Indiabulls Financial Services Ltd (IBFSL) – Buy the Transformation For more information on Indiabulls and the opportunity in it, feel free to discuss with Gokul Raj. P Mail Id : [email protected]Mobile: +91-9994577745 Our key objective is to pick stoc ks which can compou nd sustainably at a healthy rate for the next 3-5 years and create wealth. W e like to select companies with strong competitive adv antages and are quoting at a discount to t heir intrinsic value. Our key objective is to pick stoc ks which can compou nd sustainably at a healthy rate for the next 3-5 years and create wealth. W e like to select companies with strong competitive adv antages and are quoting at a discount to t heir intrinsic value.
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Robust Housing finance segment – Housing finance industry is deeply under penetrated in India with 7%contribution to the country’s GDP as against 12% for China. A peer group comparison in Asia reveals that India hasone of the lowest mortgage to GDP ratio. It is expected that the share of housing in GDP would go up substantially
in the coming years. The share of outstanding housing loan as a percentage of GDP has risen from 3.4% in 2001 to7% currently.
Transformation into a Focused mortgage lender – Over the last 3 years time period, the company has beenundergoing a transformation, wherein it is moving from being a high risk unsecured lender to being a more maturedand focused player on mortgage loans. The company has been clearly exiting the highly volatile business segmentslike personal loans and auto loans and has been concentrating on building a long term and stable asset portfolio.We believe that this transformation will serve as the base for the company to achieve the next level of growth andopportunities.
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Improving Asset and Liability profile – The Asset profile of the company has improved significantly over the last 3years. The Secured lending % of the total lending has gone up from 72% in FY 08 to 98% in FY 11. Today, mortgagescontributed to 71% of the total assets compared to less than 45% 3 years back.
In accordance to the changing asset profile and the business focus, the company has been able to modify its liability
profile from short term oriented to long term oriented and stable sources.
Low gearing support strong growth without equity infusion – The gearing ratio at 3.13 times is lower whencompared to other listed peers. Most of the peers in the housing finance segment have a gearing ratio of more than7. This makes IBFSL as one of the better capitalized NBFC s with a very strong balance sheet. The low gearing levelswill allow the company to grow for at least another 2 years without any need for equity infusion.
• There has been a considerable broadening and deepening of the Indian financial markets due to various financial market
reforms undertaken by the regulators, the introduction of innovative financial instruments in the recent years and the entry
of sophisticated domestic and international players.
• Sectors such as banking, insurance, asset management and brokerage have been liberalised to allow private sector
involvement, which has contributed to the development and modernization of the financial services sector.
• This is particularly evident in the non-banking financial services sector, such as equities, derivatives and commodities
brokerage, residential mortgage and insurance services, where new products and expanding delivery channels have helped
these sectors achieve high growth rates.
• Additionally, India has a large and rapidly growing middle class with increasing levels of discretionary income available for
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credit in India has correspondingly increased.
• The last five years have seen not only a great expansion of the Indian economy but also a great expansion of consumer
lending.
• Previously, Indian consumers were averse to the concept of using credit to fund purchases and preferred to save prior tospending. Today, with a variety of consumer credit products being widely available, we believe Indian consumers are
• Despite high loan growth in consumer financing, it remains an underpenetrated market. We believe demand for consumer
loans will increase going forward in view of household gearing remaining low and disposable income continues to rise rapidly.
• The market has changed dramatically due to the following factors –
Increased focus by banks and financial institutions on consumer credit resulting in a market shift towards regulated playersfrom unregulated moneylenders/financiers
Increasing desire by customers to acquire assets such as cars, goods and houses on credit;
Fast emerging middle class and growing number of households in our target segment;
Improved terms of credit as interest rates in India fall into line with global interest rates and further reduced interest rates for
sophisticated products;
Legislative changes that offer greater protection to lenders against fraud and potential default increasing the incentive to
• India‘s robust economic growth and the resultant increase in incomes are speeding up the pace of urbanisation. This,
along with the increasing availability of housing finance, has led to a housing boom in the past few years.
•
The housing shortage, however, continues to remain acute and as per the estimate of the Technical Committeeconstituted by the Ministry of Housing and Urban Poverty Alleviation, the total housing shortage in urban India at the
end of the 10th Five Year Plan (2002 - 2007) is estimated at 24.71 million dwelling units and this will further go up to
26.53 million dwelling units by the end of the 11th Five Year Plan (2007 - 2012).
• Driven by low interest rates and economic growth, the Indian housing market boomed over 2006 and 2007 and the
total home loan approvals and disbursements increased significantly over the last few years.
• According to the National Housing Bank, annual housing loans disbursed by NBFCs increased from Rs. 32.9 billion in
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sca o s. . on n sca represen ng a compoun annua grow ra e, or , o per cen .
• Total loans outstanding increased from Rs. 82.8 billion to Rs. 176.7 billion for the same period at a CAGR of 21 per
cent. Improved tax rebates on home loans, lowering of real estate prices to affordable levels and slashing of interest
rates on home loans have resulted in growth of this sector.
• The weakened economic situation in 2008 led to a simultaneous weakening in mortgages as consumers refused to
make large financial commitment in the face of a global economic crisis. However, as per a report by the Housing
Development Finance Corporation, homebuyers are once again coming into the markets in larger numbers.
• “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.
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“Fee income” is basically the Application and processing charges that the company collects for its various loanofferings. Fee income is directly dependant on the total amount of new disbursements that the company makes.
• Any recoveries from the written off assets are usually charged into the “Other income”.
The company continues to expand its branch network and currently has over 160 branches spread across 18 states. Thebranches are set‐up in accessible locations with the aim of nurturing long‐term customer relationships. Customers are attended
to by knowledgeable and experienced staff, trained to deliver quality service.
• Customer convenience and Superior service form the core of IBFSL’s product proposition. Home Loans from the company are
competitively priced and cater to the mass‐market salaried segment. Prospective customers are promptly attended to by a
Direct Sales Team of over 3,000 people and all pertinent information is made easily available on‐line. Specialist helpdesks are
• 77% of the borrowings of the company are at fixed interest rates and more than 80% of the lending is at floating interest
rate. While there is exactly no loan with a fixed interest rate, the interest rate revision is not as frequent and as fast as in a
floating interest rate loan.
• This favorable loan mix of the company puts it in a comfortable position in a rising interest rate scenario to pass on any
rise in credit cost to the customer without taking a hit on its borrowing. Going forward, the company plans to increase itsshare of the floating loans that it provides.
• IBFSL is one of the very few NBFC s with top notch ratings from all of the credit rating agencies. This is mainly due to the
strong business growth of the company with its focus on relatively safer asset class of mortgage loans.
• The company has a P1 + rating on all of its short term borrowings from CRISIL, a Standard and Poor’s company. For its
long term borrowings, the company has a rating of AA + from CARE and AA from ICRA and CRISIL.
• There has been a remarkable improvement in the liability profile of the company over the last 3 years. It can be seen from
the above that pre–crisis, the company was heavily dependant on short term borrowing like commercial paper and other
sources including Mutual funds. These short term borrowings usually demand a higher interest rate and the duration is less
than a year.
• High reliability on short term borrowing for financing long term assets will result in Asset – Liability mismatch. Taking aleaf out of the financial crisis experience and acting in accordance to the changing asset profile of the company towards
long term mortgage loans, IBFSL has done a commendable job in transforming its liability profile in just 2 to 3 years.
• 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 more bond issues by the company taking the contribution from bonds to closer to
• On the back of a strong and steady demand for Home loan products, the company has seen a sustainable growth
in its AUM over the last 4 quarters. The average growth for the last 4 quarters has been Rs. 2,200 Crore.
• We believe that the strong focus on Home loans and the aim to double the CV loan book will help the company topost a strong growth in FY 12 as well. We expect that the average AUM growth for the next 4 quarters to be in the
range of Rs. 2,200 Crore to Rs. 2,500 Crore.
• We expect around 37% growth in the AUM for FY 12 and we expect the total AUM to stand around Rs. 27,120
• Shown above is the 1 year price chart of IBFSL. The charts suggest that there is a very strong support at 130 levels,which has been successfully tested several times over the last 1 year. We believe that the downside is highly cappedat 130 levels.
• On the upper side, though what we see is 240, which is the 1 year highs, it should be noted that IBFSL quoted atRs. 1000 in Jan 2008 before the market crash, on back of higher valuation and very high double digit growth rates.
• We believe that at the current levels, the downside seems to be capped and very low and the upside potentialfor the counter is significant. It looks even more better, taking the dividend yield of more than 6% intoconsideration. Hence we believe that a substantial investment can be made safely at the current levels.
We believe that the dynamics of the housing finance sector is strong and large, which augers well for the growth of Indiabulls Financial Services Ltd. Take the case of HDFC Ltd, the largest player in the Housing finance segment for example. Ithas a loan book of more than 25 billion USD (more than 5 times that of IBFSL) and a market cap of 22 billion USD (22
times that of IBFSL). Simply, the market size and the business potential on the upside is huge.
IBFSL, which was started in 2000, with highly talented and educated entrepreneurs and with the support of LN Mittal andeasy availability of funds, has come a long way since then. The first phase of the growth story was between 2002 and 2008,when the company concentrated on aggressive growth and expansion, providing various financial services and high yieldingrisky products.
However, with the financial crisis and liquidity crunch in 2008 and 2009, the company had to learn a lesson and hive off theshort term lending practices, move out of unsecured lending, stop the risky products and move towards a long term and a
sustainable business practice. This transformation lead to company concentrating on mortgage loans and today IBFSL is
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It is this transformation that we are betting on and we believe that it would serve as the base for the company to achievea robust growth for several years to come.
We expect IBFSL to grow its assets by close to 37% in FY 12 and to grow its Interest income by more than 33% in the sameperiod. We believe that this would lead to an earnings growth of 27% – 30%% in FY 12. The company is currently available
at a very attractive P/B valuation of 1.05 and a 1 year forward P/E of 5. Considering the strong growth prospects of thecompany along with a 6% dividend yield, higher ROA and a increasing ROE, we believe that the counter can easily trade at aP/B valuation of 1.5 times and command a P/E of 8 times on FY 12E earnings.
Assuming a Target P/B of more than 1.6 and assuming a Target P/E of 8 times FY 12E earnings, we recommend a BUY onthe counter, with a Target price range of Rs 246, for a investment period of less than 12 months.
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