Indiabulls Housing Finance’s (IHFL) PAT grew 26% y-o-y to Rs 8.6 billion. Core operating performance was robust, with strong AUM growth and stable spreads. However, other income remains subdued due to lower incremental yields. Note that IHFL had generated a good spread on its investment book above cost of funds in FY16 and FY17 – that is beginning to vanish now. AUM growth was in line with trend at 33 % y-o-y to reach Rs 1 trillion. This was driven by 36% y-o-y growth in disbursements to Rs 95 billion. Management is bullish on pick-up in supply in the affordable housing space. Despite competitive pressures, IHFL managed to hold spreads steady at 3.25%. Management continues to guide for incremental spreads in the range of 2.75- 3% and book spreads of 3-3.25%. Incremental cost of funds is around 7.3-7.5%.The share of home loans in the overall book inched up 100bp to 58%. With the share continuously inching up, we believe spread pressure will continue.
HFL’s transformation from a diversified lender to a focused mortgage player has yielded returns, with RoE/RoA improving from 3%/0.8% in FY09 to 26%/3.4% in FY17. Focus on core mortgage loans and market share gains should drive AUM growth of 25% over the next three years. IHFL is among the lowest-levered HFCs. Asset quality trend is likely to remain stable. We keep our EPS estimates largely unchanged. Maintain ‘Buy’ with a TP of Rs 1,550. IHFL seems adequately equipped to gain market share from PSU banks, given its low cost structure. We think IHFL will gain meaningfully from the government’s impetus to affordable housing. We believe the focus on mortgage and market share gains will drive AUM growth of 25% for the next three years. As individual home loans have lower risk weight than corporate loans, capital consumption will be lower with gradual shift towards individual home loans. At the same time, increased sell-downs will also help improve return ratios. IHFL has consistently outperformed peers on key parameters. Average three year RoE at 26% is the best among the peer group. The company offers superior return ratios with 3% dividend yield.