Housing Finance Sector

04 Oct, 2010 Housing Finance Sector Investment Thesis Housing industry has witnessed robust growth in the past few years owing to continuous growth in population, migration towards urban areas, growing income levels, rise in nuclear families and easy availability of finance. The 11th Five-Year Plan has estimated an urban housing shortage of 24.7 million units with 99 % of the shortage pertaining to the economically weaker sections and the lower income groups. We believe the domestic small & mid-segment housing market would drive growth going forward. Initiatives taken by NHB (National Housing Bank) are expected to boost growth of low to medium cost home segment. Availability of housing finance is one of the major factors driving demand in the housing industry. Although the banks will continue to dominate the housing finance space on account of their low cost advantage, we believe that Housing finance companies do score in terms of better credit assessment skills, better operational efficiency and lower regulatory requirements. Therefore we believe that housing finance companies focused on providing housing finance to the low and middleincome segment are expected to be beneficiaries of the rising demand. We initiate coverage on Gruh Finance and GIC housing finance ltd. Gruh Finance Ltd: GRUH Finance is a housing finance company with a market share of 1% in the housing finance market. The company provides housing finance to customers in deeper geographical pockets in semi-urban and rural areas. We expect Gruh to register a 19% growth in its loan book during FY10-12. Going forward, a shift in customer mix towards self-employed segment will result in higher yields for the company. However since the income stream of such borrowers is more vulnerable to economic cycles, this poses a risk to the asset quality of the company. We expect net profits to register a 20.6% CAGR during FY10-12. The stock has historically traded at high valuations with the median P/ABV of 2.5x. The stock price has witnessed a significant run up recently. At CMP of `419, the stock trades at PBV of 3.9x its FY12 book value of `108.2 and PE of 14.5x its EPS of `28.9 for FY12, which is expensive in our view. We initiate coverage on Gruh Finance Ltd with a SELL recommendation and target of `379 (3.5x PABV of `108.2 of FY12). GIC housing Finance Ltd: GIC Housing Finance Limited (GIC) was promoted December 1989 by General Insurance Corporation of India and its erstwhile subsidiaries. The target customers for GIC are middle and lower middle-income borrowers. With strong demand and branch expansion, we expect GIC to register an 18.3% growth in its loan book during FY10-12. Also since majority of the borrowings are from banks, we expect the policy measures by RBI to have an impact on the cost of funds, which in turn would put pressures on margins. We expect net profits to register a 15.4% CAGR during FY10-12. At CMP of `146, the stock trades at PBV of 1.8x its FY12 book value of `80.7 and PE of 8.8x its EPS of `16.6 for FY12. We therefore initiate coverage on GIC housing Finance Ltd with a BUY recommendation and target of `161 (2.0x PABV of `80.7 of FY12). Analyst Deepti Chauhan research@acm.co.in Tel: (022) 2858 3408 Housing Finance Sector ACMIIL

Demand drivers for housing demand Increasing population and favourable demographics Population growth has a direct bearing on the requirement for housing units. The total population of India is estimated to exceed 1,200 million in the year 2012-13 as compared to roughly 1,100 million in the year 2006-07. Further, in the current scenario, population growth is actually occurring in the younger age brackets. 54% of the population is below 25 years of age. This translates into a tremendous increase in working population and higher disposable income thereby translating into greater demand for housing. Urbanisation According to the United Nations Population Fund (UNFPA), India is getting urbanized at a faster rate than the rest of the world and by 2030 more than 40.7 per cent of the country s population would be living in urban areas. According to Census of India 2001 estimates, 30% of the total population of India would be living in urban areas by 2011. The number of cities with one million plus population is further expected to increase from 5 in 2001 to 70 by 2025. With increasing urbanisation, housing demand is expected to increase as on one hand urbanisation reduces the area per household and on the other hand it leads to an increasing need for more nuclear families, leading to the formation of a greater number of households. Nuclearisation Nuclearisation refers to the formation of nuclear families from joint families. Nuclearisation is primarily driven by employment-related migration and the changing social structure could also be a factor. This migration is predominantly to urban areas. Nuclearisation, like urbanisation, also has twin impact. It reduces the area per household, but increases overall household formation, thereby increasing the demand for housing units. Increasing Income levels and affordability Indian households are entering into higher income brackets leading to improving affordability despite increased in property prices. The per capita disposable income has grown manifold from `15,881 in FY01 to `37,490 in FY09. According to the data provided by HDFC Ltd the affordability has increased four-fold over last fifteen years as rise in salary levels have kept pace with the increase in property prices. Low interest rates and greater availability of housing finance has further improved the overall affordability factor. Source: RBI Housing Finance Sector ACMIIL

Housing finance Availability of housing finance is one of the major factors driving demand in the housing industry. This coupled with lower interest rates offered by banks and financial institutions in the past have supported housing demand in the past. Banks dominate the space with 63% market share in housing loans with Housing Finance Companies (HFC) accounting for the rest. Tax benefits Tax benefits for borrowers (Individuals): Tax deduction is available for home loans under two sections of the Income Tax Act of India (excluding home loans from private sources such as friends, family, etc). As per Section 24(b) of the Income Tax Act, 1961 annual interest payments up to ` 150,000 on housing loans can be claimed as a deduction from taxable income. As per Section 80C, read with section 80 CCE of the Income Tax Act, 1961 the principal repayment up to `100, 000 on home loan is allowed as a deduction from gross total income. While corporate borrowers do not get any special tax incentives, deduction of interest paid on a loan is allowed as a normal deduction for tax purposes. Trends in housing Demand Housing Shortages in India However with continuous growth in population, migration towards urban areas, rise in nuclear families, growing income levels, India continue to face housing shortages. As on FY10, the housing shortage in India is estimated at 79.5 million units. Rural 2005 2008 2010 Million Units Immediate Shortage 30.1 26.7 26.0 Total Shortage 62.0 59.4 59.0 Urban 2005 2008 2010 Immediate Shortage 2.6 2.6 3.2 Total Shortage 18.4 19.3 20.5 Immediate Shortage= (Number of households-housing stock-obsolete stock-upgradation of kutcha houses)total Shortage= (Immediate shortage-congested houses) Source: CRISIL As appears from the table the housing shortage is increasing in the urban areas while it is declining in the rural areas. This is mainly on account of migration towards urban areas and increasing trend of nuclear families. State wise shortages of Housing-Tier II and III cities The state wise data on housing shortages reveals that the maximum shortage of housing is found in states of Uttar Pradesh, Tamil Nadu, Maharashtra and Madhya Pradesh. The construction activity in residential, commercial and retail segments of real estate, which until recently was focused on the four metros, is now spreading to Tier II & Tier III cities. This is mainly on account of saturation of metros and lower real estate prices & higher availability of space in Tier II and II cities. Further multinationals are expanding and setting up backend-processing units in smaller cities, which in turn is generating demand in these cities. Housing Finance Sector ACMIIL

Real Estate developers increasingly focusing on affordable housing The escalating cost of housing coupled with the current economic slowdown has forced developers to turn their attention from the affluent segment to the mass segment. The real estate developers have turned their attention to affordable housing catering to the lower and middle-income groups. According to prop equity research out of the 13 cities where it collects data, most of the cities have shown increased activities in the mid income segment. The report says that in the new launch category, a number of cities have shown movement towards the mid segment, which it attributes to the return of buyer s confidence in the residential project. Several real estate companies have launched affordable housing projects in Mumbai, NCR, and tier-i and tier-ii cities such as Pune, Hyderabad, Bangalore and Ahmedabad. Housing Finance Market Housing Finance continues to be dominated by a few large players As of March 2010, the total outstanding housing loan portfolio (includes Banks and Housing Finance Companies (HFCs)) was approx `.4700 billion. Banks dominate the space with 63% share with HFC accounting for the rest. HDFC is by far the largest player with nearly 21% share in the overall housing finance market. Source: Company Data, ACMIIL Research Changing Dynamics Source: Company Data, ACMIIL Research The home loan market was earlier dominated by housing finance companies (HFC) LIC and HDFC. However in 2002, banks entered into this segment. This increase in banks share has been the result of a steady deposit growth for banks, poor corporate credit off-take and higher demand in the mortgage loan segment. Due to their CASA advantage the banks were in a position to aggressively price their product, which enabled them to eat into the market share of these HFC s. From FY07 onwards however the banks became less aggressive and HFC managed to regain some of the lost market share in this segment from Banks. Housing Finance Sector ACMIIL

Competitive advantage of housing finance companies over banks Regulatory requirements less stringent for HFC s HFC Banks Capital Adequacy Ratio 12% 9% Statutory Liquidity ratio 15% 25% Cash Reserve Ratio 0% 6% Priority Lending Targets 0% 40% Diversified portfolio of banks Banks offer various products apart from home loans, which constitute 10% of the total credit and ~50% of the retail loans. Housing finance companies have an edge over the banks in terms of business focus and efficiency. The focused approach help HFCs to develop adequate knowledge about the market, customers etc. This in turn enables them to improve cost efficiencies and develop competencies enabling them to maintain lower NPAs. Source: RBI HFC s are geographically concentrated Concentration of credit HDFC+GRUH State % Dewan Housing Gujarat 24% Major presence in southern and western states Maharashtra 35% LICHF Present mostly in metros and 60% loans from Mumbai, Delhi, B a n g a l o r e, P u n e, Chennai, Hyderabad. GIC HF Over 80% of credit concentrated across west and South India. The geographical concentration of the housing finance companies suggests that these HFC s are scattered. While LICHF is present in metros, HDFC along with its subsidiary is focused on states of Gujarat and Maharashtra. Therefore the only competition, which these HFC face is from, banks. Traditionally the metropolis cities are dominated by the presence of multi-national banks and large PSU and private banks along with the Housing Finance companies. The Tier-II (semi-urban) cities have strong presence of public sector banks and Housing Finance companies and the rural segment is under the influence of co-operative banks and unorganized sector including moneylenders. Housing Finance Sector ACMIIL

Asset quality-hfc has better asset quality than Banks HFCs have maintained their credit quality better than banks. Salaried individuals account for a large proportion of the home loans of HFCs and loan to value is also lower. This along with the credit appraisal process has enabled the HFC to keep the asset quality under control. Source: RBI Improving market share of HFC. While the economic slowdown impacted the growth of housing sector in FY09, housing finance by banks was relatively more impacted as compared to the credit extended by Housing Finance Companies (HFCs). While credit by Banks to the housing sector grew by around 7% Y-o-Y at end FY09 in comparison to the nearly 12% growth exhibited in FY08, HFCs registered a robust performance with growth of 21% Y-o-Y compared to 29% growth registered in FY08. However FY10 saw revival in housing credit for banks, which registered 8% Y-o-Y growth. The HFC s witnessed a decline in growth to 19% mainly on account of the aggressive pricing schemes launched by banks in FY10. The HFC also launched similar schemes in order to compete with the banks. The market share of the HFC has improved from 29% in FY07 to 37% in FY10 while that of banks has declined. Trends in Housing Finance market Distribution of housing loans According to data from RBI, the southern and western regions account for the ~65% of the outstanding housing loans portfolio of banks. Also regional data further indicated that Maharashtra state account for the maximum share in the total housing loans portfolio of the Banks. Source: RBI Housing Finance Sector ACMIIL

Housing finance highly concentrated in Metros. Despite significant growth in the housing finance market, the percentage of housing loans to rural areas out of the total loans has reduced from 10% in FY01 to 7% in FY09. Whereas in metros the share has gone up from 39% in FY01 to 52% in FY09. This indicates that the housing finance needs of the rural population remain largely underserved. This could be mainly only on account of the high risk perception of the rural consumers and lower focus by the developers to cater to this segment. NHB initiatives for increasing housing finance to low-income households. One of the major hurdles to the development of low-cost housing on a large scale has been the lack of financing for the end buyer. To encourage flow of housing finance to low-income households, the National Housing Bank is examining the possibility of giving concessional refinance to housing finance companies catering to the finance needs of the low income households, within a year of commencement of operations. Normally, HFCs can tap NHB for refinance at concessional interest rates in respect of home loans, given by them only after their business stabilizes i.e. two to three years after kicking off operations. This will not only benefit the housing finance companies as funds will be available to them at concessional rate but would also encourage builders to construct housing for this segment. Low cost housing finance market Players focused on this segment include Dewan Housing finance, Gruh Finance and GIC housing finance The low cost housing finance market target individuals in the low and medium income segment where the average ticket size is in the range of `4-5 lacs. Niche presence-competitive advantage These players are largely present in Tier II and III cities, which enables them to compete with other established players in the market including banks and HFCs (LIC and HDFC) where the average ticket size is relatively higher and are largely present in metros and Tier I cities. This niche presence enables them to enjoy higher yields compared to the their peers. This further enables them to maintain higher net interest margins. Housing Finance Sector ACMIIL

Operational efficiency The players in the low cost housing market also face challenges reflected in high cost to income ratio. This is mainly on account of high employee cost as well as other administrative expenses of operating in these segments. Comfortable Asset quality The borrowers in this segment are those categorised into the mid income and low-income households. The income stream of such borrowers is relatively more vulnerable to economic cycles. Therefore the credit risk is higher. However lower loan to value ratio and strong credit appraisal process enabled the HFC s to keep the asset quality under control. Conclusion Housing industry has witnessed robust growth in the past few years owing to continuous growth in population, migration towards urban areas, growing income levels, rise in nuclear families and easy availability of finance. The 11th Five-Year Plan has estimated an urban housing shortage of 24.7 million units with 99 % of the shortage pertaining to the economically weaker sections and the lower income groups. We believe the domestic small & mid-segment housing market would drive growth going forward. Initiatives taken by NHB (National Housing Bank) are expected to boost growth of low to medium cost home segment. Availability of housing finance is one of the major factors driving demand in the housing industry. Housing Finance Sector ACMIIL

Although the banks will continue to dominate the housing finance space on account of their low cost advantage, we believe that Housing finance companies do score in terms of better credit assessment skills, better operational efficiency and lower regulatory requirements. Therefore we believe that housing finance companies focused on providing housing finance to the low and middle-income segment are expected to be beneficiaries of the rising demand. We initiate coverage on Gruh Finance and GIC housing finance ltd. Gruh Finance Ltd: GRUH Finance is a housing finance company with a market share of 1% in the housing finance market. The company provides housing finance to customers in deeper geographical pockets in semi-urban and rural areas. We expect Gruh to register a 19% growth in its loan book during FY10-12. Going forward, a shift in customer mix towards self-employed segment will result in higher yields for the company. However since the income stream of such borrowers is more vulnerable to economic cycles, this poses a risk to the asset quality of the company. We expect net profits to register a 20.6% CAGR during FY10-12. The stock has historically traded at high valuations with the median P/ABV of 2.5x. The stock price has witnessed a significant run up recently. At CMP of `419, the stock trades at PBV of 3.9x its FY12 book value of `108.2 and PE of 14.5x its EPS of `28.9 for FY12, which is expensive in our view. We initiate coverage on Gruh Finance Ltd with a SELL recommendation and target of `379 (3.5x PABV of `108.2 of FY12). GIC housing Finance Ltd: GIC Housing Finance Limited (GIC) was promoted December 1989 by General Insurance Corporation of India and its erstwhile subsidiaries. The target customers for GIC are middle and lower middle-income borrowers. With strong demand and branch expansion, we expect GIC to register an 18.3% growth in its loan book during FY10-12. Also since majority of the borrowings are from banks, we expect the policy measures by RBI to have an impact on the cost of funds, which in turn would put pressures on margins. We expect net profits to register a 15.4% CAGR during FY10-12. At CMP of `146, the stock trades at PBV of 1.8x its FY12 book value of `80.7 and PE of 8.8x its EPS of `16.6 for FY12. We therefore initiate coverage on GIC housing Finance Ltd with a BUY recommendation and target of `161 (2.0x PABV of `80.7 of FY12). Housing Finance Sector ACMIIL

04 Oct, 2010 GRUH Finance Ltd S E L L Key Data (`) CMP 419 Target Price 379 Key Data Bloomberg Code GRHF IN Reuters Code GRUH.BO BSE Code 511288 NSE Code GRUH Face Value (`) 10 Market Cap. (` Bn.) 15 52 Week High (`) 449 52 Week Low (`) 190 Avg. Daily Volume (6m) 86633 Shareholding % Promoters 61.1 Mutual Funds / Bank/ FI 3.5 Foreign Institutional Investors 10.5 Bodies Corporate/Individuals/others 24.8 Total 100 ` mn FY10 FY11E FY12E Net Interest Income 956.2 1,117.0 1,335.7 Operating Income 1,288.6 1,515.8 1,849.2 Net Profit 689.6 805.9 1,003.2 Net interest margins 4.2 4.1 4.2 EPS (`) 19.9 23.2 28.9 Book value (`) 76.2 90.5 108.2 Background GRUH Finance is a housing finance company with a market share of 1% in the housing finance market share is in terms of size of the loan book HDFC is the largest shareholder in GRUH with a stake of 61.4% as on March 2010. The company has its operations in seven states of India: Gujarat, Maharashtra, Karnataka, Madhya Pradesh, Chattisgarh, Tamil Nadu and Rajasthan. The Company endeavors to provide housing finance to customers in deeper geographical pockets in semi-urban and rural areas. Investment Rationale Robust disbursement growth: The loans assets have registered a growth of 17.8% CAGR during FY08-10. In terms of geographical diversification, the portfolio of GRUH is concentrated in the states of Gujarat and Maharashtra. The main strategy of the company is to penetrate into places that are avoided by large housing finance companies. Therefore the company has been able to carve its own niche in the housing finance sector. Going forward we expect Gruh to register a loan CAGR of 19.3% during FY10-12. However the share of salaried customers is declining on account of the focus of the Gruh to meet demand from the self employed segment. Since the income stream of such borrowers is relatively more vulnerable to economic cycles, the credit risk of the company is likely to increase on account of the relatively higher risks associated with these segments. Asset Quality likely to deteriorate: GRUH continues to maintain excess provisions resulting in zero net NPA position for the company as on March 2010. Going forward with the change in borrower profile on account of increased focus towards the self employed customers; the asset quality might get impacted. Any slippages in these segments could result in deterioration in the asset quality indicators. Spreads to be under pressure: Gruh reported NIM s of 4.2% in FY10. Going forward, as Gruh is focusing more on the higher yielding assessed income based lending for the self-employed segment, we believe that the yields will improve. However with tightening of policy rates, we expect the cost of funds to increase. We expect NIM s to decline to 4.1% in FY11 and thereafter improve to 4.2% in FY12. Valuation and recommendation We expect Gruh to register a 19% growth in its loan book during FY10-12. Going forward, a shift in customer mix towards self-employed segment will result in higher yields for the company. However since the income stream of such borrowers is more vulnerable to economic cycles, this poses a risk to the asset quality of the company. Since majority of the borrowings are from banks, we expect the policy measures by RBI to have an impact on the cost of funds, which in turn would put pressures on margins. We expect net profits to register a 20.6% CAGR during FY10-12. The stock has historically traded at high valuations with the median P/ABV of 2.5x. The stock price has witnessed a significant run up recently. At CMP of `419, the stock trades at PBV of 3.9x its FY12 book value of `108.2 and PE of 14.5x its EPS of `28.9 for FY12, which is expensive in our view. We therefore initiate coverage on Gruh Finance Ltd with a SELL recommendation and target of `379 (3.5x PABV of `108.2 of FY12). Housing Finance Sector ACMIIL 10

Network Gruh finance has 102 retail offices as on June 2010 across 7 states of the country. It has 34 offices in Gujarat, 30 offices in Maharashtra, 11 in Karnataka, 14 in Madhya Pradesh, 6 in Rajasthan, 4 in Chattisgarh and 3 in Tamil Nadu. The company has major presence in Western regions. Loan Assets The portfolio of GRUH is characterized by small ticket size loans in the rural and semi urban regions of western India. The loans assets have registered a growth of 17.8% CAGR during FY08-10. In terms of geographical diversification, the portfolio of GRUH is concentrated in the states of Gujarat and Maharashtra. These 2 states together contributed 72% of the incremental disbursements in FY10. Gruh has plans to increase disbursements from other regions through expansions in those states. Borrowers Profile Majority of the loans disbursed by Gruh are individual loans constituting 96% of the loan assets. Also as on FY10, ~56% of these loans are disbursed to salaried customers. However the share of salaried customers is declining on account of the focus of the Gruh to meet demand from the self employed segment. Within the self-employed segment, the company also considers the borrowing capacity of the borrower based on the assessed income. The proportion of such assessed income based book has gone up to 25% as on March 31, 2010 from 20% of total loan book as on March 31, 2009. A shift in customer mix towards self-employed segment has resulted in higher yields for the company. Nevertheless, the income stream of such borrowers is relatively more vulnerable to economic cycles. Therefore the credit risk of the company is likely to increase on account of the relatively higher risks associated with these segments. The ability of GRUH to maintain strict control over the asset quality in these segments would remain critical. Of the loan portfolio, 93% is floating, enabling flexibility to pass on increase in cost of funds. Going forward as well, the growth for the company is expected to come from relatively higher yielding assessed income based lending for the self-employed segment. We expect average yields on advances to increase from 12.2% in FY10 to 13.2% in FY12. Housing Finance Sector ACMIIL 11

Present in areas that are less competitive It has 102 branches a majority of these in areas where HDFC does not have a presence. The main strategy of the company is to penetrate into places that are avoided by large housing finance companies. Therefore the company has been able to carve its own niche in the housing finance sector. Borrowing Profile Majority of the funds for Gruh are sourced from NHB and banks. Earlier, the overall borrowings of GRUH were mainly constituted by bank borrowings. In 2008-09, the borrowing profile of the company witnessed a shift towards lower cost NHB refinance on account of tight liquidity conditions faced by the banks in September 2008 in addition to availability of funds from NHB at relatively lower rates of interest. Consequently, NHB refinance constituted about 48% of the total borrowings of GRUH as on March 31, 2009 as compared to 11% in the previous year. As on FY10, NHB and bank borrowings constitute 80% of the total borrowings. In a rising interest rate environment, we do expect this to have an impact on our cost of funds, however the ability to pass on the same to the customers will provide cushion to the spreads. Asset Quality The Gross NPA for the company witnessed some deterioration in March 2010 as it increased from 1% in FY09 to 1.20% in FY10. GRUH continues to maintain excess provisions resulting in zero net NPA position for the company as on March 2010. Going forward with the change in borrower profile on account of increased focus towards the self employed customers; the asset quality might get impacted. Any Housing Finance Sector ACMIIL 12

slippages in these segments could result in deterioration in the asset quality indicators. However, the strong monitoring and recovery systems of the company are expected to mitigate the risk to some extent. Capital Adequacy The capital adequacy ratio stands at 16.55% as on March 2010 as against the minimum requirement of 12% stipulated y NHB. Net Interest margins Gruh reported NIM s of 4.2% in FY10. Going forward, as Gruh is focusing more on the higher yielding assessed income based lending for the self-employed segment, we believe that the yields will improve. Further with tightening of policy rates, we expect the cost of funds to increase. However we believe that since 93% of the existing loan portfolio is floating, this provides flexibility to pass on increase in cost of funds. We expect NIM s of 4.1% in FY11 and 4.2% in FY12. Concerns Asset liability Mismatch: Gruh Finance loan book has an average maturity of 12 years as compared to liability profile of 5 years. This exposes the company to interest rate risks. The company is taking efforts by increase access to longer tenure NHB loans and reducing dependence on short-term borrowings. Concentration of revenues: The loan book for Gruh is excessively dependent on two states namely Gujarat and Maharashtra, with ~ 70% exposure. This concentration along with slower expansion can pose risk to the company s revenues. Valuation and recommendation We expect Gruh to register a 19% growth in its loan book during FY10-12. Going forward, a shift in customer mix towards self-employed segment will result in higher yields for the company. However since the income stream of such borrowers is more vulnerable to economic cycles, this poses a risk to the asset quality of the company. Since majority of the borrowings are from banks, we expect the policy measures by RBI to have an impact on the cost of funds, which in turn would put pressures on margins. We expect net profits to register a 20.6% CAGR during FY10-12. The stock has historically traded at high valuations with the median P/ABV of 2.5x. The stock price has witnessed a significant run up recently. At CMP of `419, the stock trades at PBV of 3.9x its FY12 book value of `108.2 and PE of 14.5x its EPS of `28.9 for FY12, which is expensive in our view. We therefore initiate coverage on Gruh Finance Ltd with a SELL recommendation and target of `379 (3.5x PABV of `108.2 of FY12). Housing Finance Sector ACMIIL 13

Earnings Model (` Mn) Particulars FY09 FY10 FY11E FY12E Interest Income 2,618.1 2,758.2 3,409.3 4,233.3 Interest expended 2,011.8 1,802.0 2,292.2 2,897.6 Net Interest Income 606.3 956.2 1,117.0 1,335.7 Growth % -8.7 57.7 16.8 19.6 Other Income 334.7 332.4 398.8 513.5 Operating Income 940.9 1,288.6 1,515.8 1,849.2 Operating Expenses 222.7 281.0 306.9 354.8 Pre Provisioning Profits 718.3 1,007.6 1,208.9 1,494.4 Provisions & contingencies 22.5 63.4 105.0 120.2 Profit before Taxes 695.8 944.3 1,103.9 1,374.2 Provisions for taxes 193.0 254.7 298.1 371.0 Net Profits 502.8 689.6 805.9 1,003.2 Growth % 18.7 37.2 16.9 24.5 Sources and Application of Funds (` Mn) Particulars FY09 FY10 FY11E FY12E Liabilities Capital 346.5 347.3 347.3 347.3 Reserves & Surplus 1,862.2 2,299.0 2,793.7 3,409.6 Networth 2,208.7 2,646.3 3,141.0 3,756.8 Borrowings 22,451.5 23,231.2 28,286.6 34,153.0 Total 24,660.2 25,877.5 31,427.6 37,909.8 Assets Fixed assets 91.3 95.1 108.6 123.7 Investments 127.8 327.2 442.0 533.6 Loans 20,856.1 24,537.0 29,312.5 34,921.3 Net current Assets 3,533.9 824.7 1,471.1 2,237.9 Deferred Tax assets 51.2 93.4 93.4 93.4 Total 24,660.2 25,877.5 31,427.6 37,909.9 Housing Finance Sector ACMIIL 14

Key Ratios FY09 FY10 FY11E FY12E Spreads Cost of Borrowings 10.0% 7.9% 8.9% 9.3% Yield on Advances 13.6% 12.2% 12.7% 13.2% Net Interest Income 3.6% 4.3% 3.8% 3.9% Net interest margins 3.1% 4.2% 4.1% 4.2% Profitability ratios Return On Average Assets (ROAA) 2.3% 2.7% 2.8% 2.9% Return On Average Net worth (ROANW) 24.5% 28.4% 27.9% 29.1% Balance sheet ratios Loan to borrowings ratio (%) 92.9 105.6 103.6 102.2 Debt/Equity Ratio (Times) 10.2 8.8 9.0 9.1 Growth Ratios Borrowings 26.6% 3.5% 21.8% 20.7% Loans 17.9% 17.6% 19.5% 19.1% Networth 16.1% 19.8% 18.7% 19.6% NII Growth 15.1% 35.7% 17.0% 22.2% EPS 18.7% 36.9% 16.9% 24.5% Valuation ratios EPS (`.) 14.5 19.9 23.2 28.9 Adjusted Book value (`) 63.7 76.2 90.5 108.2 P/E (X) 28.9 21.1 18.1 14.5 P/ABV (X) 6.6 5.5 4.6 3.9 Dividend per share 6.3 8.5 10.0 12.4 Dividend yield 1.5 2.0 2.4 3.0 Housing Finance Sector ACMIIL 15

B U Y 04 Oct, 2010 Key Data (`) CMP 146 Target Price 161 Key Data Bloomberg Code GICHF IN Reuters Code GICH.BO BSE Code 511676 NSE Code GICHSGFIN Face Value (`) 10 Market Cap. (` Bn.) 8 52 Week High (`) 152 52 Week Low (`) 78.5 Avg. Daily Volume (6m) 976213 Shareholding % Promoters 47.0 Mutual Funds / Bank/ FI 0.1 Insurance Companies 5.0 Foreign Institutional Investors 5.5 Bodies Corporate/Individuals/others 42.4 Total 100 ` mn FY10 FY11E FY12E Net Interest Income 1,061.4 1,308.2 1,591.4 Operating Income 1,224.9 1,353.8 1,653.4 Net Profit 670.9 728.9 893.4 Net interest margins 3.5 3.7 3.8 EPS (`.) 12.5 13.5 16.6 Book value (`) 63.3 71.0 80.7 GIC housing Finance Ltd Background GIC Housing Finance Limited (GIC), was promoted December 1989 by General Insurance Corporation of India and its erstwhile subsidiaries namely, National Insurance Company Limited, The New India Assurance Company Limited, The Oriental Insurance Company Limited and United India Insurance Company Limited. The company has a nation-wide network of 30 branches and has major presence in west and South India. Investment Rationale Robust disbursement growth: The loans assets have registered a growth of 9.4% CAGR during FY08-10. The slow growth in loan book is attributed to the change in capital adequacy norms by NHB as well as the economic slowdown, which led to slow growth in loans. Going forward with expansion in branch network and strong demand, we expect GIC to register a 27.5% CAGR in disbursement which will result in 18.3% CAGR in loan book during FY10-12. NIM, highest among peers: The company has reported margins of 3.8% in FY10. Despite lower growth in loan book compared to its peers the company has maintained margins higher than its peers for the past four years. This is mainly due to its market focus on rural India where the yields on advances are high. Also the company has managed its borrowing cost effectively and has better operational efficiencies compared to its peers. Asset quality to improve: GIC has policy not to write off the loss assets from their balance sheet and these loss assets have been fully provided. This is the one of the reason company s Gross NPL remains as high as 3.9%. According to GIC HF, there were certain centre specific asset quality issues that had erupted over the last few years. The company has since revisited its internal processes and controls and expects to restrict deterioration in asset quality. Valuation and recommendation With strong demand and branch expansion, we expect GIC to register an 18.3% growth in its loan book during FY10-12. Also since majority of the borrowings are from banks, we expect the policy measures by RBI to have an impact on the cost of funds, which in turn would put pressures on margins. Further with capital adequacy at 18%, we believe that the company is in a position to leverage further and improve its return ratios. We expect net profits to register a 15.4% CAGR during FY10-12. At CMP of `146, the stock trades at PBV of 1.8x its FY12 book value of `80.7 and PE of 8.8x its EPS of `16.6 for FY12. We therefore initiate coverage on GIC housing Finance Ltd with a BUY recommendation and target of `161 (2.0x PABV of `80.7 of FY12). Housing Finance Sector ACMIIL 16

Network The company has a nation-wide network of 30 branches. Of these, 55% branches are located in the west (majority in Maharashtra), 35% in South and rest are located in north and east. With a view to increase its scale of operations, the company plans to open a 17 branches over the medium term in tier II cities. These braches are expected to be operational by June 2011. Loan Assets The loans assets have registered a growth of 9.4% CAGR during FY08-10. The slow growth in loan book is attributed to the change in capital adequacy norms by NHB as well as the economic slowdown, which led to slow growth in loans. Majority of the loans disbursed by GIC are individual loans constituting 99% of the loan assets. The target customers for GIC are middle and lower middle-income borrowers. The current focus of the company is on salaried and self-employed segment. Going forward with expansion in branch network and strong demand, we expect GIC to register a 27.5% CAGR in disbursement which will result in 18.3% CAGR in loan book during FY10-12. Borrowing Profile Majority of the funds for GIC are sourced from banks (89%) and balance from NHB (11%). Earlier, the overall borrowings of GIC were mainly constituted by bank borrowings. However the company has started diversifying its resources base with a view to achieve an appropriate maturity structure and minimise the cost of funds. The weighted average residual tenor of bank borrowings is ~ 8 years. As against this, the weighted average maturity of the advances (taking into consideration prepayment) is ~ 12 years. GIC has access to large number of bank lines, which provides comfort to the overall asset liability profile of the company. Net Interest margins The company has reported margins of 3.8% in FY10. Despite lower growth in loan book compared to its peers the company has maintained margins higher than its peers for the past four years. This is mainly due to its market focus on rural India where the yields on advances are high. Also the company has managed its borrowing cost effectively and has better operational efficiencies compared to its peers. Going forward as well we expect the company to effectively mange its borrowing cost. During 1QFY10 the effective cost of finds for GIC was 6.73%. However in a rising interest rate environment we do expect the cost of funds to increase, nevertheless the ability to pass on the same to the customers will provide cushion to the spreads. We expect the NIM to improve to 3.7% in FY11 and 3.8% in FY12. Housing Finance Sector ACMIIL 17

Operational efficiency GIC has the lowest cost to income amongst its peers indicating better operational efficiencies. This along with higher net interest margins has enabled GIC to maintain its profitability. Asset Quality GIC has policy not to write off the loss assets from their balance sheet and these loss assets have been fully provided. This is the one of the reason company s Gross NPL remains as high as 3.9%. According to GIC HF, there were certain centre specific asset quality issues that had erupted over the last few years. The company has since revisited its internal processes and controls and expects to restrict deterioration in asset quality. Capital Adequacy The capital adequacy ratio stands at 18.03% as on March 2010 as against the minimum requirement of 12% stipulated by NHB. At present, the management is comfortable on its capital adequacy and does not have fund raising plan for the next two years. Concerns Asset quality: GIC housing finance has one of the highest gross NPA amongst its peers. In an environment of rising interest rate, we believe that the margins may come under pressure. Therefore to maintain profitability the management of NPAs would be critical. Housing Finance Sector ACMIIL 18

Valuation and recommendation With strong demand and branch expansion, we expect GIC to register an 18.3% growth in its loan book during FY10-12. Also since majority of the borrowings are from banks, we expect the policy measures by RBI to have an impact on the cost of funds, which in turn would put pressures on margins. Further with capital adequacy at 18%, we believe that the company is in a position to leverage further and improve its return ratios. We expect net profits to register a 15.4% CAGR during FY10-12. At CMP of `146, the stock trades at PBV of 1.8x its FY12 book value of `80.7 and PE of 8.8x its EPS of `16.6 for FY12. We therefore initiate coverage on GIC housing Finance Ltd with a BUY recommendation and target of `161 (2.0x PABV of `80.7 of FY12). Housing Finance Sector ACMIIL 19

Earnings Model (` Mn) Particulars FY09 FY10 FY11E FY12E Interest Income 3,107.2 2,947.6 3,522.6 4,345.4 Interest expended 2,115.1 1,886.2 2,214.4 2,754.0 Net Interest Income 992.1 1,061.4 1,308.2 1,591.4 Growth % 1.2 7.0 23.2 21.6 Other Income 17.8 163.4 45.6 62.0 Operating Income 1,009.8 1,224.9 1,353.8 1,653.4 Operating Expenses 175.0 202.3 236.2 289.8 Pre Provisioning Profits 834.8 1,022.6 1,117.5 1,363.6 Provisions & contingencies 55.5 103.8 119.0 139.8 Profit before Taxes and Prior period items 779.3 918.8 998.5 1,223.8 Prior period items -1.2 0.1 0.0 0.0 Profit before Taxes 778.1 918.8 998.5 1,223.8 Provisions for taxes 207.9 247.9 269.6 330.4 Net Profits 570.2 670.9 728.9 893.4 Growth % 1.1 17.7 8.6 22.6 Sources and Application of Funds (` Mn) Particulars FY09 FY10 FY11E FY12E Liabilities Capital 538.5 538.5 538.5 538.5 Reserves & Surplus 2,942.8 3,331.3 3,795.6 4,405.5 Networth 3,481.3 3,869.8 4,334.1 4,944.0 Borrowings 24,779.8 26,269.1 29,928.5 36,519.9 Total 28,261.1 30,138.9 34,262.5 41,463.9 Assets Fixed assets 29.6 31.0 31.9 32.2 Investments 11.4 491.3 11.4 11.4 Loans 26,404.5 28,657.7 33,620.4 40,113.7 Net current Assets 1,619.9 728.4 368.3 1,076.0 Deferred Tax assets 195.9 230.5 230.5 230.5 Total 28,261.1 30,138.9 34,262.5 41,463.9 Housing Finance Sector ACMIIL 20

Key Ratios FY09 FY10 FY11E FY12E Spreads Cost of Borrowings 9.2% 7.4% 7.9% 8.3% Yield on Advances 11.9% 10.2% 10.7% 11.1% Net Interest Income 2.7% 2.8% 2.8% 2.9% Net interest margins 3.7% 3.5% 3.7% 3.8% Profitability ratios Return On Average Assets (ROAA) 2.2% 2.3% 2.3% 2.4% Return On Average Net worth (ROANW) 17.2% 18.3% 17.8% 19.3% Balance sheet ratios Loan to borrowings ratio (%) 106.6 109.1 112.3 109.8 Debt/Equity Ratio (Times) 7.1 6.8 6.9 7.4 Growth Ratios Borrowings 17.4% 6.0% 13.9% 22.0% Loans 10.4% 8.5% 17.3% 19.3% Networth 10.1% 11.2% 12.0% 14.1% NII Growth 1.2% 7.0% 23.2% 21.6% EPS 1.1% 17.7% 8.6% 22.6% Valuation ratios EPS (`.) 10.6 12.5 13.5 16.6 Adjusted Book value (`) 56.6 63.3 71.0 80.7 P/E (X) 13.8 11.7 10.8 8.8 P/ABV (X) 2.6 2.3 2.1 1.8 Dividend per share 6.9 8.2 8.3 9.5 Dividend yield 4.7 5.6 5.7 6.5 Housing Finance Sector ACMIIL 21

Notes: Institutional Sales: Ravindra Nath, Tel: +91 22 2858 3400 Kirti Bagri, Tel: +91 22 2858 3731 Himanshu Varia, Tel: +91 22 2858 3732 Email: instsales@acm.co.in Institutional Dealing: Email: instdealing@acm.co.in Disclaimer: This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in the report. ACMIIL and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should however not be treated as endorsement of the views expressed in the report Disclosure of Interest GRUH Finance Ltd GIC housing Finance Ltd 1. Analyst ownership of the stock NO NO 2. Broking Relationship with the company covered NO NO 3. Investment Banking relationship with the company covered NO NO 4. Discretionary Portfolio Management Services NO NO This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may from time to time have positions in and buy and sell securities referred to herein. SEBI Regn No: BSE INB 010607233 (Cash); INF 010607233 (F&O), NSE INB 230607239 (Cash); INF 230607239 (F&O) Housing Finance Sector ACMIIL 22