Indiabulls housing finance updated

Indiabulls Housing Finance Ltd (IBHFL)

- A Highly Profitable & Large Mortgage Financier in the making

Content Index

• Opportunity Write-Up from Research Desk :- Slide #3

• Corporate Governance Issues & Our View :- Slide #5

• Veritas & Indiabulls story :- Slide #6

• Key Strengths which led to our Re-Recommendation :- Slide #7

• Case Analysis & Probabilities :- Slide #8

• Indiabulls Housing Finance – Investment Snapshot :- Slide #9

• Industry Structure – An Overview :- Slide #11

• Banks Vs Housing Finance companies – Competition :- Slide #17

• Indiabulls Housing Finance - Investment Rationale :- Slide #23

• IBHFL – Financials :- Slide #37

• Conclusion :- Slide #43

“ Specialists in discovering Multibagger stocks “

From our Research Desk

Dear Members, Indiabulls Housing Finance is not a new company or a stock to us. We have been tracking the company for many years (Since early 2009) and also had released a detailed Research report in June, 2011 as “Indiabulls Financials – Buy the Transformation” betting on the company’s transformation from a diversified NBFC to a focused Housing Finance company of which the process had just begun then. While the business performance has been in-line or in fact better than our expectations, we believe that the Markets have still not factored this shift adequately. As age old Market Wisdom says, “Some times the best stock to buy, could be something which you already have in your Portfolio”. Similarly while the current Market conditions is throwing up several opportunities, we would ask our clients to buy IBHFL at current prices as the real Valuations are better than the last time we recommended - while in the mean time, the Business Risk has reduced considerably. While the stock has given us returns of around 50% (including dividends), the profits have grown much more. While some of the current low valuations can be attributed to the overall depressed Market conditions, still the current valuations reflects a highly unwarranted fear and irrationality about the stock. One of the major reasons being the perceived Corporate Governance Issues about the company. While there may be some concerns about the Group, we believe a lot of the fear is just over exaggeration and doesn’t have any Logic to support them. We have tried to address as many Issues as possible with this report. Being in Stocks, we know that Perceptions can stay longer than we imagine. But the biggest positive with IBHFL is its huge current Dividend Yield of over 11% at current prices. This kind of Post – Tax returns is an interest for patient Investors to hold on to the Stock still the Market re-rates the stock to its True Value. We believe that the Dividends along with Capital appreciation would certainly help us to get healthy Multibagger returns. Thanks !



Overcoming Fear & Irrationality

We will overcome fear through these Techniques over the next 4 Slides


Corporate Governance Issues & our Views Commonly Perceived

Governance Issues Our Rational Analysis of these Issues

Government Connections behind growth of company

While there is lot of fire behind this smoke, we believe that this would be more pro-found in their Power and Real Estate business.

In a B2C business like Mortgage, this doesn’t matter.

Aggressive Accounting Practices

Our Analysis of Dividend Payouts, Tax Payouts and Provisioning terms doesn’t indicate any gross Aggression & in fact points to a lot

conservative approach in building the business.

Dupes Minority Shareholders

Dividend history, Value Creation track record and Improving transparency don’t concur with this Perception.

High Related Party Transactions (or) Risks

IBHFL has zero loans to its Real Estate or Power subsidiary and no Equity Cross Holdings. Their performance in no way affects.

Complicated Structure The company has a lot of Subsidiaries with a complicated structure.

But there has been improvement on this front over last 2 years.

Aggressive Risks in Loan Book

In fact, our Analysis on Treasury Management and Balance sheet shows huge conservativeness in their Underwriting skills.

Huge Manipulations in Financials

While its certainly not impossible, the probability of this in a HFC which is highly regulated and constantly rated is very low.


Veritas & Indiabulls story During August 2012, Canadian Research firm – “Veritas” had published a scathing report on the Indiabulls group titled – “Bilking India”. While the Management confronted the report publicly with a law suit, the negative sentiment which was created is significant. We had read the entire 105-Page Veritas research report. The report certainly does good analysis and points to the controversial corporate governance activities of the group over the past. But certainly the exaggeration has been huge on some of the numbers. We believe 95% of corporate’s in India if subjected to such Forensic analysis would come bad including the biggest company – Reliance. 1.) Most of the Issues pertaining to the Report point to Irregularities in their Power and Real Estate ventures and the Irrational valuations which the company’s nascent ventures had got Pre-2008 leading to significant Wealth destruction for Investors while the company’s initial Equity holders made a killing. Here the story would be same across most corporate’s in the Infra space including the ridiculously priced Reliance Power IPO. 2.) Only serious Issue with respect to Indiabulls Financials was the loans to ESOP’s. Here we believe that the Veritas report has made gross Factual errors and has exaggerated a Non-Issue. The company’s response to this allegation was satisfactory and our Analysis doesn’t indicate any gross misdoings.


Key Strengths & Comforting Factors There are a lot of strengths and comforting factors in the business which virtually eliminates the possibilities of Irrational fears in the minds of market participants. Some of which include, High Dividend Payout & Stable Tax Rate – Indiabulls Housing Finance continues to have a high Dividend payout ratio of over 45% and also has been having a stable tax rate of around 26% inline with most HFC’s. Both of these parameters eliminate a lot of doubts linked to real cash generation in the Business. The company also has been aggressive in providing for Provisions and has been conservative in building up Counter cyclical buffers which we believe must lead to lower concerns related to Aggressive Accounting practices in cases like Zero Coupon Bonds. Least Leveraged Balance Sheet – IBHFL has over 20% of its Balance Sheet as Cash & Cash Equivalents with a gearing of just around 5X and a CAR of over 17%. All this shows the extreme conservativeness in the part of Management to build a safe and robust business rather than just chasing growth and Profitability. While Management has issued Warrants to Promoters and diluted previously, we believe that the Equity Dilutions would be more measured going forward considering the Business strength and a slowing economy. Focus on growing Stable Mortgage Business – The Biggest issue Pre-2008 was the aggressive Management policy in expanding in each and every segment. We believe there is lot more Maturity currently with focus on Mortgage business and as stated the Book has not extended to other forms of credit despite huge attraction, 2 years back. We believe that the conversion to a Housing Finance company gives us a lot of comfort w.r.t its future growth areas. Healthy Productivity Improvements – Company’s growth has been accompanied by a focused approach in improving productivity across parameters leading to high Return ratios and improving competitiveness in the Housing Finance segment. Company’s Cost to Income % and Fee Growth % shows the hard work behind. Consistently Achieving Guidance – The Management has built a lot of credibility by consistently achieving all its stated objectives over the last 4 years, Quarter on Quarter. Both the direction and the speed of the Transformation gives us a lot of comfort about the Management’s ability to deliver Shareholder value going forward. Company has also put of a lot of effort to improve Transparency and become more Minority Shareholder friendly over time.

Various Case Analysis & Probabilities

Extreme Negative

Bear Case Base Case Bull Case Best Positive

Around 5% 25% 40% 25% Around 5%

Inflated Profits, higher Related party transactions

Aggressive accounting & Excessive Risks in Loan book

Standard Accounting practices and disclosures

Increasing Transparency & Minority share-holder friendly

Conservative Accounting & Provisioning

Aggression in new Lending areas & high Leverage

Over Dilution in favor of Owner, decreasing dividend payout

Continuing Dividend Distribution Policy| >40% PAT

Robust & Stable lending Book with AAA rating upgrade.

Achieving consistency like HDFC (Growth, ROE, ROA, CAR)

Collapse of RE prices, NNPA’s of > 4%.

Higher GNPA’s from Non-Mortgage (>3%)

Growth slow-donw, NNPA’s moving up 50bps

Existing Provisioning cover is enough

No Impact and continuing stable Asset Quality.

< 5 % 5-10 % ~ 15 % > 20 % > 30 %

< 100 Rs 150 – 250 Rs ~ 330 Rs 400 – 450 Rs > 550 Rs

50 Rs/ Share 80 Rs/ Share 110 Rs/ Share 125 Rs/ Share 150 Rs/ Share

< 80 Rs 100 – 200 Rs ~ 400 Rs 500 - 700 Rs > 1000 Rs

Parameters

Probability

Corporate Governance

Management Actions

Slowdown Impact

ROE’s (E)

Expected Book Value (FY- 2018 )

Dividends for next 5 Years

Share Price Range

( 5 Year Expected)

IndiaBulls Housing Finance – Investment Snapshot (as on Aug 29, 2013)

Recommendation :- BUY

Maximum Portfolio Allocation :- 6-8 %

Investment Phases & Buying Strategy

1st Phase (Now) of Accumulation :- 80%

Current Accumulation Range :- 175-185Rs

Indiabulls Housing at the current price offers huge Value and Growth to Investors. The Current Dividend Yield of over 11% will help Investors to hold on to the stock, till the Market prices move upwards to its Intrinsic Value.

Core Investment Thesis :

IBHFL has been one of the fastest growing companies in the lucrative mortgage space which offers immense scope for profitable growth for many more years. The company has transformed remarkably into India’s second most profitable Housing Finance company in a short time. We believe this company has enormous potential and can create huge share holder value going forward.

Current Market Price – Rs. 183.9 Current Dividend Yield – 11.16% Bloomberg / Reuters Code – IHFL. IN/ IBULL.NS BSE / NSE Code – 535789 / IBULLHSGFIN Market Cap (INR BN / USD Mn) – 6150/61.50 [1 USD – Rs. 67.17] Total Equity Shares [Mn]– 312.5 Face Value – Rs. 2 52 Week High / Low – Rs. 290 / Rs.177.1 Promoter’s Holding - 40.94% FII - 40.50% DII - 3.38 % Other Holdings - 15.18%


Key Investment Highlights 1.) Low Gearing of around 5X with healthy growth without Equity Dilution for at least the next 2 years. 2.) Credit rating to move from AA+ to AAA within the next 1 year leading to lower borrowing cost. 3.) Consistent profit growth of 20-25% expected over next 3-5 years funded by Internal Accruals. 4.) Experienced Management team who was together disbursed over 73000 Cr Rs of Loans cumulatively. 5.) Strong Underwriting & Recovery Skills leading to lower Non Performing assets and higher Productivity. 6.) Well Capitalized Balance sheet to overcome all potential Interest Rate cycles and Liquidity situations. 7.) Consistently Improving Assets and Liabilities leading to stable Spreads and ROE’s of over 25%. 8.) Scaled up a Solid and stable Mortgage Financing business in record time proving Management Quality. 9.) Consistent Dividend Payout of over 40% of net PAT leading to current Dividend Yield of over 11%. 10.) Extremely Cheap valuation of around Book Value and an Earnings Yield of over 25% at current prices.


Housing Finance in India - An Overview


Strong Structural Demand for Housing Finance

• The total housing shortage in India is huge at 24.7 Million units and hence there is a strong structural story for the growth of housing finance in this country as India develops and housing becomes affordable for the masses.

• Mortgage or Housing finance is the cheapest source of credit for an ordinary citizen and it is bound to expand as the economy matures as it can be seen from the evolution of other economies. Mortgage credit will continue to grow at higher rates considering the expansion in GDP as well as the increase in Mortgages as % of GDP ratio.

• Indians are conservative and housing finance as a financial product has been well accepted and it is probably the only financial product which has the potential to reach penetration levels which are equal to the global average. In a growing economy like India real estate prices definitely tend to increase over a 10-15 year period and hence people are inclined to take leverage on an appreciating asset.

Housing Shortage

in Million Units

Urban 10.6

Rural 14.1

Mortgage as % of GDP


Long term Growth drivers


• The median age of the Indian population is about 25 years which will supply potential working age home owners over the long term leading to consistent demand for Home loans. • Most of home buying is by younger generation moving out of their ancestral place, with out sufficient surplus funds but future cash flows that can be leveraged. • The proportion of population in urban areas continues to increase which could lead to further increase in demand for new homes in urban areas. • According to Crisil, the finance penetration in urban areas in FY12 was around 39% which is expected to increase to 43.5% in 2017 while rural penetration is expected to increase from 8.2% in FY2012 to 8.9% in FY2017.

Trends that support growth of Housing Finance in India

• There are Strong trends which support housing finance growth in India like improving affordability, nuclearization of Indian families and increasing urbanization. • Average household income has grown at a faster rate than the property prices which has made owning a house affordable for a larger class of Indian public. • Average size of the Indian household has decreased from >5 to less than 4 persons and increasing movement of people from smaller towns to bigger cities.

Nuclearization of Indian Families


Huge Incentives for taking a mortgage loan

• It can be seen from the table that though the nominal interest rates on mortgage loans have not decreased much, the effective interest rate after accounting for the tax incentives have come down substantially, making housing finance a lot cheaper when compared to other forms of credit like car loans, personal loans etc. • Buying a house with a rental yield of over 2.5 % and an effective interest rate of less than 6 % whose price also appreciates over the loan period has made mortgage loans a very attractive and essential financial product.


Housing Finance - Stable Business • A home for a majority of Indians is a very emotional subject and hence they would try the maximum possible to stay in it by not defaulting on their EMI on their home loan. This can be seen from the low NPA’s of most housing finance providers. This is even higher in the LMI segment which is very sensitive to their Housing.

• India is nowhere near a sub-prime like crisis and housing finance providers are well regulated by the National

Housing Bank (NHB) and they are required to maintain a high provisioning and strong lending practices in terms off the

Loan/ Underlying Asset ratio. There is very little speculative demand in the market now and most of the buying is from

genuine users which creates a strong base for the housing finance companies.

• The increasing asset prices and long tenure credit (more than 10 years) on housing makes the earnings of housing

finance companies less volatile and cyclical when compared with banks and NBFC’s.

• Housing finance as a market has moved from a fixed interest rate regime to a floating interest rate regime over the past

decade and hence the housing finance companies (HFC’s) are able to pass most of the rate hikes and get a steady yield on

the underlying assets. Customers are also at advantage because of the long tenure which helps them average the interest

rates over a complete cycle, where as car/ vehicle/ transport loans are still on a fixed rate basis where the asset liability

mismatch of the finance companies must be constantly monitored.

• Housing finance companies have extended their product portfolio and most of the companies provide in addition to

the plain housing loans, products like reverse mortgage loans, home extension loans, top-up loans and lease rental

discounting which helps them pep up their aggregate yields. For e.g., a person who has sufficient cash flows and has

part paid his housing loan when planning to buy a car, can go in for a top-up on his housing loan than for a costly car loan

and use the money for buying the car at a cheaper interest rate.

• Hence, housing finance is one of the best forms of leverage for an individual and Indian consumption and middle

class boom will help the market grow sustainably.


Banks Vs HFC’s – An Overview


Competition between HFC’s and Banks


• Banks have traditionally competed on interest rates in the housing finance market while the housing finance companies have a specialized focus that brings customers. For home buyers the comfort of working with a HFC basically comes from faster turnaround times and better service quality. • When compared with the Mortgage loan books of Banks, HFC’s are more or less competitive in terms of size and scale of operations. Their efficiency per branch is far higher than banks.

• The housing finance space is catered to by both housing finance companies and banks. The banks have a lions share of the loan assets with 64% share and the rest is held by housing finance companies. • The share of housing finance companies have gained steadily from 26% to about 36% over the past seven years.

Cost of Funds-Banks vs HFC’s


• There is a general perception that banks enjoy lower cost of funds which are deterrent to the growth of HFC’s. However, if one accounts for mandated allocations to SLR and CRR which delivers very low yields the cost of funds advantage narrows to 50BPS. • Banks generally have a higher operating expenses than HFC’s and hence the minor edge which banks enjoy over HFC’s in terms of cost of funds renders insignificant. • Over the past seven years, the net advantage in funding to a commercial bank over a specialized HFC has rarely exceeded 50BPS.

Cheaper Funding Costs of Banks – No Big Advantage


• The asset composition for Banks and HFC’s are different with higher dispersal options enjoyed by HFC’s vis-à-vis Banks. HFC’s typically lend upto 87.1% as loan towards housing finance whereas banks total lending capacity is upto 59.8% towards the same. • Banks typically park 20% in SLR and about 6% in CRR which typically results in inflexibility in their lending operations in contrast to HFC’s which allots very minimal sums to regulatory provisions.

Incremental competitive aggression will be subdued


• There has been a perception that aggressive home loan lending by banks will play a spoilsport for HFC’s. But such concerns has been overdone as base rate sets acts as a floor on home loan rates as Banks cannot lend below those rates. • Bank mortgage rates are already close to their base rate and there is little room for more competitive pricing unless there is a cut in base rate.

HFC’s focus leads to High Profitability Vs Banks


• The profitability of banks in mortgage business is far lower than that of HFC’s due to higher Operating costs and Provisioning compared to focused HFC’s which have better underwriting capabilities. • For loans which lend for home loans at 10.25% the incremental ROA is around 0.5% leaving little room for maneuvering with rates thereby forcing them to look at alternative growth for their loan book.

Particulars SBI (Incremental) HDFC(Incremental) LIC Housing(Incremental)

Interest Income/Total Assets 9.70% 10.70% 10.80%

Home Loan Lendiing Rate 10.30% 10.30% 10.30%

Interest Expense/Total Assets 8.30% 7.40% 8.60%

Cost of Deposits Assumed 8.70% 9.20% 9.60%

NII/Total Assets 1.40% 3.30% 2.20%

Fee Income/Total Assets 0.20% 0.20% 0.20%

Opex/Total Assets 0.50% 0.30% 0.40%

Credit Cost/Total Assets 0.30% 0.10% 0.10%

Pretax Profit/Total Assets 0.70% 3.10% 1.90%

Taxes/Total Assets 0.20% 0.80% 0.50%

ROA 0.50% 2.30% 1.40%

Leverage 26.60% 9.10% 12.40%

ROE 13.40% 21.0% 17.30%

Tier I ratio Assumed 9.50% 12.70% 10.70%

Investment Rationale


Indiabulls Housing Finance – Brief History


Transformation into a focused mortgage lender


• The Real Estate company was demerged into IndiaBulls Realty in FY08. • The Securities and stock broking business was demerged into IndiaBulls Securities in FY09.

Basic Comparisons


Loan Book Break-Up


• The Company provides 70% of its loans to individuals while Corporate /Lease rental discounting accounts for 16%.Builders and Non housing accounts for 5% and 9% respectively. • The company derives about 16% from lease rental discounting which increases the spread at a lower risk profile. Company has emerged as a very strong player in this segment. • The company client profile is less risky than market leader HDFC which has higher exposure to Builders which carry higher risk profile.

• The Company provides 70% of its loans to individuals while Corporate /Lease rental discounting accounts for 16%.Builders and Non housing accounts for 5% and 9% respectively. • Company’s housing loan book is structured very much similar to that of HDFC and slightly different from other HFC’s who rarely do lease rental discounting.

Strong Distribution Network


• The Company currently has presence in about 200 cities. The company had presence in 2010 at about 140 cities and has been scaling up its presence gradually. • The company has added so far 5 cities and intends to add about 18 branches every year. • The company has branches in about 56 Tier-I cities,87 Tier-II cities and 57 Tier-III cities which helps the company to widen its reach and geographical presence. • The company’s national and international reach further enhanced from sourcing tie ups with Yes Bank and Doha Bank.

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 company’s 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. Fee income is further strengthened by syndication of loans from Co-lenders. • Any recoveries from the written off assets are usually charged into the “Other income”. • The Company’s increasing DST man power and improving productivity will enhance in-house sourcing to about 75% in FY14 leading to better cost control.

Strong Asset Growth


• The Company currently has about Rs.34,425.6 Cr of loan assets in FY13 as against Rs.27,521.2 Cr in FY12 registering a growth of about25.09%. We expect the company’s loan assets growth to be around 25% in the medium term. • The company sold loans amounting to Rs.2,397.4 Cr during the year ended March,31,2013 and has guided about Rs.3000 Cr of loan sales in FY14. • The company sells the loans to Banks which use about 50% of such loans to reach the priority sector lending targets mandated by the RBI. This is one of the cheapest sources of funding for IBHFL. • The company earns a spread of about 3.1% over the life of the loan on loans sold to banks.

Optimal Asset Liability Match


• 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, the company has done a commendable job in transforming its liability profile in just 2 to 3 years to match each other. • 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 bond contribution to remain around 30%. 30%.

Improving Liability Profile


• The Company sources most of their funding from Banks and Bonds, which account for about 92% of its borrowings.

• The company borrows about 8% of its borrowings from Commercial paper thus insulating it from any wide fluctuations in the short term market. Company’s liability costs will also improve with an expected ratings upgrade from AA+ to AAA over the next year.

• Recently the RBI tightened liquidity in the banking sector due to high inflation and falling rupee, which led to spurt in short term lending rates. The company is unlikely to be affected by these measures as the company’s exposure is only about 8% in these instruments and does not make material differences in its financial performance.

Prudent Underwriting Skills


• The company has a conservative home loan portfolio with average loan to value at 65% and an average loan term of 13 years. The company has a average loan size of Rs.24 Lakhs and a mortgage over the property financed with monthly amortization.

• Even on the Loan against Property (LAP) the company has a monthly amortizing structure and a very conservative Loan to Value ratio. Moreover a thorough Cash Flow analysis of the borrower is done before lending out a loan.

Stable Asset Quality


• The company carries out a cash flow study of the borrowers which has enabled the company to underwrite conservatively and maintain low NPA levels. • The company’s Gross and Net NPA’s have consistently improved during the past four years with Gross NPA’s reducing from 1.92% to about 0.79% .

• The Company focuses on underwriting low risk mortgage assets at low LTV which minimizes the lending risk. • Company also has a stable monthly amortizing Loan book leading to healthy cash flow and lower Asset quality issues. • Consistency in NPA reduction is a clear sign of the Managements strengths.

Reducing Cost to Income Ratio & Solid Balance Sheet


• The Company’s Cost to Income ratio has been consistently reducing which reflects the efficiency of the management to drive improvements. • The management has indicated that they would reduce the Cost to Income ratio by 50BPS every year for the next three years which we believe is feasible. • The company has a solid 20% of its assets as Cash and Equivalents giving it enough space to weather any sort of economic crisis.

Rising Productivity & Efficiency


• The company has been a consistent performer in the past three years with all critical productivity ratios showing an increasing trend leading to ROE’s upwards of 25%. • The company has a strong dividend track record and has a dividend policy of paying 40-50% of its profits as dividends and this would continue for many more years.

Particulars 2011 2012 2013

Pretax ROAA(%) 5.50% 4.90% 4.90%

Post Tax ROAA(%) 4.10% 3.70% 3.70%

ROE(%) 17.20% 21.90% 25.60%

Capital Adequacy(%) 20.09% 18.86% 18.47%

Tier-I 19.89% 18.21% 14.96%

Tier-II 0.20% 0.65% 3.51%

Dividend Per Share 10 13 20

Dividend as a % of PAT 42% 41% 49%

Cost to Income Ratio(%) 23.40% 18.70% 18%

No. of Outlets 163 181 200

No. of Employees 4512 4243 4072

Asset Per Employee(Rs.Cr) 3.71 5.85 8.09

Profit Per Employee(Rs.Cr) 0.17 0.24 0.31

Financials


Earnings Projection • IndiaBulls Housing revenues are expected to grow by 25% and 20% in FY14 & FY15 driven by robust loan growth which has recorded one of the fastest growth in the industry.

• IndiaBulls Housing has EBITDA margins of about 34%.We conservatively estimate EBITDA margins of about 33% in FY14 and 31% in FY15 on account of rising interest rates due to weak rupee.

• IndiaBulls Housing is likely to report PAT of Rs.1473.84 Cr in FY14 and 1663.8 Cr in FY15 with an EPS of Rs.47.16 and Rs.53.24 in FY14 and FY15 respectively. • IndiaBulls Housing EPS is likely to record a growth of about 20% and 13% in FY14 and FY15 respectively.

Specialists in discovering Multibagger stocks “

Particulars (In Rs.Cr) Mar-11 Mar-12 Mar-13 Mar-14E Mar-15E

Operating Income 326.24 785.51 4658.06 5822.58 6987.09

Other Income 7.15 3.44 48.14 58.23 69.87

Total Income 333.39 788.95 4706.2 5880.80 7056.96

Expenditure

Interest & Financial Charges 135.26 380.69 2603.58 3202.42 3982.64

Operating & Other Expenses 87.36 61.94 489.29 698.71 838.45

Profit before Depreciation & Tax 110.77 346.32 1613.33 1979.68 2235.87

Depreciation 1.62 1.05 9.21 14.56 17.47

Profit before Tax 109.15 345.27 1604.12 1965.12 2218.40

Tax 30.32 95.28 376.21 491.28 554.60

PAT 78.83 249.99 1227.91 1473.84 1663.80

EBITDA 103.62 342.88 1565.19 1921.45 2166.00

EBITDA Margins(%) 31.76 43.65 33.60 33.00 31.00

PAT Margins(%) 24.16 31.83 26.36 25.31 23.81

EPS 5.06 16.06 39.29 47.16 53.24

Concerns & Reasoning


1.) Interest Rate Risk: The companies results of operations are substantially dependent upon the level of net interest income. Interest rates are highly sensitive to many factors beyond control, including the RBI‟s monetary policies and domestic and international economic and political conditions. Further, an increase in interest rates may adversely affect the demand for housing finance in India, which in turn may affect interest income on housing loans. 2.) Increase in NPA’s :

A number of factors are not within the companies control could affect the ability to control and reduce non-performing loans. Any adverse developments in the Indian economy and the real estate scenario, changes in interest rates and exchange rates and changes in regulations would result in increase in NPA’s which will impact the financials of the company. 3.) Increase in Cost of Funds :

The company raises significant amount of funds by way of loans from banks and financial institutions. Increase in interest rates would also result in increase in cost of funds. If, the company is unable to pass such increase in funding and other costs to its customers, it would lead to decline in its NIMs and adversely affect the results of operations and financial condition. Further if the rate of inflation increases, the Company’s ability to raise funds at competitive rates becomes difficult which may impact its margins and profitability.

Attractive Valuations

• Indiabulls Housing Finance’s ROA is the highest among peers with 4.90% which shows its fundamental strength of its business compared to its peers.

•Indiabulls Housing ROE is at 25.60% which is better than its peers and also has done it through lower leverage which makes the number even more significant.

•Indiabulls Housing is trading at a PE multiple of 4.68x its FY13 12 months trailing EPS. The stock is trading at attractive valuations and is amongst the cheapest stock and the higher Dividend yield is an added bonus for the Investor.


Particulars Business &

Type Mcap(Rs.Cr) FY13

Revenues(Rs.Cr) AUM(Rs.Cr) P/B ROA(In %) ROE(In %) P/E

LIC Housing Finance HFC-Home

Loans 8369.84 7659.6 77812 1.29 1.40% 17.10% 8.18

Shriram Transport Finance

NBFC-CV Finance 16617.02 7014.43 52717 2.28 3.61% 20.53% 8.65

Mahindra Finance NBFC-CV Finance 14372.69 3856.7 24038 3.23 3.40% 23.10% 16.63

IndiaBulls Housing Finance

HFC-Home Loans 6150 5822.58 34426 1.2 4.90% 25.60% 4.68

Dewan Housing HFC-Home

Loans 1517.46 4122.64 31020 0.47 1.71% 17.20% 3.12

Conclusion


Price Chart

• IndiaBulls Housing was demerged from IndiaBulls Financial services and has started trading from July-2013.

• The stock has undergone a significant correction since its relisting. It has corrected from levels of 280 to 180 Rs within a short span of a month. • We believe that this correction was un warranted and the company had infact more positive news for shareholders with the first Quarterly dividend of 6 Rs/ Share.


Share Holding %

July Jun Dec Sep

2013 2013 2012 2012

Promoters 40.94 37.75 NA NA

FII 40.50 43.25 NA NA

DII 3.38 3.59 NA NA

Others 15.18 15.41 NA NA

Conclusion

We believe that Housing Finance in India is hugely underpenetrated and there would be a secular growth in the Industry for many more years. Focused HFC’s would continue to be grow more profitably than Banks. Indiabulls Housing Finance is well positioned to capitalize on this Huge opportunity and grow profitably without taking undue risks. To give an idea of the Target Opportunity, India’s biggest Housing Finance company – HDFC has a loan book size of over 4.5X of IBHFL’s and HDFC’s incremental Loans in 1 years is almost equal to 70% of IBHFL’s total book size. Not only is there big growth opportunity, even in terms of Market Capitalization – the Relative Valuations are widely divergent and small incremental improvements could lead to handsome Investor gains. Company’s transformation into an focused Housing Finance company has been accompanied with huge productivity improvements leading it to emerge as an Efficient Financier. Company’s ROE and ROA parameters shows the significant progress made in Cost/ Income, better Loan Sourcing, Fee Income growth, Improving Liabilities mix, healthy Syndication fees, strong Underwriting skills and conservative Provisioning. The Management’s stated objective continues to be, “Deliver Long term stability like HDFC on all parameters like ROE’s, Growth rates, Dividend Payout ratios, NPA’s etc”. While emulating HDFC is no joke, we certainly believe that the Management has travelled in that direction over the past 3 years and has made significant progress in building a stable business. This improves the Odds of the company reaching its stated Objective going forward. Our Analysis clearly shows that the Market has still not priced in the Transformation of Indiabulls from a diversified NBFC to a stable and focused Housing Finance company. That’s the reason you are able to buy a 25% ROE generating business around 1.2X Book Value and less than 5X trailing earnings. With EPS expected to grow around 20% CAGR and a healthy Dividend Yield of over 11%, we believe tat the Risk-Return payoff in this Investment is hugely favoring us.


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Indiabulls housing finance updated

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