Upgrade Indiabulls Housing Finance (IHFL) to ‘buy’ (earlier ‘neutral’) and raise 12-month price target to Rs 575 (earlier Rs 520) as the business cycle is turning favourable with sharp decline in rates. Our price target is based on residual income model and implies 2.3x FY17e P/BV and 8x FY17e P/EPS.
IHFL reported margins are better than peers as ~50% of loan book are constituted by higher yielding loan against property (LAP), developer and commercial vehicle segment. However, with a sharp decline in rates, we believe margins could further expand in the near term. We note that leading credit rating agencies Crisil and Icra have upgraded IHFL credit rating from AA to AA+ whereas CARE has upgraded from AA+ to AAA. Borrowing composition could also change in favour of cheaper bonds. At September-end, bank loans constituted 60% of borrowings whereas bonds/ commercial paper constituted 32%/ 8%. However, bonds constituted ~52% of incremental borrowings. We expect margins to improve by 20-30bps over FY16/FY17.
Sharp decline in rates, likely pick-up in the economic growth and easing liquidity could boost credit demand keeping credit costs low. We expect AUM to grow 19% CAGR over FY16-17 as demand in mortgage and LAP segment remains strong and developer demand could pick up. Loan loss provisioning has remained low so far at average 50bps over FY12-15E despite high yields as GNPLs have remained at 0.8%. We expect credit costs to remain at 0.6%-0.7%. We revise earnings estimates by 2-3% in FY16/FY17 and expect PAT to grow by 18% CAGR over FY16-17.