Can Fin Homes Ltd BUY

Transcription

1 STOCK POINTER Can Fin Homes Ltd BUY Target Price 2,175 CMP 1,699 FY18E P/BV 4X Index Details Sensex 27,252 Nifty 8,432 BSE 100 8,673 Industry Housing Finance Scrip Details MktCap ( cr) 4,929 BVPS ( ) 330 O/s Shares (Cr) 2.6 Av Vol Week H/L 1,786/812 Div Yield (%) 0.87 FVPS (`) 10.0 Shareholding Pattern Shareholders % Promoters 43.0 Public 57.0 Total Can Fin Homes Ltd (CFHL) ticks all the boxes that investors expect from Housing Finance Companies. It has strong and rising NIMs, growing loan book with low risk, hungry management that sets challenging targets for self and growth without dilution. We believe Can Fin can sustain high P/BV multiple and reward patient investors as it chases target of loans of 350bn by FY20 from 135bn at end FY16. We initiate coverage on CFHL with BUY with a target price of Rs.2,175, implying an upside of 29% from the CMP of Rs. 1,699. We are optimistic about CFHL s prospects given that: CFHL is the fastest growing HFC among listed companies with an expected loan growth of 28% CAGR over FY16-18E. Can Fin has the best in class asset quality with GNPAs at 0.25% in Q2FY17. Non-housing book (LAP & others) is expected to grow at a faster rate of 42% in FY17. It was 12% of loan book at end FY16 and will likely reach 16% in FY18. Can Fin vs. Sensex Low cost funding from NCD/CP/Public Deposits increased to 48% in Q2FY17 from 34% in FY16. These strategic changes in the composition of loan book and borrowings are expected to translate into expansion of spreads from 2.33% in FY16 to 2.75% in FY18E. We expect Can Fin to deliver PAT CAGR of 35% over FY16-18E. At CMP of 1,699 the stock is trading at 4.3x and 3.5x its estimated adjusted book value for FY17 and FY18 which is attractively valued considering the valuations of its peers. Y/E Mar Key financials (Rs. in Cr) Net Interest Income Non-Interest Income PAT EPS Adj.BV RoE (%) RoA (%) P/E(x) P/Adj.BV(x) E E Page 1 of 36 Thursday, 10th November, 2016

2 CONTENTS A] Can Fin Homes Ltd Company Background 3 Growth Drivers 4 SWOT Analysis 5 Investment Rationale 6 Key Risks 13 Financial Outlook 14 Valuation 15 Peer Comparison 18 Financials and Projections 19 B] Housing Finance Sector Overview Housing Finance Sector in India 20 Housing demand scenario in India 21 Key Growth Drivers 24 Housing loan industry key players and who will win in the long term? 28 Regulatory Framework 33 How to evaluate housing finance business? 35 Page 2 of 36 Thursday, 10th November, 2016

3 Company Background Can Fin Homes Ltd (CHFL) is one of the large players in the housing finance sector in India today. CHFL has completed 29 years of operation in the field of home finance and has made profits and paid dividends continuously since inception in CHFL has 120 branches and 50 satellite offices spread across various locations in India and all these branches and satellite offices are linked to the Registered Office at Bangalore through a core banking platform. Since its parent bank has strong roots in Southern India, 70% of Can Fin branches are located in Southern India and the remaining 30% in Northern India. CHFL is a housing finance institution approved by National Housing Bank (NHB), the apex authority of housing in India. CHFL is offering a range of loan products, housing loans as well as non-housing loans, at competitive interest rates and designed to suit the needs of the customer. CHFL is one of the few housing finance institutions permitted by National Housing Bank, to accept deposits from public. The deposit schemes of CHFL are rated "MAAA" by ICRA, which indicates highest credit quality and carries the lowest credit risk. Products Offered Housing Loans Non Housing Loans Individual Housing Loan Loans under Urban Housing Gruhalakshmi Rural housing Loan(GRHS) Composite Loan Credit Link Subsidy Scheme(CLSS)under Pradhan Mantri Awaz Yojna Site Loans Mortgage Loans/Loan against Property (LAP) Loans for commercial Properties Personal Loans Flexi LAP Commercial Housing Loan (Source: Company Presentation, Ventura Research) Page 3 of 36 Thursday, 10th November, 2016

4 Growth Drivers for CFHL (Source: Annual Report, Ventura Research) Page 4 of 36 Thursday, 10th November, 2016

5 CFHL SWOT Analysis STRENGTHS Variety of products to cater the requirements of target segment Increasing geographical reach AAA ratings for loans/ncd and A1 for CP Turn Around Time for approval of loans of just 7 days 0% Net NPA for last 7 Years Judicious Investments in Technology WEAKNESSES A lot of concentration on Southern region as 76% of the Branches are in South. This leaves a lot of scope to expand in other parts of India Increased focus on riskier products/services like LAP, builder loans, etc, often comes with a danger tag and to some extent the bad debts which in turn rises the NPA levels Judicious Investments in Technology OPPORTUNITIES Increasing demand for land in suburbs Growing population Development of smart cities Judicious Investments in Technology THREATS Unavailability of land Increasing price of land and property Stiff Competition from Banks Volatile conditions of the Real Estate Sector Increase in Operating Cost (Source: Annual Report, Ventura Research) Page 5 of 36 Thursday, 10th November, 2016

6 Key Investment Highlights Vision of Loan CAGR FY % Vision 2020 Management Goals To reach the loan book size of 350 bn end of FY20 with high Asset quality with transparent and best ethical practices and prudent risk management practices. Business Budgets for FY17 Loan book size of 135 bn (from 106 bn in FY16) Number of Branches/Satellite Offices to be up at 175 (from 140 as at Mar2016) To improve its asset quality Lend to individual segments Increasing the Non Housing Loan segment Improve profitability Extend its business operations Increasing the Geographical Reach Branch Expansion continues in FY17 CHFL had mainly been concentrated in Southern part, 76% of the branches are present in South. But now to reach their goal they are steadily spreading in other parts of the country as well.30 new offices were added during the Q1FY17 taking the network to 170.With this branch network, CHFL will enjoy a strong marketing and distribution capabilities to scale its business and address the growing needs of a larger section of customers. It helps to enhance the service quality and also the visibility in the market. Branch Expansion FY14 FY15 FY16 FY17E No. of Branches Network Growth 20% 41% 20% 25% (Source: Annual Report, Ventura Research) Page 6 of 36 Thursday, 10th November, 2016

7 They are not only adding the touch points but also focussing on improving the performance and efficiency of each branch by taking various cost reduction programs. Continuing work with Direct Selling Agents In order to strengthen the marketing and sales operations of CHFL at grass root levels and to penetrate deeper into the market, the services of Direct Selling Agents (DSA) are being taken by CHFL. However, the DSAs provide leads to CHFL, while the technical tasks such as credit and legal aspects are monitored by the higher officials. The number of active DSAs working for CFHL amounts to 638. About 53% of the total business sanctions are been sourced by them in FY as compared to 57% during previous FY Continues to invest in Technology CHFL has invested in technology to make things easier for customers. In 2013, Can Fin linked all branches on a centralised platform (like a core banking platform) under Application Service Provider (ASP) model. To make processes simple for customers it has provided services like: ECS Online transfer of funds Online application SMS alerts Customer feedback through web portal In the foreseeable future, Can Fin plans to further invests in technology to minimise distance with customers. Asset Quality best amongst the peers, higher provisioning drives comfort CHFL have a robust credit policy and recovery policy. Their systems of strong credit appraisal, credit monitoring, SMA/NPA follow up ensures good asset quality and regular returns. They have registered good results continuously - they reduced their chances of defaulting credit and maintained the lowest NPA in the Indian housing finance industry. Their prudent lending, vigilant credit mechanism and effective collection system have helped them maintain Non-Performing Assets (NPA) for the FY16 at 0.19% - which is well below the industry average of 0.70% Page 7 of 36 Thursday, 10th November, 2016

8 In Q2FY17:- Gross NPA continues to remain low at 0.25% (0.29% at Sept 15) Net NPA contained at 0.03% (0.10% at Sept 15) Provision Coverage of 88% (67% at Sept 15) Asset Quality Continued to Improve Nil NNPAs for the 7 th Successive Year in % FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 GNPA NNPA (Source:Company Presentation,Ventura Research) Perfection of security has also been given high importance in order to ensure better quality of assets. One-time settlements and intensive recovery drives are used to bring down core NPAs. CHFL has been able to maintain the lowest GNPA level in the industry mainly because of CHFL s intense effort and focus on asset quality. Globalization - Recruiting Smart Local talent It is easier for local people to understand, communicate and connect with the customers of the same region in better ways. As a result, CHFL has strategy to hire local talent to serve local clientele. It also adds credibility and helps to build customer trust and turns the customer s aspirations into reality. Page 8 of 36 Thursday, 10th November, 2016

9 Lowest Turn Around Time amongst the peers CHFL has a turnaround time (TAT) of approximately 7 days for loan approval as they have highly efficient operations like: Quick credit appraisals Credit monitoring NPA/SMA follow up Centralised transactions Generation of quality MIS Target customer segment continues to be Salaried Professionals who aspire to have their own home Lending Basket Category-wise Distribution of Loan Book Particulars FY13 FY14 FY15 FY16 Salaried & Professionals Non-Salaried Individuals 86% 86% 84% 80% 13% 14% 15% 19% Builder Loans 1% 0% 0% 0% Staff Loans 0% 0% 1% 1% Total 100% 100% 100% 100% (Source: Company Presentation, Ventura Research) Carving their path in the right direction: Central Government is taking initiatives like Real Estate Regulatory Act Atal Mission for Rejuvenation and Urban Transformation (AMRUT) - to boost the infrastructural growth of the nation by developing 500 cities across the country The Smart City Project to develop infrastructure in 100 cities Implementation of such policies would increase the demand for home loans and CHFL already has a strong presence in states like Andhra Pradesh, Tamil Nadu and Karnataka and other cities which come under these projects like Kakinada, Tirupati, Mangalore, Hubli, Raipur, Chandigarh, Ahemdabad, and Vadodra etc. Page 9 of 36 Thursday, 10th November, 2016

10 Focussing on such developing cities will help them to achieve their loan growth target. In India, about 90% of the total demand for housing is constituted by demand for affordable homes. The average Ticket Size for FY16 for Housing Loans is 1.8mn and for Non Housing Loans is 0.9mn catering to the Tier II and Tier III cities. Multiple Levers to widen the margins Non-Housing Loans in high growth Phase: Sustained Advancement of Loan Book Composition of Loan Book Rs. in '000 Crs in % FY14 FY15 FY16 FY17E FY18E FY14 FY15 FY16 FY17E FY18E Housing Loans Non housing Loans (Source: Ventura Research) (Source: Ventura Research) Management has given guidance of Loan Book to grow from 106 bn to 135bn in FY17. We expect the proportion of non- housing loans to increase to 16% by FY18. Table below shows that the Non-Housing Loan interest rates are much higher than the Housing Loans; this will lift up the NIMs and profitability of CHFL. Cost of Loans Loans Interest Rates Housing Non Housing 8.85% onwards 11.25% onwards (Source: Company Website, Ventura Research) Page 10 of 36 Thursday, 10th November, 2016

11 FUNDING BASKET: Increased Focus on NCDs & CPS Key boost to margins % More NCDs and CPs in FY NHB Refinance Bank Loans NCDs & CP Deposits FY15 FY (Source : Annual Report, Ventura Research) With strong AAA ratings for borrowings/ncd and A1+ for CP programs, CFHL has reduced the borrowing cost and improved the margins and profitability by increasing the proportion of the Borrowings through money market instruments like NCDs and CP. CFHL has reduced dependence on Bank Loans from 54% in FY09 to 27% in FY16 which has substantially reduced the cost of borrowings. It was 8.75% by the end of FY16 down from 8.89% as on Dec 2015 and further intends to scale down the borrowing cost and strengthen the margin levels gradually. This will be backed by the combination of strict cost management and cost reduction programmes started in FY16 which resulted in high profits and margin levels. Page 11 of 36 Thursday, 10th November, 2016

12 Margin Expansion Expected FY15 FY16 FY17E FY18E Increase in proportion of high yielding loans % to total loans Housing 89% 88% 86% 84% Non Housing 11% 12% 14% 16% Increase focus on NCDs and CPs % to total borrowings NHB Refinance 44% 37% 34% 32% Bank Loans 31% 27% 19% 18% NCDs and CP 22% 34% 44% 48% Deposits 3% 2% 3% 2% NIM 2.54% 3.24% 3.53% 3.60% NIM Spread 1.64% 2.33% 2.70% 2.75% (Source: Annual Report,Ventura Research) Interest Income NIM and NIM Spread in % FY15 FY16 FY17E FY18E NIM Spread % NIM % (Source: Annual Report, Ventura Research) The borrowing cost going down and yield rising up due to increasing proportion of Non Housing Loans we expect NIMs to reach at the level of 3.6% by FY18. Page 12 of 36 Thursday, 10th November, 2016

13 Key Risks Risks Interest Rate Risks: The Company s profitability can be affected because of the mismatch in interest rates between its assets and liabilities Credit Risk: A sound credit risk policy and efficient pricing are challenges to avoid lower returns and consequent losses. Liquidity Risk : The inability to match the maturity of assets and liabilities on time might expose the Company to liquidity risk. Market Risk: Reduced industrial activity and slowdown could impact the demand of consumers and in-turn the business of the Company Operational Risk: Multiple operational risks associated during the normal course of operation pose a significant threat to overall financial position of the Company Mitigation Financial risks and their effectiveness are regularly reviewed by the Can Fin's Risk Management Committee In many cases modifications are made according to the demand of the suituations. Board of Directors and Audit Committee monitor the risk management systems and discuss during Board meetings about adequate steps needed for effective risk management CFHL conducts regular monitoring and assessment of the customer s risk ratings by evaluating (measured by RBIA) his/her profile Ensure that the financial experts can limit the challenges and perform adequate measures during times of need. There are several checks while it evaluates the credit worthiness of its customers when they borrow. CHFL have mobilised its funds optimally and within the tolerance level of Asset Liability Management (ALM). It also has a comfortable CAR of 20.69%. CHFL also regulated the borrowings from different banks, reducing concentration risk It has diversified their borrowing profile with Commercial Papers and Non Convertible Debentures (NCDs). This has not only helped get funds at lower interest rates, but has also helped them to manage the liquidity of funds with ease. A special team has been set up to assess market conditions, ensuring corrective and decisive steps are takenfor Eg.in FY16 RBI reduced its lending rate which resulted in a decline in base rates by several HFCs Can Fin reduced the lending rates upto 1.25% as on Oct7,2015 in order to gain market share in housing finance sector. Based on the needs and requirements of the customers Can Fin has structured the pricing of loans depending on the type of employment,i.e salaried /professional,selfemployed,etc. Offsite Transaction Monitoring System (OTMS) have been deployed to detect early warning signals on rear-to real-time basis to help tackling the issues immediately Systems & Procedures (S&P) Committee works helps to prevent frauds and other malpractices Every branch is frequently monitored with visits by executives to ensure optimum levels of efficiencies are maintained A dedicated team has been set up to constantly monitor the operational performances. (Source: Annual Report, Ventura Research) Page 13 of 36 Thursday, 10th November, 2016

14 Financial Outlook Business momentum to remain healthy In Q2FY17, 30new offices (10 branches and 20 Satellite offices) were added taking the network to 170. Increase in touch points will help CFHL to achieve their targets. In Q2FY17, the NCDs and CPs proportion increased from 37% (FY16) to 48% this Quarter. With the borrowing cost reducing and the high margin business i.e. Non- Housing Loans having a robust growth we expect CFHL s profit to grow at a CAGR (FY16-18E)-32%. With all the network expansion and hitting the right target segment with the support of Government initiatives, we expect CFHL to outperform and achieve their set goal. Quarterly Financial Performance (Rs. crores) Particulars Q2FY17 Q2FY16 FY16 FY15 Interest Income , Growth % Interest Expense NII NIM % Employee Benefit Expenses Depreciation & Amortization Other Expenses Provisions Total Fee & other Income PBT Tax PAT PAT Margin % (Source: Company Presentation, Ventura Research) The Interest income grew 26% YoY and NII grew 42% YoY. Provisioning decreased from Rs.75mn to Rs.60mn and profit grew by 56% YoY basis. This is the result of the changing borrowing mix as the proportion of NCDs/CPs increased as compared to last year. This is also reflected in the NIMs expansion. We expect this trend of expansion to continue. Page 14 of 36 Thursday, 10th November, 2016

15 Valuation We expect CFHL to deliver PAT CAGR of 35% over FY16-18E. At CMP of 1,705 the stock is trading at 4.3x and 3.5x its estimated book value for FY17 and FY18 which is attractively valued considering the valuations of its peers. P/BV and RoE 4.50 ROE % Apr-14 1-Apr-15 1-Apr-16 25% 20% 15% 10% 5% 0% P/BV ROE (Source : NSE,Company Presentation, Ventura Research) We note that CFHL valuation has increased from 0.6x book value in April 14 to 4.2x book value by September 16. This was driven by consistent improvement in ROE. By end of FY16, Can Fin has 18% ROE and we expect further improvement to 21.8% by end of FY18. We think this would support the existing valuation. Page 15 of 36 Thursday, 10th November, 2016

16 1-Apr-14 1-Jun-14 1-Aug-14 1-Oct-14 1-Dec-14 1-Feb-15 1-Apr-15 1-Jun-15 1-Aug-15 1-Oct-15 1-Dec-15 1-Feb-16 1-Apr-16 1-Jun-16 1-Aug-16 Share Price and P/ABV 1,800 1,600 1,400 1,200 1, CMP P/ABV (Source : NSE,Company Presentation, Ventura Research) We arrive our price target of 2175 by applying 4x multiple to expected adjusted book value of 544 at end of Sept 18. Share Price and P/E 1,600 1,400 1,200 1, Aug-13 1-Aug-14 1-Aug-15 PE CMP PE Multiple (Source: NSE,Ventura Research) Page 16 of 36 Thursday, 10th November, 2016

17 We note that CHFL traded between 10-15x forward PE till March 16. It has seen a sharp re-rating in the past few months and trades near 20x now. This re-rating could be due to strong performance in 1H FY17 and announcement of intention of increasing loan book to 350 bn by FY20. Attractive Valuations despite High Growth (Source: Ventura Research) Page 17 of 36 Thursday, 10th November, 2016

18 Peer Comparison for financial performance with estimates Year Interest Income NII PAT EPS NIIM P/E P/BV IBHFL ,418 27,110 23, % E 1,01,819 33,643 28, % E 1,28,996 44,614 35, % Can Fin Homes ,829 3,009 1, % E 13,813 4,276 2, % E 17,758 5,581 2, % DHFL ,102 18,218 7, % E 59,836 22,081 9, % E 73,118 30,137 13, % LIC HFC ,22,509 29,441 16, % E 1,40,677 35,881 18, % E 1,62,431 41,810 22, % Repco ,521 3,035 1, % E 10,549 3,683 1, % E 13,321 4,766 2, % (Source: Annual Report, Ventura Research) Page 18 of 36 Thursday, 10th November, 2016

19 Financials and Projections Y/E March (` crore) FY15 FY16 FY17E FY18E Y/E March (` crore) FY15 FY16 FY17E FY18E Income Statement Ratio Analysis Interest Income , , ,716.8 Efficiency Ratio (%) Interest Expense ,158.7 Int Expended / Int Earned Net Interest Income Int Income / Total Funds YoY change (%) NII / Total Income Fee & other Income Other Inc. / Total Income Total Net Income Ope. Exp. / Total Income Total Operating Expenses Net Profit / Total Funds Pre Provision profit Borrwings / Loans O/s YoY change (%) Provisions NIM Profit Before Tax YoY change (%) Solvency Taxes Gross NPA (Rs. Cr) Net profit Net NPA (Rs. Cr) YoY change (%) Gross NPA (%) Net NPA (%) Balance Sheet Capital Adequacy Ratio (%) Fixed Assets Non Current Investments Long Term Loans and Advances 8, , , ,398.1 Short Term Loans and Advances Per Share Data (`) Other Current Assets EPS Total Assets 8, , , ,557.7 Dividend Per Share Share App Money Pending Allot Book Value Deferred tax Liabilities Provisions Short Term Borrowings 1, , , ,193.9 Valuation Ratio Long Term Borrowings 5, , , ,443.8 Price/Earnings (x) Other Liability , , ,250.0 Price/Book Value (x) Equity Price/Adj.Book Value (x) Reserves , ,242.5 Total Liabilities 8, , , ,557.7 Return Ratio RoAA (%) Dupont Analysis RoAE (%) % of Average Assets Net Interest Income Growth Ratio (%) Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit Taxes Deposits Avg.Assets / Avg.Equity (x) Advances Page 19 of 36 Thursday, 10th November, 2016

20 Housing Finance Sector in India Why invest in this sector? Housing is a basic human need, but rapid urbanization, sub-standard construction, and lack of finance contribute to the global crisis in housing, creating one of the biggest challenges in emerging markets. According to IFC, the demand for low-income housing accounts for as much as 90 percent of all demand for housing worldwide. Yet in developing countries, only 7 percent of adults have an outstanding loan to purchase a home, and only 5 percent have a loan to build, expand, or renovate their home. Furthermore, in many markets, poor and low-income groups have little or no means of financing housing, even improvements and repairs. Investments in housing finance have economic multiplier effects that lead to more jobs, improved health and education. At the same time, access to housing and better living standards result in greater productivity and boost shared prosperity. What can Housing for all by 2022 do to Indian housing sector? The commitment to have housing for all by 2022 is the vision of Indian government, and realising this dream can be a step towards building a brighter India. According to KPMG, implications of this vision are By 2022, India needs to develop about 110 mn housing units Investments of more than USD2 trillion or about USD250 to 260 billion annual investment until 2022 Investments will need to grow at a CAGR of 12 to 13 per cent (unadjusted for inflation) in per cent of the housing needs till 2022 would be concentrated in nine states. These states are Uttar Pradesh, Bihar, Maharashtra, West Bengal, Madhya Pradesh, Andhra Pradesh (including Telangana), Rajasthan, Tamil Nadu, and Karnataka Urban housing will account for about 85 to 90 per cent of the total investments; the focus should be on affordable urban houses, which is 70 per cent of the total urban housing requirement. KPMG believes that though housing deficit is much wider in rural areas compared to urban areas, it requires only a small portion of total investments envisaged till 2022, which can be meted out without much difficulty. About 1.7 to 2.0 lakh hectare of land is expected to be required to fulfil urban housing need by Page 20 of 36 Thursday, 10th November, 2016

21 Housing demand scenario in India Why buying house is prudent investment? Rental Yield v/s Housing Loan Cost 5 4 In % Rental Yield Effective Interest Rate on Housing Loans (Source: India bulls Q1FY17 Presentation, Ventura Research) The most important reason to buy a house today is the low Difference between rental yield and effective housing loan interest rate. It is only 0.9% p.a. For only Rs.1,800 per month more, a house costing Rs 3 Mn can be purchased instead of renting it a tremendous incentive to own a house and create real assets Effective housing loan rate expected to slip below rental yield by FY18 unleashing demand Tepid property price appreciation combined with wage inflation pushing up affordability Overview of Housing Finance Industry In India, the housing industry is recognised as having an important impact on the country s development, civic life and human capital formation. India s economic growth, coupled with favourable structural factors, such as: Under penetration of the mortgage market, Page 21 of 36 Thursday, 10th November, 2016

22 The large gap between housing demand and supply, Improved affordability as a result of tax incentives, The encouraging regulatory environment and Positive demographic trends, This is expected to fuel continued growth in the housing finance market. The following graph shows the growth of total outstanding housing loans for banks and HFCs from FY11 to FY18: Trend in Total Outstanding Housing Loans Rs. in trillions FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E HFC Banks (Source: CRISIL Report, Ventura Research) CRISIL expects housing loan disbursements to have grown at a five-year CAGR of 19-21% to reach Rs.8.30 trillion by FY20, aided by mortgage penetration, higher average ticket sizes and demand for affordable housing Page 22 of 36 Thursday, 10th November, 2016

23 Growth in Total Housing Finance Disbursements 10,000 8,000 6,000 4,000 2,000 - Rs in bn 8,303 (24% CAGR) 522 (15% CAGR) 990 (18% CAGR) 1,762 (19.21% CAGR) 3,302 FY04E FY07E FY11E FY15E FY20E Loan Disbursement (Source: CRISIL Report, Ventura Research) Growth Momentum: Trends in Residential Real Estate The real estate sector in India at an inflection point, with sales in the top six residential markets showing a strong positive uptake in 2016 after a prolonged slowdown Mumbai residential sales up YoY by 23% for H1 CY 2016 Bangalore residential sales up YoY by 18% for H1 CY % y-o-y growth in home loan disbursals in Gujarat Private equity inflow into the sector has crossed 2007 levels in first five months of 2016; expected to cross previous high of 2008 Real estate developers seeing strong pickup in sales. Some examples: o Godrej Properties has sold all the flats in phase I of its project The Trees 93% of this within one month of launch o Mahindra Lifespace sold 60% of its units in Mahindra Windchimes within a month of its launch; and also sold 60% of its inventory in Vivante with the 700 sq.ft. Apartments completely sold off o Kotak Mahindra's private equity arm raised Rs 16 Bn to invest in residential projects over the next 3-4 years Affordable segment continued to maintain the largest share of total residential sales with more than 70% of the units sold in the affordable housing segment. (Source: India bulls Q1FY17 Presentation, Ventura Research) Page 23 of 36 Thursday, 10th November, 2016

24 Growth Momentum: Trends in Commercial Real Estate Office space demand in the first half of CY 2016 increased by 12% growth YoY across top 6 cities in India. Office space leasing in the top 7 cities of India is up by 18% YoY in CY2015 Absorption of 17 Mn sq.ft. during H1 CY 2016 o Mumbai Metropolitan Region experienced a growth of 50% YoY in the commercial space in H1 CY 2016 o Hyderabad reported the highest growth of 91% in the commercial real estate o Demand driven by IT / ITeS recorded over 50% of the total leasing activities Office space vacancy is at a 5-year low. Office space vacancy in metros has slipped below 10% Driven by real demand as corporates implement growth plans As a rule of thumb, 100 sq.ft. Of office space requires almost 1,000 sq.ft. of residential space Leasing activity is the highest in suburban and peripheral localities, which coincide with availability of affordable housing (Source: India bulls Q1FY17 Presentation, Ventura Research) Key Growth Drivers Low mortgage penetration and housing shortage Mortgage Penetration As a % of GDP (Source: CRISIL Report, Ventura Research) Page 24 of 36 Thursday, 10th November, 2016

25 The Indian mortgage industry is expected to have grown by a CAGR of 19% from FY12 to FY15. India's housing finance market still remains under penetrated in comparison to many advanced and emerging economies, evidenced by its low mortgage-to-gdp ratio. India s low mortgage-to-gdp ratio is a result of followings Shortage of housing supply, Pre-existing regulatory restrictions. There have been structural changes in India in recent years which are expected to continue to benefit the housing finance market. Urbanisation Finance Penetration in Rural and Urban Areas In % FY09 E FY10 E FY11 E FY12 E FY13 E FY14 E FY15 E FY20 E Rural Urban (Source: CRISIL Report, Ventura Research) In urban areas, less than 50% houses will be bought by taking housing loans even in FY20 while in rural areas only 10% houses will be bought by taking housing loans. Urbanisation is expected to accelerate with the urban population projected to grow at a CAGR of % from FY15 to FY21. This increase in urbanisation has affected housing demand by reducing the area per household while increasing the number of nuclear families and, therefore, the number of households seeking housing and housing finance. To meet this demand, the government has implemented its affordable housing initiatives, which provide for the construction of new houses and availability of home loans in cities Page 25 of 36 Thursday, 10th November, 2016

26 Slowing average ticket size growth Average LTV Ratio of Top 13 Cities In % FY10 FY15E FY20E (Source: CRISIL Report, Ventura Research) Rising gross income levels and declining interest rates that lower the equated monthly instalments on home loans, will render borrowers eligible for higher loan amounts. This will, in turn, enable the buyer to purchase a higher priced home or increase the loan-to-value ( LTV ) on the loan, contributing to an increase in the average ticket size ( ATS ) of loan disbursements. (Source: CRISIL Report, Ventura Research) Tax benefits Under Section 80C of the Income Tax Act, 1961, an individual is eligible to claim the deduction of the payments made towards repayment of an amount borrowed for the purpose of purchasing or constructing a residential house. Under Section 24(b) of the Income Tax Act, one can claim a deduction for the amount of interest paid on the capital borrowed for the purpose of the acquisition, construction, repair and reconstruction of a property. Tax Incentive for Affordable Housing: Effective tax rate on housing loans for this segment has reduced to 4% now from 12% in This will encourage more borrowers to buy houses. Page 26 of 36 Thursday, 10th November, 2016

27 Tax Incentive for Affordable Housing Particular (inlakhs) FY16 FY10 FY00 Loan amount Nominal Interest Rate (%) 9.4% 9.3% 13.3% Deduction allowed on interest repayment* Deduction allowed on principal repayment# Tax Rate applicable 34.6% 30.9% 34.5% Tenure (Yrs.) Total amount paid per year Interest component Principal component Tax amount saved Effective interest paid on housing loan Effective interest rate on housing loan 4.0% 6.0% 11.9% (Source: CRISIL Report & India bulls Q1FY17 Presentation, Ventura Research) In budget for FY17 government introduced 100% tax exemption on profits from building affordable housing. This will attract organized developers and increase supply. Service tax exemption on construction of affordable housing will lead to reduction in prices, increasing affordability. Government Implemented Schemes Over the past few years, the Government of India (GoI) has introduced various national policies with the general aim of reinforcing the primacy of the housing sector. These are: Smart Cities: GOI has in place a development plan which will cover 100 cities between 2016 to 2020, which will include improvement, city renewal, city extension (Source: Ministry of Urban Development (Government of India) - Smart City Mission Transform-nation Mission Statement & Guidelines). Housing for all by 2022: GOI launched the programme in June 2015, with the aim of providing 20 million new housing units in 500 towns and cities over the next seven years. The programme was set up to promote affordable housing for the Indian population through partnerships with entities in the private sector. Real Estate (Regulatory & Development) Act, 2016 will lead to a structured, transparent and disciplined sector. This will increase buyers interest in the sector as they are likely to get a fair deal when purchasing property. Page 27 of 36 Thursday, 10th November, 2016

28 7 th Pay Commission Annual payout to 10 Mn government employees to go up by Rs 1 Tn per annum. Increased disposable income will have positive impact on the housing sector. This is likely to start in FY17 but could be a multi-year story as 7 th PC has increased salary for entry level jobs as well. (Source: India bulls Q1FY17 Presentation, Ventura Research) Population growth and changes in demographics As of July 2015, India was home to more than 1.25 billion people (an estimated million households Vs million households in 2004) and the median age of its population was below 28 years of age (Source: World Factbook). Population growth and changing demographics, such as age mix, increasing trends of nuclear households, continuous urbanisation, income growth and increasing penetration of finance, have contributed to the growth in the Indian housing market, especially in urban areas. (Source: NHB Report) Population growth is primarily occurring in younger age brackets, which will lead to a significant increase in the working population, and subsequently to a greater demand for housing. (Source: CRISIL Report, Ventura Research) Housing loan industry key players and who will win in the long term? Key Market Participants HFC vs Banks in % 60 Market Share of HFCs vs Banks FY09E FY11E FY15E FY17E FY20E Bank HFC (Source: CRISIL Report, Ventura Research) Page 28 of 36 Thursday, 10th November, 2016

29 HFCs have steadily gained housing finance market share from banks, having increased their share from 31% in FY12 to 37% in FY15. HFCs are able to gain market share due to better access to customers in nonmetro cities, their strong origination skills, focused approach and customer service orientation. Small HFCs vs Mid-size HFCs CRISIL predicts mid-size HFCs (like GICHF) (those with total outstanding retail housing loans of less than Rs. 300billion as of March 2015) will record a CAGR of 27-29% from FY16 to FY17. Large HFCs will grow at a slower CAGR of % during the same period. Mid-size HFCs are expected to grow at a higher rate because of their focus on affordable housing projects and their relatively higher concentration in tier-ii and smaller cities, where growth has been higher over FY15. Share of Mid-sized HFCs to Increase in % FY10E FY12E FY15E FY17E Large HFC Mid Size HFC (Source: CRISIL Report, Ventura Research) Page 29 of 36 Thursday, 10th November, 2016

30 Quality of Assets NPAs to Decline in the Next Two Years in % FY11E FY12E FY13E FY14E FY15E FY16E FY17E Industry NPA (Source: CRISIL Report, Ventura Research) The distinguishing feature of the housing loan portfolio in India is the low NPA level, which is partially the result of financiers adequate appraisal systems and effective recovery mechanisms, as well as greater information availability. NPAs are likely to decline marginally in FY 2016 and 2017 owing to economic recovery, lower interest rates, better control, system checks, follow-ups, and the expected improvement of job. Security Segmental analysis indicates that the GNPAs in the non-individual portfolio are higher than in the individual portfolio GNPA (%) Comparison between Banks and HFCs in % FY11 FY12 FY13 FY14 FY15 FY16 Banks HFC (Source: India bulls Q1FY17 Presentation, Ventura Research) Page 30 of 36 Thursday, 10th November, 2016

31 HFCs due to their singular focus and single-product specialized appraisal skills have low NPAs. HFC NPAs have been declining even through the period of economic stagflation between 2008 and 2015 Sources of Borrowing Banks have traditionally been the dominant sources of funding for HFCs, as lending to HFCs qualifies for priority sector lending, subject to certain conditions. Recently, high base rates of banks resulting in higher costs of bank borrowings have driven HFCs to focus on market borrowings. The proportion of bank borrowings therefore declined from approximately 36.00% for FY12 to approximately 30.00% for FY14, while market borrowings in the form of bonds and debentures increased from approximately 35.00% to approximately 40.00% during the same period. (Source: NHB Report) The NHB provides refinance for certain qualifying loans at significantly reduced rates to certain qualifying HFCs. In order to access NHB refinance, HFCs are required to lend to certain select customers in the low and middle income segments in rural and urban parts of India HFC borrowings for FY12 to FY in % NHB Foreign Govt or Citizen Banks Debentures Public Deposits Others FY12 FY13 FY14 (Source: CRISIL Report, Ventura Research) Page 31 of 36 Thursday, 10th November, 2016

32 Profitability of HFCs Overall Profitability of HFCs in % FY14 FY15 FY16E FY17E in % Yields on funds Cost of funds Net spread (RHS) (Source: CRISIL Report, Ventura Research) The RBI decreased the repo rate by 125 bps cumulatively in 2015, and further reduced it by 25 bps in April 2016, which will lower banks cost of funds. Moreover, as market interest rates decline, HFCs are likely to be able to raise funds through non-convertible debentures, commercial papers and other instruments at a lower cost. CRISIL expects the net profit margin for HFCs to be in the range of 1.80% to 2.00% in the near future, as the decline in the cost of funds will more than offset any fall in yields. Page 32 of 36 Thursday, 10th November, 2016

33 Comparison of HFC s Profitability Analysis of Large HFCs In % In % FY14 FY15 FY16E FY17E Yields on funds Cost of Net funds spread (RHS) Profitability Analysis of Mid- and Small-size HFCs In % In % FY14 FY15 FY16E FY17E Yields on funds Cost of Net funds spread (RHS) (Source: Crisil report, Ventura Research) (Source: Crisil Report,Ventura Research) Mid- and small-size HFCs (with a retail mortgage loan size of less than Rs billion) have been gaining market share, which has risen to 22% as of March 2015, from 14% in March CRISIL expects this figure to reach 25% by March This is primarily due to the variation of business dynamics between the mid- to small-size HFCs and the large HFCs. Regulatory Framework The Indian housing market is governed by a complex legislative framework, which pertains to property developments, the transfer of property, and the relationship between tenant and landlord. Along with relevant broader statutory requirements, HFCs and banks are concerned with specific regulations imposed by their respective regulators, NHB (National Housing Bank) and RBI (Reserve Bank of India) respectively. Page 33 of 36 Thursday, 10th November, 2016

34 Comparision of regulations for Banks & HFC s Sr. No. Key Regulations Banks HFCs 1 Regulator Reserve Bank of India National Housing Bank 2 Capital adequacy ratio 9.0% 12.0% 50.0% for loans up to Rs. 35.0% for loans up to Rs million; LTV cap 90.0% million; LTV cap 80.0% 3 Risk weight on housing loan 50.0% for loans between Rs million; LTV cap 80.0% 50.0% for loans between Rs million; LTV cap 90.0% Risk weight in commercial real estate loan Risk weight on commercial real estate Residential Housing loan Need to maintain Cash Reserve Ratio Need to maintain statutory liquidity ratio 75.0% for loans above Rs million; LTV cap 75.0% 100.0% 100.0% 75.0% 75.0% 4.0% of net time and demand deposits 21.5% of net time and demand 75.0% for loans above Rs million; LTV cap 75.0% No 12.5% of net time and demand deposits 8 NPA Recognition 9 Standard Asset Provisions 90 Days Past Due 90 Days Past Due Housing Loans 0.4% 0.4% Others % 1% (Source: CRISIL Report & India bulls Q1FY17 Presentation, Ventura Research) Page 34 of 36 Thursday, 10th November, 2016

35 How to evaluate housing finance business? Variable Comment Current industry average NIM (Net interest margin) GNPA (Gross Non-Performing Assets) Interest spread PCR (provision to coverage ratio) Housing loans as % of total Loans CAR Capital Adequacy Ratio Higher the better Non-Performing Assets before making provision Difference between Interest income and interest expense Tells about how much provisions has been made with respect to GNPA HFCs are increasingly using Loan against Property to boost their profits. These loans can be used for any purpose and are more risky for HFCs. Higher the better (Source: Ventura Securities, CRISIL Report & India bulls Q1FY17 Presentation, Ventura Research) Bank 7.6%, HFC 1.1% large HFC 1.8%; Small HFC 2.6% Ideally it should be 100% Ideally being a housing finance company it should be 100% but apart from GICHSG no other housing company has 100% exposure to housing loans. Most companies are having CAR more than NHB requirements Page 35 of 36 Thursday, 10th November, 2016

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