Indiabulls Housing Finance - Pragmatic Mover; Initiating Coverage :: Edelweiss

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Indiabulls Housing Finance (IHFL), a prominent mortgage financier (with AUM of INR450bn), emerged much stronger after down-sizing riskier assets post FY09. The company is undergoing structural metamorphosis with steady 20% plus asset growth, credit rating upgrades and active sell-downs supporting its best-in-class NIMs. We believe an optimal product strategy with stringent risk mitigants to manage NPLs, stable franchise, high liquidity and low gearing will help sustain superior return ratios (RoA/RoE of 4%/30% plus). Moreover, high dividend yield and consistent earnings delivery, will lend predictability and result in further re-rating of the stock. We initiate coverage with ‘BUY’ and target price of INR653 (upside > 30%) assigning it 3.1x FY16E adjusted book based on Gordon growth model.

Optimal product strategy: Yield generators and quality stabilisers

IHFL’s unique business model is marked by an optimal product strategy—while the relatively safer home loans constitute ~50% of its portfolio, higher yielding loan against property (LAP) and corporate mortgage loans account for the balance. Besides being market leader in LAP, clear market segmentation and low LTV help contain NPLs in line with home loans. Even within corporate mortgage loans, 75% is towards low-risk lease rental discounting and balance is towards residential construction financing.

Consistency and stability: Fundamental cornerstones

With strengthening borrowing profile (triggered by recent rating upgrades) and ramp up of sales force, IHFL is now capitalised to cash in on emerging opportunities. Management is targeting steady 20-25% asset growth and stable NIMs supported by recent rating upgrades, active sell-downs and liquidity buffer, despite some pressure on yields. This, along with operating leverage benefits and controlled asset quality, will drive earnings CAGR of 20% over FY14-17E.

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https://www.edelweiss.in/research/Indiabulls-Housing-Finance--Pragmatic-Mover;-Initiating-Coverage/28000.html