Indiabulls Housing Finance Limited Investment Thesis

Executive Summary

Bond Details

Information Details

Name of the Issuer Indiabulls Housing Finance Limited

Size of the issue USD 350,000,000

Status of Notes Senior Secured

Tenure of senior secured Notes 3 Years maturing on May 28, 2022

Coupon/ Schedule of payment 6.375% p.a. payable semi-annually

Coupon Distribution Type Fixed Rate

Call/ Put Options N.A.

Method of Distribution Syndication

Evaluated Yield 8.65%

Evaluated Price 94.245

ISIN Code XS1999787564

Listing SGX

 The USD 350 million was raised by Indiabulls Housing Finance Limited under the USD 1,500,000,000
Medium Term Note Program.

 The money was raised outside India due to liquidity crunch in 2019 because of IL&FS default, and
the following NBFC crisis.

 The bond is listed on SGX for trading, with an evaluated yield of 8.65%.
 Indiabulls Housing Finance Limited Investment Thesis

Detailed Analysis

Business Description

Indiabulls Housing Finance Ltd (IBHFL) is a Housing Finance Company (HFC). The company provides long-
term housing loans to individuals and loans against homes to small business owners. IBHFL also provides
Lease Rent Discounting (LRD) loans against leased out commercial premises.

It is also involved in sell down transactions. IBHFL has been one of the largest sellers of mortgage pools,
with around INR 34,200 crores sold since inception. They are affected by either securitization or as
direct assignment transactions.

Key Financial Indicators

Financial Indicators FY 2017 (INR cr) FY 2018 (INR cr) 9m FY 2019 (INR cr)

Net Interest Income 3819 5103 4767

PBT 3722 4996 4176

PAT 2906 3847 3084

Assets under management 91301 122578 124271

Total assets 103638 131845 128693

%Tier 1 17.29% 15.07% 14.18%

%Capital Adequacy Ratio (CAR) 20.97% 20.82% 22.75%

Net Gearing 5.7 7 5.5

%Gross NPAs 0.85% 0.77% 0.79%

%Net NPAs 0.36% 0.34% 0.59%

 Gross and net NPAs seem to have reduced in 2018, but increased this year due to the slow-paced
infrastructure industry.

 The Net gearing ratio has reduced from 7, which shows signs of deleveraging.

 The total assets are growing in line with the housing industry of India, and it has maintained a good
CAR ratio
 Indiabulls Housing Finance Limited Investment Thesis

Growth Drivers

1. The housing sector contributed 6% to GDP in 2018 and is expected to contribute 11% by 2020. The
mortgage penetration (credit as a percentage to GDP) stands at 10%, compared to 26% and 81% of
China and US respectively. Housing Finance Companies have also been taking the market share for
home loans steadily over banks in recent years.

2. IBHFL has got a credit rating of AAA from ICRA, Brickworks, CARE as well as CRISIL, making IBFL the
second non-lending bank on standalone basis to be upgraded in the last 25 years by CRISIL.
This has reduced borrowing costs for them by 30-35 bps.

3. Government initiatives like RERA act, 2016 and Credit Linked Savings Scheme (CLSS) have made
borrowing safer and less costly for home loan borrowers. Tax incentives coupled with Pradhan
Mantri Awas Yojana (PMAY) subsidy schemes have resulted in an effective average loan rate of
0.58% for a borrower.

4. IBHFL is creating its own digital platform, making it easier to scale and also increase penetration to
consumers in Tier-II and Tier-III cities. With low scaling costs and less man power needed, cost to
income ratio would also reduce, making IBFL more profitable in the near future.

Industry positioning

Assets Return Interest on

Interest Gearing %CRAR Gross
S.No. Company (INR on ROE% International Rating
Coverage (Latest) (Latest) NPA%
cr) Assets Bonds

India Bulls AAA

130103 3% 1.58 4.7 22.75% 0.79% 25% 8.9%
1 Housing Finance (Crisil)

3817 6.25% 2.00 2.4 61.55% 0.63% 11% 9.18% AAA(ICRA)

2 Aavas Financiers
19579 2.48% 1.47 10.22 18.2% 0.88% 26% 9.75% AAA(ICRA)
3 Gruh Finance
562682 2.24% 1.47 4.7 18.9% 1.22% 13% 8.22% AA+(ICRA)
4 HDFC
171968 1.31% 1.26 11.45 16.04% 0.78% 15% 8.47% AAA(ICRA)
5 LIC Housing
PNB Housing
83868 1.61% 1.34 9.3 13.98% 0.48% 16% 9.25% AA(ICRA)
6 Finance

 IBHFL has a strong profitability with respect to its large asset base. The company is able to produce a
ROE of 25% through leverage, and still main high credit standards, with a rating of AAA

 IBHFL and HFDC are similar in debt profile and ratings, although IBHFl bonds has a slightly higher
coupon rate. Relatively, IBHFL is undervalued and hence poses as a more profitable investment.

 The Interest coverage ratio of 1.58 is in line with the industry

 Indiabulls Housing Finance Limited Investment Thesis

Du Pont Analysis (ROE Driver)

Year 2016 2017 2018 2019 (TTM)

Net Income 2,352.90 2,908.55 3,825.51 4,057.79
Revenue 8,364.50 10,493.00 13,201.61 16,316.99
Assets 77799 106483.6 130103.9 135496.54
Equity 10693.92 12122.47 13423.53 16482.12

Net Profit Margin 0.28 0.28 0.29 0.25

x
Revenue / Assets 0.11 0.10 0.10 0.12
x
Leverage Ratio 7.28 8.78 9.69 8.22
=
Return on Equity 22% 24% 28% 25%

 Although the Return on Equity (ROE) has risen from 22% in 2016 to 28% in 2018, Net Profit Margin
and Return on Assets have remained the same. The increase in ROE can be attributed to leverage,
which has increased from 7.28 in 2016 to 9.7 in 2018.

 The reduced ROE in 2019 was due to the NBFC liquidity crisis

 The high ROE is typical for an HFC, as they are leveraged 7x or 8x.

Key Risks

 Loan Against Property (LAP) and corporate mortgage loans formed ~19% each of the company’s
AUM as on December 31, 2018. The corporate mortgage loan book includes lease rental discounting
(LRD) loans to builders (50% of corporate loans as on December 31, 2018), and construction finance
(50%). Given the large ticket size and the high inherent risks associated with these exposures, the
corporate mortgage loan book remains exposed to concentration risks.

 There has been an increase in the number of new entrants in the housing finance market, including
HFCs promoted by existing NBFCs, new companies started by entrepreneurs and supported by
private equity players. The competitive intensity in the industry, particularly the affordable housing
segment, is expected to remain high over the medium term.

 Regulatory caps have also eased recently. RBI raised LTV ratio for INR 30-35 lakh from 75% to 80%.
For a loan amount less than INR 30 lakhs, the LTV is 90%. This poses a systematic risk of default.
 Indiabulls Housing Finance Limited Investment Thesis

 NBFCs are dependent on the credit market to meet their liquidity requirements. Any adverse change
in the economy could lead to credit markets drying up, making it riskier for NBFCs to operate.

 IBHFL, on April 05, 2019, announced a scheme of amalgamation (the scheme) between itself and
The Lakshmi Vilas Bank Limited (LVB), wherein LVB would get amalgamated into IBHFL. The merger
can impact the profitability of the entity moving forward, and effect the credit ability of the
company.

 Deteriorating Fundamentals Ratios for NBFC Sector (India)

Year GNPA ratio NNPA Ratio CRAR
2014-2015 4.1 2.5 26.2

2015-2016 4.5 2.5 24.3

2016-2017 6.1 4.4 22.1

2017-2018 5.8 3.8 22.8

2019-2019 6.6 3.7 19.3

 Although the CRAR% of NBFC Industry is above the required 15%, it has been on a decline.

 The GNPA and NNPA ratios have also increased steadily, which is a concern for NBFC sector
going forward.