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Indiabulls Housing Finance rated ‘Buy’ by Edelweiss on yet another strong performance

Though asset quality remained benign, provisions seem optically higher as IHFL used the DTA benefit to make prudent provisions. Cut in lending rates weighed on NIMs which restricted NII growth to sub-20%.

Indiabulls Housing Finance (IHFL) continued to deliver operationally strong performance, consistent with its guidance, across financial parameters. Earnings were supported by robust momentum and rising proportion of e-home loans. Though asset quality remained benign, provisions seem optically higher as IHFL used the DTA benefit to make prudent provisions. Cut in lending rates weighed on NIMs which restricted NII growth to sub-20%. IHFL maintained growth guidance of 20-25% across financial parameters. An optimal product strategy with stringent risk mitigants, stable franchise & high liquidity will sustain superior return ratios—RoA, RoE of >3%, 25%. Maintain Buy.

Robust growth momentum sustained
Growth momentum sustained with disbursements jumping >40% y-o-y led by home loan and commercial segments, leading to AUM spurt of >30% y-o-y. Repayment trend in home loans was significantly lower at sub-10% (annualised). Management’s FY20 targets are (i) double balance sheet; (ii) grow its core home loans, (iii) profit of Rs 55 bn and (iv) cost/income of <10%. Given strong balance sheet, ramped up sales force and consistent track record, we perceive minimal execution risk.

Asset quality intact; provisions lead to higher credit cost
IHFL’s asset quality remained stable, with GNPAs at 0.85%. Credit cost was, however, higher at Rs 3.1 bn as the company used one-time DTA gains for making counter-cyclical provisions. Notwithstanding challenges, collection efficiency remained robust. Higher proportion of in-house sourcing, lower LTV and focus on low-risk lease rental discounting have enabled IHFL maintain stable asset quality. IHFL aims to maintain 60-70 bps credit cost.
Outlook and valuations: Pragmatic mover; maintain ‘BUY’

Given the huge opportunity landscape, we expect IHFL to deliver strong loan growth, but lower spreads will lead to 24-25% NII growth. Stringent risk mitigants to manage NPLs and tight cost control will help deliver consistent 20-22% earnings CAGR over FY17-19e. The stock trades at 2.9x FY19e P/ABV. We maintain ‘BUY/SO’ with target price of Rs 1,150.

Lower lending yield weighs on spreads; outlook cautious
Despite AUM growth upwards of 30%, NII growth in Q4FY17 was restricted to sub-20% levels. This was largely due to lending rate cut, increase in proportion of home loans, declining proportion of zero-coupon bonds. However, as was guided by the management, the hit in yield was partially offset by benefit from lower funding cost, which is a derivative of (i) higher tilt towards lower-cost market borrowings; (ii) benefit of lower funding rate of bank borrowings. While current spreads are at the higher end of the targeted range of 300-325 bps, benefit is being passed on. We expect NIMs to decline over next two years and are building in 24-25% NII growth.

CRISIL’s LAP grading indicates tilt towards higher rating bucket
CRISIL’s grading of IHFL’s LAP book indicates the company’s tilt in disbursements to LAP1/2 grading, forming 9.7%/81.1% till date. Additionally, grading of the company’s LAP portfolio by ICRA indicates that 18.7% of LAP loans disbursed are of average credit worthiness, sustainability of which needs to be monitored.

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Other highlights
IHFL had earlier launched eHome Loans and “Smart City Home Loans” initiatives. The company has gained healthy traction on these new initiatives. 20 % of home loans’ sourcing is now through eHome Loans; and Smart City Home Loan branches account for sourcing of 7 % of monthly incremental home loan applications. Yields for home loans, LAP and corporate mortgage loans stood at 9.7 %, 13.5 % and 14.0 %, respectively. On incremental basis, yields were 8.98%, 11.25% and 12.0% for home loans, LAP and corporate mortgage loans, respectively.

While the premium housing market is under pressure, the mass housing market is robust on both price and sales volume. Mid-income affordable housing schemes should start seeing meaningful traction from this quarter/early next quarter. RERA should lead to increased demand for structured credit going ahead. LAP book is stickier as compared to the home loan portfolio due to pre-payment penalty of 3-5 %. Avg. ticket size of home loans is Rs 2.4 million, with avg. income levels of customers at Rs 1 million.

Company description: IHFL is one of the largest housing finance companies in India with AUM of ~Rs 913 bn. It was established as a wholly-owned subsidiary of Indiabulls Financial Services (IBFSL), a leading non-banking financial firm. In early 2013, the company was reversed-merged into its housing finance subsidiary IHFL.