Académique Documents
Professionnel Documents
Culture Documents
Our key objective is to pick stocks which can compound sustainably at a healthy rate for the next 3-5 years and create wealth. We like to select companies with strong competitive advantages and are quoting at a discount to their intrinsic value.
For more information on Indiabulls and the opportunity in it, feel free to discuss with Gokul Raj. P
Mail Id : gokul@hbjcapital.com
Mobile: +91-9994577745
Content Index
Housing Finance Industry Overview :- Slide #5 Housing Finance Strong industry dynamics :- Slide #10 IBFSL Business Overview :- Slide #14 Investment Rationale :- Slide #21 Earnings Projection :- Slide #30 Management :- Slide #32 Conclusion :- Slide #34
Institutional Services
Institutional Services
Institutional Services
Institutional Services
Institutional Services
Credit growth
Financial year The consumer credit market in India has undergone a significant transformation over the last decade and experienced rapid growth due to consumer credit becoming cheaper, more widely available and increasingly a more acceptable avenue of funding for consumers. Credit availability, affordability and consumer confidence are the key drivers for consumer loan growth. Through the fiscal years 2002 to 2007, the Indian consumer market had experienced over 20% growth year-on-year in consumer loans. Although the growth slowed in fiscal year 2008 due to the unfolding of the global credit crisis, slowing of the economy and rising interest rates in early 2008, India continues to provide opportunities for the growth of consumer credit due to the rise of the Indian middle class. In addition, the younger population not only has more purchasing power, but also is more open to acquire personal debt than previous generations. Improving consumer purchasing power will continue to contribute to the growth of Indias consumer credit market.
(in %)
Institutional Services
Despite high loan growth in consumer financing, it remains an underpenetrated market. We believe demand for consumer loans will increase going forward in view of household gearing remaining low and disposable income continues to rise rapidly. The market has changed dramatically due to the following factors Increased focus by banks and financial institutions on consumer credit resulting in a market shift towards regulated players from unregulated moneylenders/financiers Increasing desire by customers to acquire assets such as cars, goods and houses on credit; Fast emerging middle class and growing number of households in our target segment; Improved terms of credit as interest rates in India fall into line with global interest rates and further reduced interest rates for sophisticated products; Legislative changes that offer greater protection to lenders against fraud and potential default increasing the incentive to lend.
Institutional Services
Institutional Services
Institutional Services
(in %)
29
26 17 12 7
Housing finance industry is deeply under penetrated in India with 7% contribution to the countrys GDP as against 12% for China. A peer group comparison in Asia reveals that India has one of the lowest mortgage to GDP ratio. It is expected that the share of housing in GDP would go up substantially in the coming years. The share of outstanding housing loan as a percentage of GDP has risen from 3.4% in 2001 to 7% currently.
Institutional Services
Indias population is estimated to grow to 1.2 bn by 2012E from 1.1 bn at present. The biggest increase is expected to be within the 24-54 years age group. Consequently, Indias working population will increase which will propel housing demand. There is an acute shortage of housing supply in the country especially in the mid income and low-income categories. Housing supply has been mainly concentrated towards the premium category, resulting in a shortage of affordable housing. According to the estimates made by the Ministry of Housing and Urban Poverty Alleviation for assessment of the urban housing shortage at the end of the 10th Five Year Plan, the total housing shortage in the country is 24.71 mn units. Housing shortage is likely to go up to 26.53 mn units during the 11th Five Year Plan i.e. 2007-2012E
Institutional Services
Growing employment opportunities in the urban areas has been the key trigger behind the migration of workforce from rural areas to urban areas. The growth in Indias urban population is more than twice the growth in the rural population. The urban population has increased steadily in the past and accounted for approximately 28% of the total population in 2006 and is expected to account for approximately 32% of the total population by 2012E. Thus, with increasing urbanisation, housing demand (on a per household basis) is expected to increase going forward. Urban & rural household with annual incomes exceeding `0.5 mn are expected to grow by 12% & 7% respectively in the next 5 years. The growth rate, though comparatively lower than the average over the past five years, reflects an overall increase in affluence in both urban and rural households as more families move into higher income brackets. The above graph shows the increase in affordability (calculated by dividing property costs by annual income) over the last 15 years.
Institutional Services
Institutional Services
Business Overview
Mortgage Loans
The company is primarily engaged in the following business activities Mortgage Loans
In the home loans segment, the company offers housing loans to salaried individuals and to self employed professionals. The average maturity period of these loans are around 12 years.
Home loans segment make up for 70% of the mortgage loans business or to around 50% of the entire business of the company. Mortgage loans contribute to about 71% of the overall business of the company. The entire portfolio of Mortgage loans IBFSL currently provides home loans earning interest at rates is secured and the company plans to grow its competitiveness in between 9.5% and 11%. this segment in the long term. Loans against property or LAP are usually provided to self The mortgage loans segment is made of Home loans and Loan employed individuals and to Small & Medium Enterprises through equitable mortgages upon their properties. The average maturity against property. period for LAP is 12 years. IBFSL currently provides LAP earning interest at rates starting from 12%.
Institutional Services
Business Overview
Corporate Loans
Corporate Loans
Corporate loans form the second largest business segment for Commercial Vehicle loans the company after Mortgage loans and contribute for around 21% of the overall business. Corporate loans are equally made up IBFSL provide secured financing for CV s and tractors to clients such as small truck operators and farmers. The average maturity of commercial credit and Loans to real estate projects. for such loans is 36 months and the CV loans earn interest at rates Commercial credits are business loans provided to Small & starting from 13%. Medium Enterprises, which are secured by the SMEs current assets, fixed assets and immovable property. The average Business Loans maturity period is 12 months. IBFSL currently provides Commercial credits earning interest at rates starting from 13%. IBFSL offers credit lines and term loans to small business owners, which typically are unsecured. The average maturity for such Loans to projects are provided to real estate builders for business loans is 36 months. This is the only unsecured lending specific projects. These loans have a average maturity period of that the company is involved in and it plans to exit this business 12 months. IBFSL currently provides Projects loans earning vertical in the near term.
Institutional Services
Income sources
Interest income contributes significantly to the overall revenues of the company. The interest income for the company has been steadily contributing to around 90% of the companys revenues. Fee income is basically the Application and processing charges that the company collects for its various loan offerings. Fee income is directly dependant on the total amount of new disbursements that the company makes. Any recoveries from the written off assets are usually charged into the Other income.
Institutional Services
IBFSL has a robust and a diversified borrowing program consisting of bank loans, commercial paper and bonds. The company currently counts 54 strong relationship with lenders 21 PSU banks, 11 Private and Foreign banks and 22 other sources Mutual funds, Provident funds, Pension funds and Insurance companies. IBFSL counts some of the major PSU, Private and foreign banks as its bond holders.
Institutional Services
The company continues to expand its branch network and currently has over 160 branches spread across 18 states. The branches are setup in accessible locations with the aim of nurturing longterm customer relationships. Customers are attended to by knowledgeable and experienced staff, trained to deliver quality service. Customer convenience and Superior service form the core of IBFSLs product proposition. Home Loans from the company are competitively priced and cater to the massmarket salaried segment. Prospective customers are promptly attended to by a Direct Sales Team of over 3,000 people and all pertinent information is made easily available online. Specialist helpdesks are also setup to address all product queries.
Institutional Services
77% of the borrowings of the company are at fixed interest rates and more than 80% of the lending is at floating interest rate. While there is exactly no loan with a fixed interest rate, the interest rate revision is not as frequent and as fast as in a floating interest rate loan. This favorable loan mix of the company puts it in a comfortable position in a rising interest rate scenario to pass on any rise in credit cost to the customer without taking a hit on its borrowing. Going forward, the company plans to increase its share of the floating loans that it provides. IBFSL is one of the very few NBFC s with top notch ratings from all of the credit rating agencies. This is mainly due to the strong business growth of the company with its focus on relatively safer asset class of mortgage loans. The company has a P1 + rating on all of its short term borrowings from CRISIL, a Standard and Poors company. For its long term borrowings, the company has a rating of AA + from CARE and AA from ICRA and CRISIL.
Institutional Services
Investment Rationale
Institutional Services
FY 09
Project loans
Commercial vehicle loans Secured and Unsecured Personal loans
FY 11
Project loans
Commercial vehicle loans
FY 13 E
Project loans
Commercial vehicle loans
Institutional Services
2%
10% 32%
Interest Income
FY06
FY07
Capital markets
FY08
FY09
FY10
FY11
Secured
Unsecured
Over the last 3 years time period, the company has been undergoing a transformation, where it is moving from being a high risk unsecured lender to being a more matured and focused player on mortgage loans. The company has been clearly exiting the highly volatile business segments like personal loans and auto loans and has been concentrating on building a long term and stable asset portfolio. The company has managed to grow its AUM, six times from around Rs. 3000 crore in FY 07 to more than Rs. 19,000 Crore at the end of FY 11, in spite of exiting various business segments and demerging units like real estate and stock broking. Currently, the company is identified as a Home loan provider with a presence in CV financing and this is the way, we expect the company to grow going forward. While the company had prior goals of becoming a secured lender, it was the financial crisis and the liquidity crunch in 2008 which made the company rethink its business strategies. We believe that this transformation will serve as the base for the company to achieve the next level of growth and opportunities.
Institutional Services
Long term and low risk mortgage loans constitute 71% of the asset book. The unsecured personal loan portfolio, which the company had in FY 10 was closed and the book ran off in Q2 of FY 12. The only other unsecured lending that the company is engaged in currently is the Business loans segment and we expect the company to exit this segment in the next 2 years time period. We expect the focus to be on Mortgage loans and Commercial vehicle loans going forward. We expect the CV loans to grow in size and this segment will contribute for 10% of the total assets in the next 2 years time period. Going forward, the long term asset profile of the company is expected to be made of Mortgage loans for 70%, Corporate loans for 20% and Commercial vehicle loans for 10%.
Institutional Services
There has been a remarkable improvement in the liability profile of the company over the last 3 years. It can be seen from the above that precrisis, the company was heavily dependant on short term borrowing like commercial paper and other sources including Mutual funds. These short term borrowings usually demand a higher interest rate and the duration is less than a year. High reliability on short term borrowing for financing long term assets will result in Asset Liability mismatch. Taking a leaf out of the financial crisis experience and acting in accordance to the changing asset profile of the company towards long term mortgage loans, IBFSL has done a commendable job in transforming its liability profile in just 2 to 3 years. The liability profile of the company today contains a majority of Bank loans (duration of 7 to 10 years) and Bonds (duration of 3 to 5 years). Going forward, we expect more bond issues by the company taking the contribution from bonds to closer to 30%.
Institutional Services
AUM in Rs. Cr
On the back of a strong and steady demand for Home loan products, the company has seen a sustainable growth in its AUM over the last 4 quarters. The average growth for the last 4 quarters has been Rs. 2,200 Crore. We believe that the strong focus on Home loans and the aim to double the CV loan book will help the company to post a strong growth in FY 12 as well. We expect that the average AUM growth for the next 4 quarters to be in the range of Rs. 2,200 Crore to Rs. 2,500 Crore. We expect around 37% growth in the AUM for FY 12 and we expect the total AUM to stand around Rs. 27,120 Crore at the end of FY 12.
Institutional Services
As low risk mortgage portfolio increased as a part of the total AUM, the NPA s have been continuously reducing over the last 6 quarters. Incrementally, we expect delinquencies to fall as the Asset profile becomes more long term oriented and safer. As a result of the falling NPA s, the provisioning has come down significantly from Rs. 261 Crore in FY 10 to Rs. 180 Crore in FY 11. We expect the NPA s to tend lower in FY 12, thereby resulting in lower provision expense and higher net earnings. Total Provisions currently stand at 4.19 times the regulatory requirements.
Institutional Services
The gearing ratio at 3.13 times is lower when compared to other listed peers. Most of the peers in the housing finance segment have a gearing ratio of more than 7. This makes IBFSL as one of the better capitalized NBFC s with a very strong balance sheet. The low gearing levels will allow the company to grow for at least another 2 years without any need for equity infusion.
Institutional Services
Attractive valuations
Business & Type
Shriram Transport Finance LIC Housing Finance Mahindra Finance IBFSL Dewan Housing NBFC CV finance HFC Home loans NBFC CV Finance NBFC Home loans NBFC Home loans
P/B
ROA (in %)
4.3 2.2 4.2 4.1 1.9
ROE (in%)
28 26 19 17 19
P/E F (1 Yr)
9.6 9.3 10.4 5.0 7.7
IBFSL being a diversified lender with a major focus on Home loans (70% of Assets) does not have a strict peer. However, shown above are the closer peers operating in Home loans and CV financing segments, with which a reasonable comparison can be made. It can be seen from the above that IBFSL, in spite of having a strong ROA is trading at a significant discount to its peers. The P/B of close to 1 is very cheap and provides an attractive investment opportunity. The return ratios on equity is lower when compared to other peers mainly due to the lower leverage of the company. As the leverage goes up over the next 1 to 2 years, we expect ROE to cross 20% in FY 12. Taking the strong growth prospects and higher ROA into account, we believe that IBFSL should easily command a P/B of at least 1.5 and P/E ratio of at least 8 on the FY 12E earnings.
Institutional Services
Earnings Projection
Income Statement (INR Mn)
Net Interest Income ADD - Other Income
FY 10
8,150 2,125 10,276 3,183 7,092 2,613 4,479 93 4,573 1,652
FY 11
13,566 2,166 15,732 4,390 11,342 1,800 9,542 372 9,915 2,487
FY 12E
18,178 2,500 20,678 5,376 15,302 1,400 13,902 372 14,274 4,710
Operating Profit
Add Non Operating Income
PAT EPS
2,921 9.88
7,428 23.88
9,564 30.74
Institutional Services
Management
Institutional Services
Asia Money had named Mr. Gehlaut as one of the 100 most influential persons in business across Asia-Pacific in the Mr. Mittal graduated with a degree in Electric Engineering fiscal year 2007-08. from the Indian Institute of Technology, Delhi and also hold masters in business administration from Harvard Business Mr Rajiv Rattan, VC - IBFSL School, where he was elected Baker Scholar. Mr. Rajiv Rattan is the Vice-Chairman and has been a director Mr. Saurabh K. Mittal , Director IBFSL since January 10, 2000. He is the co-founder and Vice Mr. Gagan Banga has been an executive director since March Chairman of the Indiabulls group of companies. 30, 2005. He was appointed as our Chief Executive Officer on Mr. Rajiv Rattan graduated with a degree in electrical December 24, 2007. Mr. Banga holds a masters degree in engineering from the Indian Institute of Technology, Delhi in Business Administration. He worked at NIIT as Regional Sales the year 1994. He was selected by Schlumberger for its Head. international services business in 1994, where he worked for
Institutional Services
Investors
The promoters have increased their stake significantly over the last 1 year. IBFSL has more than 140 FII investors and some of the larger names include LNM India Internet Ventures (LN Mittals fund), Citigroup and Morgan Stanley. HSBC is the largest non promoter entity in the company with a huge holding of 7.46%.
Institutional Services
Conclusion
Institutional Services
Price charts
Shown above is the 1 year price chart of IBFSL. The charts suggest that there is a very strong support at 130 levels, which has been successfully tested several times over the last 1 year. We believe that the downside is highly capped at 130 levels. On the upper side, though what we see is 240, which is the 1 year highs, it should be noted that IBFSL quoted at Rs. 1000 in Jan 2008 before the market crash, on back of higher valuation and very high double digit growth rates. We believe that at the current levels, the downside seems to be capped and very low and the upside potential for the counter is significant. It looks even more better, taking the dividend yield of more than 6% into consideration. Hence we believe that a substantial investment can be made safely at the current levels.
Institutional Services
Conclusion
We believe that the dynamics of the housing finance sector is strong and large, which augers well for the growth of Indiabulls Financial Services Ltd. Take the case of HDFC Ltd, the largest player in the Housing finance segment for example. It has a loan book of more than 25 billion USD (more than 5 times that of IBFSL) and a market cap of 22 billion USD (22 times that of IBFSL). Simply, the market size and the business potential on the upside is huge. IBFSL, which was started in 2000, with highly talented and educated entrepreneurs and with the support of LN Mittal and easy availability of funds, has come a long way since then. The first phase of the growth story was between 2002 and 2008, when the company concentrated on aggressive growth and expansion, providing various financial services and high yielding risky products. However, with the financial crisis and liquidity crunch in 2008 and 2009, the company had to learn a lesson and hive off the short term lending practices, move out of unsecured lending, stop the risky products and move towards a long term and a sustainable business practice. This transformation lead to company concentrating on mortgage loans and today IBFSL is known as a Home loan provider with a presence in CV financing. It is this transformation that we are betting on and we believe that it would serve as the base for the company to achieve a robust growth for several years to come. We expect IBFSL to grow its assets by close to 37% in FY 12 and to grow its Interest income by more than 33% in the same period. We believe that this would lead to an earnings growth of 27% 30%% in FY 12. The company is currently available at a very attractive P/B valuation of 1.05 and a 1 year forward P/E of 5. Considering the strong growth prospects of the company along with a 6% dividend yield, higher ROA and a increasing ROE, we believe that the counter can easily trade at a P/B valuation of 1.5 times and command a P/E of 8 times on FY 12E earnings. Assuming a Target P/B of more than 1.6 and assuming a Target P/E of 8 times FY 12E earnings, we recommend a BUY on the counter, with a Target price range of Rs 246, for a investment period of less than 12 months.
Institutional Services
Mail Id : gokul@hbjcapital.com
Mobile: +91-9994577745
Institutional Services
THANK YOU
Institutional Services