India Shelter Finance Fundamental Analysis

ISFCL specializes in providing affordable housing solutions in Tier-2, Tier-3, and rural areas. The company has consistently shown growth in both its revenue and net profit over the reported periods. Considering the annualized earnings for FY24, the issue seems to be appropriately valued.
With the Aavas for all initiative by the Government of India, the company is well-positioned for promising opportunities. Investors are encouraged to consider investing in this emerging player for potential medium to long-term returns.

ISFCL specializes in providing affordable housing solutions in Tier-2, Tier-3, and rural areas. The company has consistently shown growth in both its revenue and net profit over the reported periods. Considering the annualized earnings for FY24, the issue seems to be appropriately valued. With the Aavas for all initiative by the Government of India, the company is well-positioned for promising opportunities. Investors are encouraged to consider investing in this emerging player for potential medium to long-term returns.

Company Overview: Headquartered in Haryana, India Shelter Finance Corporation Ltd. (ISFC) is a retail-focused affordable housing finance company equipped with a robust distribution network, including 203 branches as of September 30, 2023, and a scalable technology infrastructure integrated across its business operations and the loan life cycle. ISFC's primary target audience comprises self-employed individuals, with a specific focus on first-time home loan applicants in the low and middle-income category in Tier II and Tier III cities in India. The company predominantly engages in financing affordable housing loans, characterized by ticket sizes lower than Rs. 2.5 million, aligning with the criteria outlined in the Refinance Scheme under the Affordable Housing Fund for the Financial Year 2021-22, as issued by the National Housing Bank.

ISFC's Core Operations: ISFC's core operations involve financing the purchase and self-construction of residential properties for first-time home loan applicants, offering home loans, and extending loans against property. The company places a significant emphasis on serving the financial needs of low and middle-income, salaried, and self-employed individuals. With an operational history spanning over 13 years as a housing finance company, ISFC has established a notable presence in the affordable housing finance markets of Rajasthan, Maharashtra, Madhya Pradesh, Karnataka, and Gujarat.

Key Business Highlights: Branch Expansion and Regional Focus:

• The company strategically increased branch numbers in regions with high demand for affordable housing finance.
• This approach provided valuable insights into local business, property regulations, and improved decision-making in underwriting.

Technology Integration:

• The company adopted an integrated customer relationship and loan management system on a cloud-based platform.
• This system enhances connectivity, provides real-time access to customer profiles, improves productivity, reduces turnaround times, and lowers transaction costs.

Digital Collections and Technological Infrastructure:

• Digital channels facilitated a significant portion of collections, with 92.4% and 92.2% through digital means in the six months ending September 30, 2023, and 2022, respectively.
• The company's commitment to technology is evident in the increased digital collections from 86.7% in FY 2021 to 91.9% in FY 2023.

Diverse Funding Sources and Credit Rating:

• The company has consistently diversified its funding sources, including public and private sector banks, NHB refinancing, external commercial borrowings, and non-convertible debentures.
• ISFCL maintains a robust credit rating (ICRA A+ and CARE A+ as of September 30, 2023).

Interest Rate Management:

• Despite a 250 basis points increase in the repo rate by the RBI, the company managed to keep its cost of borrowing at 8.9% on September 30, 2023.
• The average borrowing cost reduced to 8.3% by March 31, 2023, from 8.7% on March 31, 2021.

In-House Operations and Risk Mitigation:

• The company has an end-to-end in-house approach to key lending operations, including customer acquisition, underwriting, collateral valuation, legal assessment, and collections.
• This strategy enhances customer engagement, reduces turnaround times, and mitigates the risk of fraudulent activities.

Loan Portfolio Growth and Diversification:

• There is robust two-year CAGR growth of 40.8% in Assets Under Management (AUM) from FY 2021 to FY 2023.
• Home loans constitute 57.6% of AUM, and loans against property make up 42.4% of AUM as of September 30, 2023.

Customer Segmentation and Empowerment:

• The company primarily supports self-employed individuals, with loans to this segment constituting 70.6% of AUM as of September 30, 2023.
• There is a commitment to serving retail customers, and as of the same date, 97.9% of loans have one or more female borrowers.

Financial Performance Growth:

• The company demonstrated impressive growth in both revenue and profitability from FY21 to FY23.
• Interest income and PAT showed significant CAGRs of 35.3% and 33.3%, respectively.
• The yield on loans remained stable at 14.9% in FY23, and PAT surged to Rs. 155.3cr.

Loan Portfolio Expansion and Financial Metrics:

• The loan portfolio achieved a CAGR of 35%, growing from Rs. 1,981.2cr in FY21 to Rs. 3,609.1cr in FY23.
• AUM as of September 30, 2023, reached Rs. 5,180.7cr.
• Noteworthy is the decline in Capital Adequacy Ratio (CAR) from 71.5% in FY21 to 52.7% in FY23, with a marginal increase in the debt-to-equity ratio.
• RoE improved to 13.4% in FY23 from 9.8% in FY21.

Objects of the Issue: The net proceeds from the upcoming IPO's fresh issue are earmarked for specific purposes, including:

1. Meeting future capital requirements for onward lending activities.
2. Allocation for general corporate purposes.

These objectives underline ISFC's strategic intent to fortify its capital base, supporting its lending initiatives and sustaining overall corporate development.

IPO Details:

• Company Name: Not provided
• Price Band: Rs. 469 - 493 per share
• Face Value: Rs. 5
• Fresh Issue: 1.622 – 1.705 crore shares
• Offer for Sale (OFS): 0.811 – 0.852 crore shares
• Fresh Issue Size: Rs. 800 crore
• OFS Issue Size: Rs. 400 crore
• Total Issue Size: 2.43 – 2.55 crore shares (Rs. 1,200 crore)
• Bidding Date: 13th Dec. – 15th Dec. 2023
• Implied Market Capitalization at Higher Price Band: Rs. 5,277.6 crore
• Book Running Lead Managers: ICICI Securities Ltd., Citigroup Global Markets India Pvt. Ltd., Ambit Pvt. Ltd.
• Registrar: Kfin Technologies Ltd.
• Sector: Housing finance company
• Promoters: Anil Mehta, WestBridge Crossover Fund, LLC, Aravali Investment Holdings

Investment Rationale for ISFC IPO:

1. Rapid Growth in AUM:

   • ISFC has demonstrated exceptional growth in Assets Under Management (AUM), achieving a growth rate of 40.8% between FY21-23.
   • This growth is the highest among housing finance companies in India.
   • The company's operational model, focused on Tier II and Tier III cities, has proven effective in underwriting and serving customers.
   • The strategic focus on the low and middle-income retail segment has allowed ISFC to gain a deep understanding of their financial circumstances, contributing to the company's high total income-to-advance ratio of 16.8%.
   • Notably, as of September 30, 2023, all of ISFC's loans catered to the retail segment.

2. High Yield and Financial Performance:

   • ISFC has reported the third-highest yield on advances at 14.9%.
   • This demonstrates the company's commitment to maintaining a consistently high yield, surpassing 14%, over the last three financial years.
   • The focus on a retail-centric portfolio and tailored underwriting processes has contributed to this robust financial performance.

3. Diversified Borrowing Profile:

   • The company adopts a prudent approach to maintain a long-term and diversified borrowing profile.
   • Engaging with multiple lenders ensures timely funding, mitigating the risk associated with relying on a single funding source.
   • ISFC's ability to negotiate favorable borrowing costs is evident, with the average borrowing costs reducing from 8.7% as of March 31, 2021, to 8.3% as of March 31, 2023.
   • Leveraging National Housing Bank (NHB) borrowings and embracing co-lending initiatives further solidifies ISFC's commitment to innovative financing models.

4. Risk Mitigation through Securitization:

   • The company actively engages in securitization and direct assignment transactions for a portion of its portfolio eligible for priority sector lending.

   • This strategic move not only helps in transferring credit risk but also optimizes the results of operations.

   • ISFC's investment rationale reflects its strong financial standing, strategic focus on retail segments, and innovative financing models, making it an attractive proposition for potential investors.

Business Strategy Analysis:

1. Distribution Network Expansion:

   • Objective: Achieve deeper penetration in key states for sustainable growth.
   • Analysis: Growing and diversifying the distribution network is crucial for reaching untapped markets. It enhances customer reach and supports sustainable growth. However, the success depends on effective execution and understanding regional dynamics.

2. Technology Stack Leveraging:

   • Objective: Achieve scalability and improve efficiency and productivity.
   • Analysis: The emphasis on technology reflects a commitment to scalability and operational efficiency. A robust technology stack can streamline processes, reduce costs, and enhance customer experience. Continuous innovation and adaptation are key.

3. Borrowing Profile Diversification:

   • Objective: Diversify borrowing sources and optimize borrowing costs.
   • Analysis: Diversifying borrowing profiles can mitigate risks associated with dependency on a particular source. Optimizing borrowing costs enhances financial efficiency. However, managing a diversified portfolio requires a careful balance to ensure cost-effectiveness and risk management.

4. Brand Equity Enhancement:

   • Objective: Enhance brand equity and foster sustainability.
   • Analysis: Building and enhancing brand equity contribute to long-term success. It instills trust among customers and stakeholders. The focus on sustainability aligns with evolving consumer preferences and can be a differentiator in a competitive market.

Financial Analysis:

Key Financial Metrics:

• Revenue and Other Income:

  • The revenue from operations has shown consistent growth from FY21 to FY23, and H1FY24, indicating an upward trend in the company's core business.
  • Other income, representing additional sources of earnings, has also increased over the years, contributing to the overall income.

• Expenses:

  • Finance Costs (Interest): The increase in finance costs indicates higher borrowing or interest rates. The stability of these costs is crucial for profitability.
  • Impairment on Financial Instruments: A slight increase in impairment costs occurred in FY23, which should be monitored to ensure prudent financial management.
  • Employee Benefits: This expense has grown, possibly due to an increase in staff or employee-related costs.
  • Depreciation and Amortization: This expense, while relatively small, has shown an increase. It's essential to understand the nature of assets being depreciated.
  • Other Expenses: This category has seen growth, and a detailed breakdown would help understand the specific areas of expenditure.

• Profitability:

  • Profit Before Tax (PBT): PBT has shown a positive trend, reaching 2,020 million in FY23, indicating the company's operational profitability.
  • Tax Expense: The company has been consistent in paying taxes, and the effective tax rate can provide insights into tax planning strategies.
  • Profit for the Year: The company has shown growth in net profits, reaching 1,553 million in FY23.

• Earnings per Share (EPS):

  • The basic and diluted EPS have followed an upward trajectory, reflecting growth in earnings available to equity shareholders.

Overall Assessment:

• Revenue Growth: The company has demonstrated consistent revenue growth, indicating the effectiveness of its business operations.
• Expense Management: While certain expenses have increased, the company should ensure efficient cost management to sustain profitability.
• Profitability: The increasing trend in profits is a positive sign. Monitoring margins and cost-efficiency will be crucial.
• Earnings per Share: The growth in EPS reflects positively on the company's ability to generate returns for shareholders.

Note: Detailed trend analysis and comparisons with industry benchmarks and peers would provide a more comprehensive understanding. Ratios and additional financial metrics could offer deeper insights into liquidity, solvency, and operational efficiency.

This analysis serves as a preliminary overview, and for a thorough evaluation, a detailed financial statement analysis is recommended.

Risk and Concerns Analysis:

Geographical & Concentration Risks:

• Description: Concentrating operations in specific regions can expose the company to regional economic downturns or vulnerabilities.
• Mitigation: Implementing diversification strategies to expand operations into different geographies and mitigate the impact of localized economic challenges.

Changing Legal and Regulatory Environment:

• Description: Evolving legal and regulatory frameworks can pose challenges in compliance, impacting business operations.
• Mitigation: Establishing robust legal teams and frameworks to proactively adapt to regulatory changes and ensuring ongoing compliance.

Volatility in Interest Rates:

• Description: Interest rate fluctuations can impact borrowing costs, affecting the profitability of the lending business.
• Mitigation: Implementing risk management strategies, including hedging mechanisms, to mitigate the impact of interest rate volatility.

Disruption in Funding Sources:

• Description: Overreliance on specific funding sources creates vulnerability; a disruption in these sources can impede business operations.
• Mitigation: Ensuring a diversified funding portfolio, exploring alternative funding sources, and maintaining strong relationships with lenders.

Competition:

• Description: Intense competition within the affordable housing finance sector can impact market share and margins.
• Mitigation: Developing unique value propositions, enhancing customer service, and investing in technology to stay competitive.

Valuation and Outlook:

• Valuation and Outlook: The housing finance sector in India is a dynamic landscape comprising various players, including Public Sector Banks, Private Sector Banks, Housing Finance Companies (HFCs), NBFCs, and others. Among these, HFCs hold a significant market share, accounting for 34% of the total Rs. 31 trillion credit outstanding in the housing loans market in FY23. Housing Finance Companies are anticipated to exhibit robust growth, attributed to their substantial market share, deeper penetration in tier-II and tier–III cities, and consistent liquidity support. In FY23, the profitability of the addressed company (ISFC) saw an upswing due to improved credit costs and increased interest yields. Looking ahead to FY24, stability in borrowing costs is expected, ensuring the sustained profitability of housing loans, driven by higher interest income. The company's strategic plans involve expanding its branch staff, extending the branch network in existing geographical areas, and exploring opportunities in adjacent markets for diversification. ISFC's credit and risk management policies, fortified by technology and data analytics, have proven effective in maintaining asset quality. This is evident in the decline of its Gross Non-Performing Assets (GNPA) to 1.0% as of September 30, 2023, compared to 2.8% as of September 30, 2022. Among its peers, ISFC boasts the second-highest annualized Return on Assets (RoA) of 4.7% for the six months ending September 30, 2023. The company has demonstrated consistent growth in both its top and bottom lines. Utilizing the net proceeds from the fresh equity shares issue for future capital requirements towards lending, the IPO is viewed positively. At the current adjusted Price-to-Book Value (P/BV) multiple of 2.5x, the company appears attractively valued. In light of this, investors are recommended to "Subscribe" to the issue, considering a long-term perspective.
  
  
  Peer Comparisons:
  
  Here's a comparison of key financial metrics for selected housing finance companies: India Shelter Finance Corporation Ltd.: CMP (Current Market Price): Rs. 493 Market Cap: Rs. 5,278 crore P/BV (Price to Book Value): 2.4x P/E (Price to Earnings): 26.3x NIM (Net Interest Margin): 6.0% GNPA (Gross Non-Performing Assets): 1.0% NNPA (Net Non-Performing Assets): 0.7% D/E (Debt to Equity): 1.5 RoE (Return on Equity): 9.2% RoA (Return on Assets): 3.6% Aptus Value Housing Finance India Ltd: CMP: Rs. 330 Market Cap: Rs. 16,482 crore P/BV: 4.7x P/E: 29.5x NIM: 8.8% GNPA: 1.2% NNPA: 0.9% D/E: 1.2 RoE: 17.0% RoA: 8.1% AAVAS Financiers Ltd: CMP: Rs. 1,519 Market Cap: Rs. 12,015 crore P/BV: 3.4x P/E: 26.2x NIM: 8.0% GNPA: 1.0% NNPA: 0.1% D/E: 3.2 RoE: 13.6% RoA: 3.3% Home First Finance Company India Ltd: CMP: Rs. 1,019 Market Cap: Rs. 9,014 crore P/BV: 4.6x P/E: 33.3x NIM: 6.0% GNPA: 1.7% NNPA: 1.2% D/E: 3.1 RoE: 15.6% RoA: 3.8% Average of the Selected Companies: Average P/BV: 4.2x Average P/E: 29.7x Average NIM: 7.6% Average GNPA: 1.3% Average NNPA: 0.7% Average D/E: 2.5 Average RoE: 15.4% Average RoA: 5.1% Conclusion: The outlined business strategies reflect a comprehensive approach to growth, efficiency, risk management, and sustainability. The success of these strategies depends on their effective implementation, adaptability to market changes, and the ability to align with the evolving needs of the target audience. Continuous monitoring and adjustments may be necessary to ensure the strategies remain relevant and contribute to the overall success of the organization

Articles

Comments