding LAP loans at 25-28% and commercial loans at sub 25% of loan book, which will enable it to maintain above average NIM, compared to other HFCs.


24 June 2014 13

Improvement in productivity will drive operating leverage Operating leverage may begin to play out, with cost-to-income ratio trending down to 17% levels v/s 20%+ earlier, as IHFL sources 67% of the loans in-house. With assets growth being higher than branch and employee growth, IHFL’s cost to average assets ratio improved from 1.9% in FY11 to 0.8% in FY14, indicating improved productivity levels. 75% of IHFL’s loans are sourced in-house with share of direct sales team (comprises 2,000+ people on rolls) and branch walk-ins being 67% and 8% of sourcing respectively. Bank tie-ups and DSAs constitute 25% of the sourcing. Thus, company’s effective sourcing cost reduces to 0.3-0.4% of disbursements, as against the industry average of 0.5%. Cost ratios have been improving

26.6 21.0 18.7 18.0 17.1

1.9

1.4

1.1 1.00.9


Cost income (%) Cost/assets (%)


Multiple levers for fee income growth IHFL has a potential to grow its fee income going forward due to the following a) healthy retail loan growth will ensure traction in related processing charges at 20-25%, b) the proportion of LAP book is expected to remain at minimum 25% of loan book, in case of LAP, the fee is better compared to retail loans, c) as the economic recovery gains momentum, IHFL may start growing its commercial loan book. Hence, growth in higher ticket loans will ensure good fee income growth. PAT grew 5x in last 5 years

3.0 7.4

10.0

12.6

15.6203

147

34 26 24


PAT (INR b) PAT Growth (%)



24 June 2014 14

Healthy return ratios; +8% dividend yield Average three year RoE of 25% best among peer group

Return ratios - one of the best among peer group. One of the better dividend paying companies, with an average payout ratio of +50% in

the past three years and an average dividend yield ratio of 8-10% for similar period. Stable business model, healthy return ratios and high payout will continue to drive re-

rating.

Healthy profitability coupled with high dividend payout boosted FY14 RoE at 27% and RoA at 3.8%. Average three-year RoE stands at 25% - notably the best among peer group. IHFL has been one of the better dividend paying companies, with an average payout ratio of +50% in the past three years and an average dividend yield ratio of 8-10% for the similar period. Management guided that given adequate capital buffer and healthy profitability, it will maintain a healthy payout ratio of ~60% for the next three years. Average RoE of 25% for last 3 years - one of the best among peers


IHFL trades at 1.6x FY16E P/B and 5.3x FY16E P/E, though the stock got re-rated over the last few months, we believe a strong positioning in mortgage segment, potential for market share gains, healthy margins and return ratios, good asset quality and healthy dividend yield would drive further re-rating. We initiate coverage with Buy rating and a target of INR445 (2x FY16E P/B).

P/E ratio

6.15.5

13.4

3.50

4

8

12

16

Aug

-09

Feb-

10

Jul-

10

Dec

-10

May

-11

Oct

-11

Apr

-12

Sep-

12

Feb-

13

Jul-

13

Dec

-13

Jun-

14

P/E (x) Avg(x) Peak(x) Min(x)


P/B ratio

1.8

1.2

2.0

0.70.6

1.0

1.4

1.8

2.2

Aug

-09

Feb-

10

Jul-

10

Dec

-10

May

-11

Oct

-11

Apr

-12

Sep -

12

Feb-

13

Jul-

13

Dec

-13

Jun-

14

P/B (x) Avg(x) Peak(x) Min(x)


7.7

16.5

22

26 27

2.5 3.9 3.7 3.8 3.8


RoE (%) RoA(%)


24 June 2014 15

Housing Finance Companies: Valuation Matrix

CMP (INR)

EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%)

FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E

HDFC 967 41 24 19.6 15.4 145 168 4.8 3.8 2.6 2.6 25.5 26.0

LICHF 317 30 35 10.6 9.0 173 202 1.8 1.6 1.5 1.5 18.6 18.7

DEWH 321 54 65 5.9 5.0 335 390 1.0 0.8 1.5 1.5 17.3 17.8

IHFL 355 56 66 6.3 5.3 195 222 1.8 1.6 3.7 3.8 31.0 32.4

Gruh* 200 8 10 26.7 20.8 21 27 9.3 7.5 2.8 2.6 30.3 29.2

Repco * 420 23 29 18.6 14.4 138 166 3.0 2.5 2.6 2.6 16.5 17.8

* Consensus estimates Source: MOSL

Key risks Increase in competitive intensity: Stable and secure business model coupled with healthy return ratios attract higher competition – a major risk the housing finance industry is highly competitive, given the presence of a large number of banks, HFCs and other NBFCs. Similar product offerings and negligible differentiation makes the industry highly price sensitive Increase in competitive intensity can lead to pressure on spreads. Liquidity risk: Being a wholesale borrower, it could face liquidity crunch/ rate volatility during stress time periods. Asset quality: While the mortgage asset quality has remained stable in

India across cycles; however any rise in delinquency cannot be ruled out which can lead to higher than expected credit cost and impact earnings. Rigidly high property prices: Rigidly high property prices could impact growth; volume growth may be slower than our assumption. Regulatory risks: Any adverse regulatory measures can impact profitability.


24 June 2014 16

Company description Indiabulls Housing Finance Ltd (IBHF) is the fourth largest housing finance company in India. It was established as a wholly-owned subsidiary of Indiabulls Financial Services Ltd (IBFSL), a leading non-banking financial firm providing home loans, commercial vehicle loans and business loans that was established in 2000. In early 2013, keeping with IBHF’s long-term commitment to the housing finance business, the company was reversed-merged into its housing finance subsidiary IHFL. IHFL has expanded its business rapidly with the present asset book at over IRN380bn and net worth of more than INR57bn. IBHF has AA+ long-term credit rating. With a wide network of about 200 walk-in branches across the country and a strong sales team of 2,000 executives, IHFL has given cumulative loans to 0.6m retail customers.

Key Managerial Personnel’s

Name Designation Age Education Prior assignments

Mr. Sameer Gehlaut Chairman and Executive Director

40 B.E. mechanical -

IIT, Delhi First generation entrepreneur, has been spearheading the Group since its inception

Mr. Gagan Banga MD & CEO - M.A. Economics, MBA - University of Illinois, U.S.A.

14 years of experience with Indiabulls group. Mr. Banga joined the group in 2000 as marketing head and was promoted to CEO in 2004. Mr. Bnaga was earlier associated with NIIT as Head of regional sales.

Mr. Ajit Kumar Mittal Executive Director - M.A. Economics, MBA - University of Illinois, U.S.A.

20 years with RBI in middle and senior management positions and has been at the forefront of macroeconomic and financial sector issues.

Mr. Ashwini Omprakash Kumar

Executive Director -

B.E. Mechanical , IIT Roorkee,

MBA - Finance from JBMIS, Mumbai

14 years of experience in Retail Mortgage Finance and Corporate Lending to the Real Estate sector. HDFC Ltd for over 10 years leading the Corporate Mortgage Business

Mr. Rajiv Rattan Non-Executive Director 40 B.E. Electrical, IIT

Delhi

Schlumberger for 5 years (international services business), Founder of Indiabulls Housing

Mr. Saurabh Kumar Mittal

Non-Executive Director 39

B.E. Electrical, IIT Delhi, MBA -

Harvard Business School

Citigroup Asset Management, Altgate Capital and Farallon Capital Management and Co-founder of Indiabulls Housing



24 June 2014 17

Housing Finance Insustry: Business insights HFCs are operating in a structural growth market. India has among the lowest penetration of mortgages worldwide (9% compared to 60-

100% for developed economies and 20% for China. Acute shortage of housing coupled with increasingly nuclear family dynamics, growing

middle class income will ensure healthy growth. Structural factors coupled with safest asset class will ensure +20% growth for

mortgage industry in near to medium term. Favorable demographics HFCs are operating in a structural growth market. India has among the lowest penetration of mortgages worldwide (9% compared to 60-100% for developed economies and over 20% for emerging economies like China, Indonesia etc). Increasingly nuclear family dynamics, acute shortage of housing, low financing penetration, growing middle class income and improving affordability are some of the key factors that will ensure a healthy growth for housing finance industry. With multiple structural factors in place coupled with the fact that housing has emerged as the safest asset class, the housing finance market will continue post a CAGR of 20% over the medium term. Housing has emerged as the safest asset class Housing finance has emerged as the safe heaven across the entire lending space in India, with minimal problems from bad loans (less than 1% gross NPL compared to more than ~3% for banking system), despite challenging conditions, with interest rate increases and slowing economic growth. The key reasons for this are: a) the affordability index for Indian borrowers has improved, b) the majority of housing loans have been used for self-occupied houses rather than investments -- for sentimental reasons and reputation, self-occupied houses are the last factor an Indian would default on. Continued existence of these conditions would ensure that future bad loans will remain low in the sector and would remain below 1%. Indian mortgage market has a current size of +INR7.5t (~14% of total banking system). Despite this, the mortgage market is highly underpenetrated (9% mortgage to GDP is lowest among peer countries). Moreover, several socio-economic factors will support medium to long term opportunity. Youngest population India has one of the youngest populations among major counties, with the median age at 26 years. India’s population has been growing at ~1.6% per annum in the last decade, which is also resulting in a substantial increase in working population, thereby generating greater demand for housing. Indian population will continue to supply potential working age home owners over the longer term who are willing to leverage based on their future income expectations to purchase houses. Moreover, the average age of owning a house which stood at +45 years in the 2000 (as the major source of funding was personal savings) has now declined to 34 years and is expected to go down further.


24 June 2014 18

India is the youngest nation with a median age of 26 years


Increasing urbanization Despite a steady increase in urbanization, India’s urban population stands at 31%, which is far lesser than other developing countries. Over the last decade, while the overall population growth stood at 1.4%, urban population grew at 2.5%. This trend is expected to continue and as per estimates of the Planning Commission ~300m people will migrate to Indian towns and cities, thereby creating huge demand for housing. The rapid increase in urbanization has led to strong growth for housing, and the pace of urbanization is expected to accelerate as the country moves to a more rapid pace of growth. Surging growth and employment in cities will prove a powerful magnet.

Urbanization share is expected to go up to 45% by 2030


India is least urbanized among developing countries


Mortgage penetration Mortgage penetration has improved from 2% of GDP in 2002 to 9% in 2010, but remains at very low levels compared to other developed and emerging markets. Mortgage penetration levels (mortgage loans as a percentage of GDP) in India, which rose from ~2% as in March 2002 has increased fourfold to 9% over the last decade.

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Median Age (Years)

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1951 1961 1971 1981 1991 2001 2011

Urbanization Share (%)

31

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78 8287

India China Indonesia Mexico South Korea Brazil

India China Indonesia Mexico South Korea Brazil


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Despite 4x increase in mortgage penetration (last 10 yrs), India has lowest penetration


Despite such exponential increase, it is still significantly lower than the penetration rates in developed countries and appears there is room for further growth. Going forward, some factors that may contribute positively to growth in mortgage penetration in the domestic market are as follows: a) Mortgage as an asset class has the lowest interest rates and is expected to go down further. b) Increase in economic activity. c) Large inventory of unleveraged homes (which could be pledged by borrowers to raise loans). Tax incentive for home buyers Section 24/80C of the income tax act allows for deductions from taxable income for a housing loan taken on a residential property on interest up to a limit of INR0.15m and principal repayments on mortgage loans up to a maximum of INR0.1m. Including these tax savings, the effective cost of borrowing for a home loan of less than INR2m becomes 6.4% (as against headline rates of ~10% plus). In the recent Union Budget, for the current financial year, a further deduction of INR1lac for interest payments has been allowed for loans up to INR2.5m, with residential properties not exceeding INR4m in value. These lower the effective costs of availing a housing loan. Modernization of land records Government of India launched the National Land Records Modernization Programme (NLRMP) in August 2008. The aim is to modernize land records, minimize scope of land and property disputes, thus moving eventually towards guaranteed conclusive titles to immovable properties in the country. The major components of the programme are computerization of all land records including mutations, digitization of maps and integration of textual and spatial data, survey/re-survey and updation of all survey and settlement records, including creation of original cadastral records wherever necessary, computerization of registration and its integration with the land records maintenance system, development of core Geospatial Information System (GIS) and capacity building. We believe this initiative will make land titles clear and remove ambiguity. This can provide a significant boost to home loan financiers as unclear titles are one of the major hindrance in increasing financing penetration.

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24 June 2014 20

Increasing affordability Sustained economic growth in India has led to several demographic changes in its population such as more employment opportunities, a rise in overall income levels and changing savings v/s spending habits among others. A large proportion of India’s working population is young, with higher aspiration levels leading to rising standards of living, matched with sufficient purchasing power. Income levels have risen faster than property prices in the past couple of decades, leading to increasing affordability. Data from HDFC Ltd below shows that affordability in Mumbai (measured through property cost as a multiple of annual income) has steadily fallen from 22x to sub 5x over the past 15 years. Increased affordability aids mortgage growth


Penetration of housing finance rises Increasing availability of housing finance along with low interest rates in the past, have given significant fillip to house purchases. This is driven by factors like good branch and agency network of lenders and increasing acceptability of loans by customers. Finance penetration in urban areas stood at 35% and is expected to grow to 50% in the next five to seven years. While the financing penetration is lower in rural areas and stands at 9%, the lower penetration of housing finance here is primarily due to the absence of adequate branches by lenders on higher cost of operations, absence of large salaried class and challenges in valuing collateral in rural areas. Finance penetration in rural areas is expected to remain low, unless private players shift focus to these markets and establish a good branch network. Average age of borrowers falls Traditionally, late 40s and early 50s was the age profile of borrowers for procuring a housing loan. But liberalization, rising incomes and easily accessible and attractive loan options have propelled the younger generation, typically in their 30s, to borrow for house purchases. Currently, almost 80-85% of home loan borrowers belong to the salaried class.

0

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Property Value (INR m; LHS) Annual Income (INR m; LHS) Affordability (x)


24 June 2014 21

Financials and Valuations Income Statement (INR Million) Y/E March 2012 2013 2014 2015E 2016E 2017E Financing Income 32,235 42,634 51,865 62,017 74,966 90,287 Financing Charges 19,201 25,991 32,824 37,619 44,514 53,214 Net Financing income 13,035 16,643 19,041 24,398 30,451 37,073 Change (%) 6.4 27.7 14.4 28.1 24.8 21.7 Income from Investments 1,980 2,748 5,419 6,232 7,167 8,242 Fee based income 3,604 2,397 2,329 2,678 3,080 3,542 Net Income 19,264 21,788 26,789 33,408 40,898 49,157 Change (%) 19.6 13.1 23.0 24.7 22.4 20.2 Employee Cost 1,924 2,245 2,637 3,165 3,639 4,185 Other Operating Exp. 1,770 1,761 1,483 1,798 2,064 2,369 Operating profits 15,570 17,782 22,669 28,445 35,194 42,602 Change (%) 23.3 14.2 27.5 25.5 23.7 21.0 Total Provisions 2,349 1,231 2,851 2,787 3,421 4,208 % of operating profit 15.1 6.9 12.6 9.8 9.7 9.9 PBT 13,220 16,551 19,818 25,659 31,773 38,395 Tax 3,156 3,891 4,133 6,158 7,626 9,215 Tax Rate (%) 23.9 23.5 20.9 24.0 24.0 24.0 PAT 10,065 12,660 15,686 19,500 24,148 29,180 Change (%) 34.0 25.8 23.9 24.3 23.8 20.8 Minority Interest 83 76 44 150 150 150 PAT 9,981 12,584 15,642 19,350 23,998 29,030 Change (%) 34.4 26.1 24.3 23.7 24.0 21.0 Dividend (Including tax) 4,709 7,277 9,476 11,692 14,500 17,541

Balance Sheet (INR Million) Y/E March 2012 2013 2014 2015E 2016E 2017E Capital 624 625 668 696 723 723 Equity Share Capital 624 625 668 696 723 723 Reserves & Surplus 48,432 51,061 56,402 67,126 79,690 91,179 Net Worth 49,056 51,686 57,070 67,822 80,413 91,902 Equity Net worth 49,056 51,686 57,070 67,822 80,413 91,902 Minority Interest 1,315 1,449 19 19 19 19 Borrowings 252,870 312,858 355,400 428,327 523,851 645,683 Change (%) 30.9 23.7 13.6 20.5 22.3 23.3 Deferred Tax Liability -1,098 -1,641 -2,141 -2,641 -3,141 -3,641 Total Liabilities 302,143 364,351 410,348 493,527 601,142 733,963 Cash and bank balance 41,956 48,882 44,190 55,187 68,529 81,347 Investments 17,968 23,079 29,470 32,417 35,659 39,224 Change (%) -41.8 28.4 27.7 10.0 10.0 10.0 Loans 254,675 307,824 354,450 428,327 523,851 645,683 Change (%) 31.1 20.9 15.1 20.8 22.3 23.3 Net Current Assets -12,901 -15,889 -19,067 -22,880 -27,456 -32,948 Net Fixed Assets 445 456 432 448 505 601 Total Assets 302,143 364,351 409,475 493,499 601,087 733,908 AUM Mix (%) Assets Under Management 275,212 344,250 411,690 503,915 616,296 759,627 Change (%) 38.8 25.1 19.6 22.4 22.3 23.3 On Books 253,460 307,824 354,450 428,327 523,851 645,683 % of AUM 92.1 89.4 86.1 85.0 85.0 85.0 Off books 21,752 36,426 57,240 75,587 92,444 113,944 % of AUM 7.9 10.6 13.9 15.0 15.0 15.0 E: MOSL Estimates


24 June 2014 22

Financials and Valuations Ratios Y/E March 2012 2013 2014 2015E 2016E 2017E Spreads Analysis (%) Avg. Yield - on Fin. Portfolio 14.1 13.5 13.7 13.4 13.3 13.0 Avg Cost of funds 8.6 10.1 10.2 9.9 9.8 9.5 Interest Spread on on books 5.5 3.4 3.5 3.5 3.5 3.5 Profitability Ratios (%) RoE 21.1 25.0 27.0 31.0 32.4 33.7 RoA 3.7 3.8 4.0 4.3 4.4 4.3 RoA (on AUM) 3.5 3.5 3.6 3.7 3.8 3.8 Int. Expended/Int.Earned 59.6 61.0 63.3 60.7 59.4 58.9 Fee income/Net Inc. 18.7 12.7 8.7 8.0 7.5 7.2 Cost/Income Ratio 19.2 18.0 17.1 14.9 13.9 13.3 Empl. Cost/Op. Exps. 52.1 56.1 64.0 63.8 63.8 63.9 Asset quality GNPA (%) 0.79 0.79 0.83 0.90 0.80 0.80 NNPA (%) 0.33 0.33 0.36 0.50 0.40 0.40

Valuation Y/E March 2012 2013 2014 2015E 2016E 2017E Book Value (INR) 157.3 165.4 168.7 195.0 222.4 254.2 BV Growth (%) 7.8 5.1 2.0 15.6 14.1 14.3 Price-BV (x) 2.3 2.1 2.1 1.8 1.6 1.4 Adjusted BV (INR) 157.4 165.4 168.7 195.0 222.4 254.2 Price-ABV (x) 2.3 2.1 2.1 1.8 1.6 1.4 EPS (INR) 32.0 40.3 46.8 55.6 66.4 80.3 EPS Growth (%) 34.0 25.8 16.3 18.8 19.3 21.0 Price-Earnings (x) 11.1 8.8 7.6 6.4 5.3 4.4 DPS (INR) 13.0 20.0 29.0 29 34.5 41.8 Dividend Payout (%) 47.2 57.8 60.6 60.4 60.4 60.4 Dividend Yield (%) 3.7 5.6 8.2 8.1 9.7 11.8 E: MOSL Estimates


24 June 2014 23

N O T E S


24 June 2014 24

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Disclosure of Interest Statement INDIABULLS HOUSING FINANCE 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No

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