Indiabulls Housing - A compounder from here?


(sandeep) #1

I believe the name does not need any introduction and time has ripe to re-look at this gem. Second most profitable housing finance company doing all the right things to hog the limelight.Awesome dividend payout ratio at morethan 50%. Reverse merger is near to completion leading to convert itself in to a pure housing finance company and a strong re-rating is on cards.

Loan book is standing at 32,500 cr up 30% from last year.Management projecting 25-30% CAGR earning for the next few years, no wonder they would achieve that as the interest rates have peaked out. Company is not going with the herd in chasing for banking licence and is concentrating to grow in the segment that they are present currently. Credit rating stands at AA+ leaving room for further margin expansion as the credit ratings upgrade is imminent given the fact that they have been growing well even at high base.Promoters have increased their stake recently.Off-late market perception towards the group has been changing with their recent earnings, leading to higher PEre rating.

All the group companies have beenperformingbetter off-late.

Financials:

http://www.screener.in/company/?q=Indiabulls+Financial+Services+Ltd.

(Thanks to Ayush and his team … reduced my effort here :stuck_out_tongue: )

Strengths:

Higher and wonderful dividend yield than all gruh,lic,can fin etc. though growing equally at 25-30% CAGR.

Consistency in profit growth.

Concerns:

Low return on equity. ( although on the verge of increasing )

Higher cost of borrowing. ( bound to come down with the impending rate cut and ratings upgrade)

Veritas questioning Indiabulls Corporate Governance. ( though nothing much concerning things were highlighted )

Technicals:

Stock has given multi year breakout around 260 levels and is looking very strong.

Conclusion:

They should be able to grow at 25-30% CAGR for the next 3 years at least and there is enough room for margin expansion and for PE re-rating as well. All this with the healthy dividend too :).Seems to be one of the best bets worth considering for core-portfolio with a 3 year view.


(Excel Monkey) #2

The recent up move in lower quality NBFCs and private banks like indiaB fin, DHFL, Manappuram and j&k bank indicates that we are witnessing a proper bull run in these sectors. I won’t deny that there could be upside from these levels. A lower risk strategy of playing this bull run would be to stick to the quality names and leaders.


(sandeep) #3

Hi Folks,

Finally, IHFL is going to be listed next week. Lot of positive developments happened over the last three months as the company has completed reverse merger to form IHFL.

ROE bludgeoned to 25%+ levels.

Applied for Banking Licence (though not so imp.)

Very Strong results with net profit increasing by 31% YOY

Imminent Credit ratings upgrade

6 rs Interim dividend declared

Company projecting to grow at 20-25% CAGR minimum for next few years…

I believe all set for a blockbuster relisting… I am expecting script to atleast go past 400 by next quarterly results.

My Question might seem so Naive to you guys but still want to hear from HITESH , PRASAD , Vinod , Subash and other GRUH lovers… Why cant we embrace IHFL instead of GRUH/REPCO ? Agree that these have more earnings visibility for the next 6-7 years atleast and also the smaller base but still they are quoting very expensive in all parameters… IHFL is maintaining 50% dividend payout ratio as well. All these things are coming at less than 7 PE at cmp. This can really achieve 15ttm PE in 2 years if the company performance keeps improving/atleast being maintained the same way it has been for the last two years…


(RsKm) #4

Indiabulls Housing Finance’s financials require lots of cleaning. A few things that I noticed on my cursory glance:

1). It directly charges substantial expenses (especially premium on redemption of bonds) regularly to Reserves (share premium) instead of charging them off in P&L account. This overstates profits. It charged off Rs.65cr directly to reserves in Apr-Jun13 quarter alone. Similar figures for FY13, FY12 and FY11 are Rs.378cr, Rs.162cr and Rs.153cr.

This also overstates RoE.

2). It has a substantial continent liability of Rs.192cr plus interest (not quantified). The company has already lost the case in arbitration and US district court. This is for buying 42.5% stake in a subsidiary with around Rs.337cr of networth as on 31/03/13.


(RsKm) #5

Recasted financials today (by substracting redemption premiums) from PAT. Assumed 250cr payout for contingent liab (Rs.7/share impact) and took into account dilution from pending warrants and eSops.

This is how financials look then:

No of eq shares (fully diluted) 36.5cr

Fully diluted adjusted book value : Rs 173

CAR 18.5% (tier 1 15%) - comfortable for growth ahead.

FY13 EPS Rs.26 (fully diluted), RoE 22%

FY14E EPS Rs.33-34 (management guided for 25-30% growth) RoE 24%

P/E 7.5x

As company has enough cash & eqv, it’s not impacted by higher short term rates.

The stock has been falling since listing and now offers value.


(RsKm) #6

It’s India’s 3rd largest home finance company with decent return ratios and decent expected growth. Once, banking carnage subsides, it may be a good invesment. My rough estimate of fair value 400.


(Ankit Gupta) #7

I think the group - Indiabulls is infamous for corporate governance issues. Aren’t their better opportunities in other HFC’s/Banks/NBFC’s?

Regards,

Ankit


(Mallikarjun) #8

Dear RsKm

Ankit is right regarding corporate governance issues…

Regards

mallikarjun


(sandeep) #9

Hi Ankit and Mallikarjun,

What sort of governance issues you are talking about… accept that the group may not be best in corporate governance but its profits,ratios and growth is genuine. Their div. payout ratio is 50% of net profits… No other NBFC or HFC not even GRUH is having 30% payout ratio…

Promoters have shown confidence and bought shares from open market … Just because of this recent developments on the short-term rate hike issues… it seems to be falling. I would certainly agree with RSKM … 400 seems certainly on the cards in the next 2 quarters.

Any critics are invited …


(RsKm) #10

http://timesofindia.indiatimes.com/city/hyderabad/Indiabulls-takes-legal-possession-of-Deccan-Chronicle-property/articleshow/21472437.cms

Indiabulls Housing Finance takes possession of Deccan Chronicle property at Hyd for recovery of ~Rs.100cr.


(sandeep) #11

Hi RsKm,

A Good News indeed. This should further improve their Gross and NET NPA figures and Lesser provisioning .


(sandeep) #12

Hi All,

Need your valuable inputs on this. Why is this going down on a lower circuit everyday?? Something cooking ? Not sure on any bad news/fundamental changes to this though.


(sandeep) #13

Hi RSKM/Excel/fellow boarders,

In what way should i read market’s valuation on this company. 50% dividend payout on a consistent basis with strong growth performance on qoq for the last 5-6 quarters and still being valued at peanuts.

We know that this not a GEM of an investment but its not a bad one either. Indeed it is really frustrating to hold onto this one for long time after purchasing it at 280-290 levels last year.

ROE improved a lot. Neglible NPA’s, good growth and cash flows. Would be glad if anyone can post their past experiences with any such scripts and how they have fared.


(sandeep) #14

Hi Fellow Boarders,

Would be glad if anyone can throw their views on this being traded very cheap? is there anything wrong with the management ? I mean i do not see any company maintaining 50% dividend payout consistently yet not compromising on its growth.


(HG) #15

Hi Sandeep,

The Market works in strange ways. I am not invested in this but I had a similar experience with DHFL. Everything looked good but the price kept going the opposite way. Went from 200+ to almost 100 with good results all the way. I got out with marginal gains on the way down. Rumors of governance issues also were there for DHFL. But now, its ruling above 200 again. Jhunjhunwala effect?

So if you are convinced, then hang in there.


(sandeep) #16

Hi HG,

I believe sometimes markets keep the stocks cheap for long time for no significant reason. Here i see it being present in the cyclical financial sector is the only reason which is making it out of flavor.once the economy starts growing coupled with interest rates coming down, i expect strong upside on this one. But this one is really testing my patience. Current Dividend yield of 10% with clear visibility of earnings growth is not letting me to sell this. Having said that i need to admit that the opportunity cost had been immense because of this. Especially when all the valuepickr stocks are going up like there is no tomorrow :slight_smile:

But i will not give up after holding it patiently until now.


(Binu) #17

@sandeep, just had a look at Indiabulls financial services. It appears that it stopped trading in March 2013, Is it a de-listed stock and you are holding on? How are you trading on this scrip? I have a feeling that I am missing something here!


(Binu) #18

It looks like its re-listed in a different name, searching what name does it goes in the exchanges!


(Binu) #19

Found it, looks like its doubled in three months, Sandeeep must be a happy camper now.


(Nikhil Rodrigues) #20

@Sandeep: Sometimes you need to think on why market is pricing a big NBFC the way Indiabulls is. As far as banks and NBFC’s go, asset quality and trust on management is everything. Doesn’t matter if you are showing 50% growth YOY. Hide few things, grow too aggressively and you end up shooting yourself. Thats how leveraged businesses work.

This is the reason HDFC Bank and Gruh trades at premium. Market doesnt like Indiabulls promoters and it will never value the company again like peers except for few extreame bull market months.

As for the dividend, the high dividend payout is just for past couple years. It didn’t pay any dividends before that. Dividend needs consistency of years.

And how does a low ROE finance company plan on growing at 25-30% with paying 50% of profits as dividends? Only way thats possible is by having very high ROE ordiluting equity. And thats not good if done at cheap PB valuations. Remember, for finance companies ROE = ROA X Leverage. Check ROA and leverage of IHFL. If ROA is too low (Gruh 3%, Repco 2.7%), the business quality is not good.

Rest, it’s your own decision.

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