Indiabulls Housing Finance:Transformed from a diversified lender to a focused mortgage player

Initiating

Indiabulls

Housing

Financials

Coverage Sector:

Finance

Indiabulls Housing Finance

BSE Sensex

25,031

S&P CNX

7,493

CMP: INR355

TP: INR445

Buy

Mortgage focus to drive returns

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

AUM and earnings growth to remain healthy

IHFL IN

334.1

407/166

-13/26/-

118.6

2.0



Financial Snapshot (INR b)

Y/E March

2015E 2016E 2017E

Net Fin. Inc.

24.4 30.5 37.1

PPP

PAT - Post MI

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoA on AUM

RoE (%)

Payout (%)

Valuation

P/E (x)

P/BV (x)

Div. Yield (%)

6.4

1.8

8.1

5.3

1.6

9.7

4.4

1.4

11.8

28.4

19.4

55.6

18.8

3.7

31.0

60.4

35.2

24.0

66.4

19.3

3.8

32.4

60.4

42.6

29.0

80.3

21.0

3.8

33.7

60.4



195.0 222.4 254.2

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.

Shareholding pattern (%)

As on

Promoter

Dom. Inst.

Foreign

Others

Mar-14 Dec-13 Sep-13

41.8

3.4

38.3

16.5

41.5

3.4

38.3

16.8

41.1

3.5

39.2

16.3

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.

Stock Performance (1-year)

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.

24 June 2014

Indiabulls Housing Finance

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

2.2

1.8

1.4

1.0

0.6

1.2

0.7

0.0

P/B (x)

Min(x)

Avg(x)

RoE (RHS, %)

Peak(x)

2.0

30.0

1.8

20.0

10.0

IHFL has best dividend yield among Indian financial space

Dividend Yield (%)

8.1

0.6

Repco

0.9

GRUH

1.4

2.4

HDFC

LICHF

DHFL

IHFL

Source: Bloomberg, MOSL

Source: Company, MOSL

24 June 2014

Indiabulls Housing Finance

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 (INR b)

79.8

YoY Gr. (%)

Commercial

21%

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

38.8

23.4

110

FY10

198

FY11

275

FY12

25.1

344

FY13

19.6

412

FY14

LAP

26%

Home Loan

48%

Source: Company, MOSL

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

24 June 2014

Indiabulls Housing Finance

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

Others

HFCs

Indiabulls

HDFC

15%

LICHF

10%

Other

Banks

34%

SBI

16%

Axis

ICICI

10%

Source: Company, MOSL

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

Mortgages

Corporate

FY10

FY11

FY12

FY13

FY14

Source: Company, MOSL

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.

24 June 2014

Indiabulls Housing Finance

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)

Tenure at origination

Loan rates (%)

Maximum LTV offered at origination

Average ticket sizes

Nature of customers

End Use

Tenure (Years)

Segment

Geographical spread

Pre-payment penalty

Sourcing

Valuation of property

Credit assessment

LAP

5 years in most cases, 10 at most

13-18

70%

INR6m

Mostly self-employed (85%)

Business needs and other purposes

10 years

Primarily self-employed

Primarily Metros

2%-5%

Primarily direct selling agents

Estimated

Subjective

Mortgage loans

15-20 years in most cases, 25 at most

10-12

80%

INR2-2.5m

Mostly salaried class

Buying the residential real estate

15 years-20 years

Primarily Salaried

All

None

All

Transaction value

Objective as primarily based on reported salary

Key business segments

Segment

Home Loans

Description

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.

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.

IHFL has stopped incremental lending to this

segment, due to the underlying stress in the

segment.

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.

% of

AUM

Average

ticket size

(INR m)

2.4

LTV

(%)

Tenure

(Years)

Yields

(%)

11.5

LAP

6.5

15.5

1.2

Commercial

N.A

10-15

years

15.5

24 June 2014

Indiabulls Housing Finance

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

1.9

GNPA (%)

NNPA (%)

0.9

1.0

0.8

0.4

0.3

0.8

0.3

0.8

0.4

FY10

FY11

FY12

FY13

FY14

Source: Company, MOSL

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

3.1

Credit Cost / Avg AUM (%)

1.6

0.9

0.4

0.8

FY10

FY11

FY12

FY13

FY14

Source: Company, MOSL

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.

24 June 2014

Indiabulls Housing Finance

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

FY12

FY13

FY14

2.0

1.6 1.7

1.4

2.2

3.1

0.3 0.2 0.3

Home Loan

0.3 0.3 0.3

LAP

Commercial

CVs

Source: Company, MOSL

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.

24 June 2014

Indiabulls Housing Finance

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

Banks (%)

NCDs (%)

CPs (%)

FY10

FY11

FY12

FY13

FY14

Source: Company, MOSL

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

Cash & Cah Equivalent (INRb)

27.1

23.7

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

23.0

20.7

52.3

FY11

59.8

FY12

71.9

FY13

73.4

FY14

Source: Company, MOSL

24 June 2014

Indiabulls Housing Finance

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

Non-Convertible Debentures

Subordinated Debt

Bonds

Long-Term Bank Loan Facility

Proposed Long-Term Bank Loan Facility

Cash Credit

Short-Term Bank Loan Facility

Short-Term Debt Programme

Amount (INR b)

143

Ratings

CRISIL AA/Stable

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

CAR (%)

Tier 1 (%)

Lowest levered HFC with net gearing of 5.3x

4.7

4.3 4.5

4.1

3.7 3.7 3.9

5.1 5.1 5.3 5.3

19.9

18.2

3.2

15.0

32.4

FY10

20.1

FY11

18.9

FY12

18.5

FY13

19.1

FY14

Source: Company, MOSL

24 June 2014

Indiabulls Housing Finance

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

Yields (%)

10.2

Cost of funds (%)

6.7

5.4

5.0

Margins and spreads

Spreads (%)

Margins (%)

10.1

14.1

FY12

13.5

FY13

10.1

13.6

FY14

4.0

FY12

3.4

FY13

3.5

FY14

Source: Company, MOSL

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

Indiabulls Housing Finance

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

1.9

1.4

1.1

1.0

0.9

Cost income (%)

Cost/assets (%)

26.6

FY10

21.0

FY11

18.7

FY12

18.0

FY13

17.1

FY14

Source: Company, MOSL

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

203

147

10.0

3.0

FY10

7.4

FY11

FY12

FY13

FY14

PAT (INR b)

PAT Growth (%)

15.6

12.6

Source: Company, MOSL

24 June 2014

Indiabulls Housing Finance

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

RoE (%)

16.5

7.7

2.5

FY10

3.9

3.7

3.8

RoA(%)

FY11

FY12

FY13

FY14

Source: Company, MOSL

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

3.5

5.5

6.1

P/E (x)

Avg(x)

Peak(x)

Min(x)

13.4

2.2

1.8

1.4

1.0

0.6

1.2

0.7

P/B ratio

P/B (x)

Avg(x)

Peak(x)

Min(x)

2.0

1.8

Source: Bloomberg, MOSL

24 June 2014

Source: Bloomberg, MOSL

Indiabulls Housing Finance

Housing Finance Companies: Valuation Matrix

EPS (INR)

CMP

(INR) FY15E FY16E

HDFC

LICHF

DEWH

IHFL

Gruh*

Repco *

967

317

321

355

200

420

P/E (x)

FY15E

19.6

10.6

5.9

6.3

26.7

18.6

FY16E

15.4

9.0

5.0

5.3

20.8

14.4

BV (INR)

FY15E

145

173

335

195

138

FY16E

168

202

390

222

166

P/BV (x)

FY15E

4.8

1.8

1.0

1.8

9.3

3.0

FY16E

3.8

1.6

0.8

1.6

7.5

2.5

RoA (%)

FY15E

2.6

1.5

3.7

2.8

2.6

FY16E

2.6

1.5

3.8

2.6

RoE (%)

FY15E

25.5

18.6

17.3

31.0

30.3

16.5

FY16E

26.0

18.7

17.8

32.4

29.2

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

Indiabulls Housing Finance

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

Mr. Sameer Gehlaut

Designation

Chairman and

Executive Director

Age

Education

Prior assignments

B.E. mechanical - First generation entrepreneur, has been

IIT, Delhi

spearheading the Group since its inception

14 years of experience with Indiabulls group.

M.A. Economics, Mr. Banga joined the group in 2000 as

MBA - University marketing head and was promoted to CEO in

of Illinois, U.S.A. 2004. Mr. Bnaga was earlier associated with

NIIT as Head of regional sales.

20 years with RBI in middle and senior

M.A. Economics,

management positions and has been at the

MBA - University

forefront of macroeconomic and financial

of Illinois, U.S.A.

sector issues.

14 years of experience in Retail

B.E. Mechanical ,

Mortgage Finance and Corporate Lending to

IIT Roorkee,

the Real Estate sector. HDFC Ltd for over 10

MBA - Finance from

years leading the Corporate Mortgage

JBMIS, Mumbai

Business

Schlumberger for 5 years (international

B.E. Electrical, IIT

services business), Founder of Indiabulls

Delhi

Housing

B.E. Electrical, IIT

Citigroup Asset Management, Altgate Capital

Delhi, MBA -

and Farallon Capital Management and Co-

Harvard Business

founder of Indiabulls Housing

School

Source: Company, MOSL

Mr. Gagan Banga

MD & CEO

Mr. Ajit Kumar Mittal

Executive Director

Mr. Ashwini

Omprakash Kumar

Executive Director

Mr. Rajiv Rattan

Non-Executive Director

Mr. Saurabh Kumar

Mittal

Non-Executive Director

24 June 2014

Indiabulls Housing Finance

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

Indiabulls Housing Finance

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

Median Age (Years)

43.7

42.8

40.7

39.7

39.6

38.5

37.9

37.5

36.9

35.2

33.7

30.5

27.9

28.4

25.9

Source: Company, MOSL

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

Urbanization Share (%)

31.16

23.34

17.29

17.97

19.91

India is least urbanized among developing countries

India

China

Indonesia

Mexico

South Korea

Brazil

25.71

27.81

1951

1961

1971

1981

1991

2001

2011

India

China

Indonesia Mexico South Korea Brazil

Source: Company, MOSL

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.

24 June 2014

Indiabulls Housing Finance

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

104

Source: Company, MOSL

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.

24 June 2014

Indiabulls Housing Finance

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

Property Value (INR m; LHS)

5.0

3.8

2.5

1.3

0.0

Annual Income (INR m; LHS)

Affordability (x)

Source: Company, MOSL

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.

24 June 2014

Indiabulls Housing Finance

Financials and Valuations

Income Statement

Y/E March

Financing Income

Financing Charges

Net Financing income

Change (%)

Income from Investments

Fee based income

Net Income

Change (%)

Employee Cost

Other Operating Exp.

Operating profits

Change (%)

Total Provisions

% of operating profit

PBT

Tax

Tax Rate (%)

PAT

Change (%)

Minority Interest

PAT

Change (%)

Dividend (Including tax)

2012

32,235

19,201

13,035

6.4

1,980

3,604

19,264

19.6

1,924

1,770

15,570

23.3

2,349

15.1

13,220

3,156

23.9

10,065

34.0

9,981

34.4

4,709

2013

42,634

25,991

16,643

27.7

2,748

2,397

21,788

13.1

2,245

1,761

17,782

14.2

1,231

6.9

16,551

3,891

23.5

12,660

25.8

12,584

26.1

7,277

2014

51,865

32,824

19,041

14.4

5,419

2,329

26,789

23.0

2,637

1,483

22,669

27.5

2,851

12.6

19,818

4,133

20.9

15,686

23.9

15,642

24.3

9,476

2015E

62,017

37,619

24,398

28.1

6,232

2,678

33,408

24.7

3,165

1,798

28,445

25.5

2,787

9.8

25,659

6,158

24.0

19,500

24.3

150

19,350

23.7

11,692

(INR Million)

2016E

74,966

44,514

30,451

24.8

7,167

3,080

40,898

22.4

3,639

2,064

35,194

23.7

3,421

9.7

31,773

7,626

24.0

24,148

23.8

150

23,998

24.0

14,500

2017E

90,287

53,214

37,073

21.7

8,242

3,542

49,157

20.2

4,185

2,369

42,602

21.0

4,208

9.9

38,395

9,215

24.0

29,180

20.8

150

29,030

21.0

17,541

Balance Sheet

Y/E March

Capital

Equity Share Capital

Reserves & Surplus

Net Worth

Equity Net worth

Minority Interest

Borrowings

Change (%)

Deferred Tax Liability

Total Liabilities

Cash and bank balance

Investments

Change (%)

Loans

Change (%)

Net Current Assets

Net Fixed Assets

Total Assets

AUM Mix

Assets Under Management

Change (%)

On Books

% of AUM

Off books

% of AUM

E: MOSL Estimates

2012

624

48,432

49,056

1,315

252,870

30.9

-1,098

302,143

41,956

17,968

-41.8

254,675

31.1

-12,901

445

302,143

2013

625

51,061

51,686

1,449

312,858

23.7

-1,641

364,351

48,882

23,079

28.4

307,824

20.9

-15,889

456

364,351

2014

668

56,402

57,070

355,400

13.6

-2,141

410,348

44,190

29,470

27.7

354,450

15.1

-19,067

432

409,475

2015E

696

67,126

67,822

428,327

20.5

-2,641

493,527

55,187

32,417

10.0

428,327

20.8

-22,880

448

493,499

(INR Million)

2016E

723

79,690

80,413

523,851

22.3

-3,141

601,142

68,529

35,659

10.0

523,851

22.3

-27,456

505

601,087

2017E

723

91,179

91,902

645,683

23.3

-3,641

733,963

81,347

39,224

10.0

645,683

23.3

-32,948

601

733,908

(%)

759,627

23.3

645,683

85.0

113,944

15.0

275,212

38.8

253,460

92.1

21,752

7.9

344,250

25.1

307,824

89.4

36,426

10.6

411,690

19.6

354,450

86.1

57,240

13.9

503,915

22.4

428,327

85.0

75,587

15.0

616,296

22.3

523,851

85.0

92,444

15.0

24 June 2014

Indiabulls Housing Finance

Financials and Valuations

Ratios

Y/E March

Spreads Analysis (%)

Avg. Yield - on Fin. Portfolio

Avg Cost of funds

Interest Spread on on books

Profitability Ratios (%)

RoE

RoA

RoA (on AUM)

Int. Expended/Int.Earned

Fee income/Net Inc.

Cost/Income Ratio

Empl. Cost/Op. Exps.

Asset quality

GNPA (%)

NNPA (%)

2012

14.1

8.6

5.5

2013

13.5

10.1

3.4

2014

13.7

10.2

3.5

2015E

13.4

9.9

3.5

2016E

13.3

9.8

3.5

2017E

13.0

9.5

3.5

21.1

3.7

3.5

59.6

18.7

19.2

52.1

25.0

3.8

3.5

61.0

12.7

18.0

56.1

27.0

4.0

3.6

63.3

8.7

17.1

64.0

31.0

4.3

3.7

60.7

8.0

14.9

63.8

32.4

4.4

3.8

59.4

7.5

13.9

63.8

33.7

4.3

3.8

58.9

7.2

13.3

63.9

0.79

0.33

0.79

0.33

0.83

0.36

0.90

0.50

0.80

0.40

0.80

0.40

Valuation

Y/E March

Book Value (INR)

BV Growth (%)

Price-BV (x)

Adjusted BV (INR)

Price-ABV (x)

EPS (INR)

EPS Growth (%)

Price-Earnings (x)

DPS (INR)

Dividend Payout (%)

Dividend Yield (%)

E: MOSL Estimates

2012

157.3

7.8

2.3

157.4

2.3

32.0

34.0

11.1

13.0

47.2

3.7

2013

165.4

5.1

2.1

165.4

2.1

40.3

25.8

8.8

20.0

57.8

5.6

2014

168.7

2.0

2.1

168.7

2.1

46.8

16.3

7.6

29.0

60.6

8.2

2015E

195.0

15.6

1.8

195.0

1.8

55.6

18.8

6.4

60.4

8.1

2016E

222.4

14.1

1.6

222.4

1.6

66.4

19.3

5.3

34.5

60.4

9.7

2017E

254.2

14.3

1.4

254.2

1.4

80.3

21.0

4.4

41.8

60.4

11.8

24 June 2014

Indiabulls Housing Finance

NOTES

24 June 2014

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Indiabulls Housing Finance

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INDIABULLS HOUSING FINANCE

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