Company’s stringent risk mitigants and strong track record make execution risks minimal; ‘Buy’ rating maintained.
We hosted an “Investors Day” with top management of Indiabulls Housing Finance Ltd (IHFL) to get insight into the company’s business dynamics and strategic plans. The interaction reinforced our conviction on the strong credit framework and risk management practices at IHFL. Moreover, the thrust on digitisation and productivity improvement coupled with emerging opportunities indicates that IHFL is making strides towards its FY20 targets (loan CAGR of >25%, cost/income <10%, and credit cost of <50bps). Given rising demand for housing finance and the company’s stringent risk mitigants and strong track record, execution risks are minimal in our view. Maintain Buy.
Growth momentum broadening out
In light of structural industry levers and improving affordability, IHFL is confident of sustaining >25% growth to reach AUM of Rs 4 trn by FY23. Besides the core home loan segment, the company is seeing equally strong demand in LAP (given PSBs are struggling) and construction finance (on the back of increasing need for RERA-compliant projects), and thus anticipates better growth momentum for these segments as well.
Building blocks in place for sustainable scale-up and market gains
IHFL follows stringent risk management practices (in-house technical and legal teams with internal sourcing >90%, granular portfolio and clearly defined target segments). This along with a diversifed borrowing mix (supported by a sharp improvement in credit rating) indicates that the foundation is in place for sustainable growth. IHFL is likely to benefit from the RBI’s relaxation on ECB borrowings. The recent lending rate hikes will help it trace book spreads back to higher end of guided 300–325bps range.
Embarks on digital journey
IHFL has been sharpening the focus on ‘beyond top-20 cities’ (which account for 80 branches now, 11% of disbursements) with spotlight on Smart City home loans & e-home loans. IHFL aims to ramp up share of disbursements to >50% by FY20. IHFL is hopeful of sharp productivity gains, anticipating cost/income to be <10% by FY20e and <8% by FY23e.
Strong franchise; maintain ‘BUY’
IHFL is envisaged to sustain superior return ratios — RoA and RoE of 2.8% and >30%, respectively — riding optimal product strategy with stringent risk mitigants, stable franchise and high liquidity. The stock is trading at 2.8x FY20 P/BV. Maintain ‘BUY/SO’.
Outlook on core home loans
Management is confident that structural growth drivers (especially in the affordable housing space) are in place, viz: (i) fiscal and regulatory support; (ii) improved affordability; and (iii) urbanisation. The company aims to continue to gain market share (PSBs are grappling with their own set of HR challenges even on the retail sourcing side) with large competitors being HDFC, ICICI Bank, Axis Bank and SBI.
In terms of the distribution franchise, while focus will continue to move into deeper geography, it will be through Smart City home loan branches (which management aims to increase to 100 branches by H1FY19 from 80 in FY18). A clear focus is on e-home loans, which currently forms 27% of home loans (including LAP). The focus on digital has paid off; productivity shot up from 1.6 loans/per person/month last year to 2.2 loans/person/month this year.