Further gains in IBHF seem limited

Company doing well, has raised growth forecast and should gain from improving economic cycle

The scrip of Indiabulls Housing Finance (IBHF) has outperformed the benchmark Sensex over the past three months, having almost doubled. While investors’ shift in favour of domestic cyclicals has partially driven this, the company’s fundamentals appear strong.

It has also raised its forecast for growth in assets under management (AUM) from 20-25 per cent to 25-30 per cent for FY15, driven largely by safer mortgage loans. Strong capitalisation (capital adequacy ratio at 19 per cent), healthy asset quality and improving cost efficiencies (cost/income ratio down to 16.9 per cent in the March quarter versus 26 per cent a year before) are its key strengths. Not surprisingly, most analysts remain positive on the prospects.

Last month, a foreign research house had said IBHF’s ability to grow its core ‘mortgage’ book, gain share and, hence, deliver above-average RoA/RoE (return on assets/equity) were key positives. Improvements in financial and operating leverage should complement, boosting the RoEs, it added.

On the business front, the market share in the home loans segment is low, at about two per cent. The company, however, is focusing on expanding reach by strengthening the distribution network to push this metric up. On asset quality, it has improved its gross non-performing assets (NPAs) ratio from 1.9 per cent in FY10 to 0.8 per cent in FY14, by pruning its high-risk unsecured loans and increasing its provisioning coverage ratio. As real estate developers and commercial vehicles are about 15 per cent of its loan book, IBHF’s gross NPAs could inch up, albeit marginally by 20-30 basis points (bps). The management says it expects to restrict this to 0.7-0.9 per cent in the near term.

A healthy and consistent dividend payout is another positive. Its average dividend payout (as percentage of net profit) was 40-50 per cent in the past three years. In FY14, it was 60 per cent. This trend seems likely to continue, given the expectations over future performance.

Analysts expect IBHF to post total income of Rs 3,165 crore (up 18.1 per cent over FY14) and net profit of Rs 1,855 crore (up 18.6 per cent) in FY15. Its net interest margin is also pegged higher at 4.9 per cent (up 30 bps), while asset quality is seen steady.

While there is a flip side as well, given the concerns surrounding IBHF’s corporate governance practices and perceived political connections, some analysts say these are overstated. Higher competition and muted real estate volumes are other key risks for the company and the sector. Nevertheless, at Rs 392, the scrip trades at 2.2 times the FY15 estimated adjusted book value, higher than the two times for LIC Housing Finance’s scrip, suggesting the upsides are limited.