Indiabulls Housing Finance (IHFL) clocked strong operating performance in Q3FY18, with core PAT (ex- gains from OakNorth Bank sale) jumping >23% y-o-y. Key highlights: (i) growth momentum sustained (AUM up >30% y-o-y) with tilt in favour of core home book (59% versus 54% a year ago); and (ii) book spreads sustained at 3.22% benefitting from rating upgrade by CRISIL though higher interest rates impacted incremental spreads. IHFL maintained FY18 growth guidance of 20-25% across financial parameters. The company is envisaged to sustain superior return ratios — RoA and RoE of 2.8% and >30% — riding optimal product strategy with stringent risk mitigants, stable franchise and high liquidity. Maintain Buy.
Growth momentum sustained
Growth momentum sustained with disbursements rising 35% y-o-y led by home loans, leading to AUM jumping 32% y-o-y. Commendably, IHFL has been sharpening focus on beyond top-20 cities with spotlight on Smart City home loans (69 branches now, >10% of disbursements) and e-home loans.
Book spreads sustained
Book spreads were sustained at 322bps with funding cost benefit flowing from rating upgrades. However, with wholesale rates inching up, incremental spreads contracted to 280bps for Q3FY18. As liabilities reprice further, book spreads will come off gradually as pressure on yields might continue due to heightened competition in this space.
Asset quality intact
GNPLs fell to 77bps (78bps in Q2FY18). However, credit cost was higher as IHFL prudently made higher contingency provisions (Rs 1.82 bn). Higher proportion of in-house sourcing (>90%), lower LTV and focus on low-risk LRD enabled IHFL maintain stable asset quality.
Outlook and valuations
Profitability was higher given capital gains from Oak North Bank stake sale. Hence, we revise up FY18E EPS by 5.7%, even while core earnings are stable. We believe, fundamentals are on strong footing and expect IHFL to clock strong operating results. We maintain ‘BUY/SP’ with revised TP of Rs 1,547 on 3.9 FY20e P/ABV.