Indiabulls Housing Finance top pick in home loan space

IHFL’s stress loans have remained largely similar between the two accounting standards.

Indiabulls Housing Finance (IHFL) reported 1Q19 net profit of Rs 11 billion, year-on-year growth of 30% under new accounting standards. Importantly, the key parameter spreads, which was a concern for the market, have moved up by 12 basis points quarter-on-quarter (4 basis points increase in incremental spreads quarter-on-quarter), with rock solid growth of 33% in loans. Housing loans share increased to 60%, with 40% year-on-year growth.

IHFL continues to focus more and more on digital platform and also in-house sourcing. 28% of home loans’ sourcing is now through eHome Loans. Including LAP, 23% of all retail mortgage loans’ sourcing is now through eHome Loans. Over 90% of incremental sourcing is done in-house by on-rolls employees and eHome loans. Focus on internal channels for sourcing is leading to superior asset quality in our view. Gross / net NPLs are at 78/59 basis points, respectively as per the new accounting standards.

IHFL’s stress loans have remained largely similar between the two accounting standards.

New accounting standards transition has been accretive to IHFL’s net worth. Net worth is higher by 18% due to mark-to-market gain on investment in OakNorth Bank in UK and reversal of deferred tax liability. The increase in net worth by Rs 24 billion will also boost Tier 1 (allowable under regulatory guidelines) pushing out capital raise, which in itself is strong even now. We believe credit costs will be lower, as it will be based off actual loss experience and IHFL is also carrying Rs 10.5 billion of adhoc provisions.

Our forecasts suggest a core EPS CAGR of 22%+ over FY18-20E for IHFL with RoEs remaining comfortably above the 30% mark (in absence of capital raise). Moreover, the company continues to have a superior dividend yield (3-5%) on account of its payout policy of 45-50% of profits. IHFL is likely to be a primary beneficiary of the growth acceleration in the mortgage market, especially in affordable housing segment and is our top pick in the home loans space. We lift our PO to Rs 2,000 (against Rs 1,920 earlier) to factor in a roll-over by a quarter and also boost to net worth led rise in book value per share.

-Bank of America Merrill Lynch

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