Indiabulls Housing - A compounder from here?

(sandeep) #21

Hi Binu,

Yes I m happy as my conviction has finally played out even though with some delay. Meanwhile enjoyed the good dividend yield as well.

Hi Nikhil,

Absolutely agree with you. IBULLS is not a high quality HFC and cannot be compared with likes of Gruh. But my bet was not on the quality or scorching growth of the business with consistency but on the undervaluation and it was certainly a mis-priced bet. When you have a PSU HFC like CAN Fin which was trading at higher PE than IBULLS despite much smaller in size with a PSU tag, it made me look like an opportune buy. But it had awaken only after taking very long hibernation ( another hint that market is not so convinced on it ).

IBULLS started paying higher dividends since last three years and has improved a lot in their NPA ratios, cost per employee , cost of funds etc … ROE is improved to 26% levels and their CAR is around 18-19%. See no reason for any dilution of equity for the next two years and the higher dividends seems sustainable now. Infact if they can strive and attain AAA+ rating their cost of funds would further go down improving the NIM’s.

Markets apathy towards the group is slowing changing though i am not expecting any dramatic improvements here.

All in all not a quality company like GRUH to buy but i am not buying it at 32 times unlike GRUH. My buying price was at 6 PE and i still strongly believe that it will out perform GRUH for the next three years with sustainable dividends. But the story is not so compelling to buy and hold for decade long.

(Ankit Gupta) #22

Hi Sandeep,

The highest rating any company can get is AAA.

I firmly agree with Nikhil that promoter integrity is very important in any financial services business. As far asout-performanceis concerned, it is more to do with the bullishness in the stock market rather than the performance of the company or the markets changing their view about Indiabulls group.

There is a very famous quote by Warren Buffett:‘You only find out who is swimming naked when the tide goes out’ which is very relevant here.

(sandeep) #23

Hi Ankit,

Thanks for correcting the AAA rating part. I agree with your quote on probable reasons for the out performance. Again i want to re-affirm on the reasons of my stand here, i am not buying IBULLS because of its quality. Every one knows how mediocre the promoters are … But at the same time it is present in a growing sector with very huge moat and improving performance coupled with economic recovery. They did churn out the numbers consistently for the last three years, improved on their ROE and ROA.

Please refrain to compare this one with GRUH instead we can weigh the parameters with CAN fin. When VP’s are buying CAN FIN aggressively why not this ? I do not see any reason why they can grow at 20% and maintain the same dividend payout ratio for the next two years.

My bet was never on the quality /long-term growth of the Business but it was on the opportunity side because of its under pricing by the market. Again i was not heavily invested in it.

All said and done. I do not want to disagree with all of your emphasis on sticking with quality businesses with the best of the class pedigree. It is the only way for long-term wealth creation but at the same time i do not want to term my investment thesis in INDIABULLS as a lucky pick. Believe it will continue delivering the numbers consistently and market will value it higher in the future with the changing sentiments towards the mid caps.

(sandeep) #24

MOSL initiated coverage on Indiabulls housing finance with a Buy rating and target price of INR445 (2x FY16E BV) .

Believe they will upgrade the target price after a quarter or two.

(Varadharajan Ragunathan) #25

Having been in the market for a long time, when the tide is rising, everything looks inexpensive. Given the serious allegations that were raised about the indiabulls group, is’nt there a risk to the stated numbers of india bulls ?

Just wondering if there is a “fat tail” risk that we are overlooking

(sandeep) #26

Hi Varadharajan,

The same Veritas has raised many red flags and downgraded RCOM to 15 rs when it was trading around 65-70 rs and then after it went on to hit 160 rs and is still looking good for medium term. What would you say for this ?

We should not blindly raise red flags and ignore a company … Agree that it may not be best of the quality stock. But same is the case with DHFL ( wadhwan’s ). Then why is it raising ? why did RJ purchase it ? …Everyone knows what sort of a group RPG is. But still CEAT has become a 6 bagger in the last 1-1.5 year. Is market so foolish to make it a multibagger ? Look at RPG life sciences … its a 3 bagger and now the herd is turning on to buy it.Every business has an intrinsic value. When the moat and opportunity is HIGH, companies with decent management that strive for growth will succeed eventually.

Certainly INDIABULLS intrinsic value is greater than what it is quoting at. It has shown consistency,restructured the business , controlled the NPL’s in a tough environment. Market still has its own doubts to some extent which will eventually be cleared with the script’s consistent earnings growth coupled with high dividend payouts.

(Sandeep Bhandari) #27

Dear all,

I personally do not have any view on Indiabulls but want to highlight one thing that the one of way to check is the acceptance of debt instrument of the company in the debt market.

Are the debt funds ready to buy debt of the company.

(sandeep) #28

ICRA upgraded the INDIABULLS NCD’s : http://www.thehindubusinessline.com/companies/icra-upgrades-indiabulls-housings-rs-4000cr-nonconvertible-debentures/article6147656.ece

IIFL raised tgt pice to 771 :

(Kunal) #29

I foundCORPORATE GOVERNANCE ISSUES AT INDIABULLS GROUP

source :alphaideas

A reader sent in this email:

Indiabulls promoters have split their company and I see some corporate governance issue in Indiabulls Wholesale. Indiabulls Wholesale was owning 100 % Indiabulls Technology where 1200+ employees are working. In FY 2013, revenue was 46 crores and FY 2014 revenue should be more than 100 crores going by their team business ramp up.

Without informing shareholders, Indiabulls Wholesale has divested the IB Technology in Q1 quarter. It raises below question which is a serious corporte governance issue.

1). The Indibulls Technology buyer has not been disclosed. If the buyer is Saurab Mittal or Rajiv Rattan, then it is a serious fraud.

2). Valuation at which it has been sold is not disclosed. Please be noted that the Indiabulls Technology is growing at a scorching pace and for a technical start up company, initial years will not have much profit and revenue will be increasing in multifold. So when we value the company, we need to go by the future revenue growth and their order book.

Going by this, even in the worst case valuation, Indiabulls Technology should be deserving 400 crores. But the promoters have sold it under the carpet for their own benefit or internal settlement with some body.

3). Indiabulls Technology is a major revenue contributor and whenever they have sold this, it should have been announced to exchange. It should not appear as one of the line item in their quarterly result. It is present as item # 4 under standalone quarterly result declaration of Indiabulls Wholesale.

When news floated about the promoters splitting up their empire, Indiabulls WholeSale went down drastically whereas other group companied held on to their price. This indicates that people are aware that IB Technology is going out of Indiabulls Wholesale and insiders offloaded their price.

(Nikhil Rodrigues) #30

Hi Sandeep,

ROA for Indiabulls is very high around 3.8. It’s best in industry and even higher than Gruh’s 2.8. I am not sure on NIM but it must be pretty high based on ROA. As far as I know it operates in usual competitive housing finance market. How come it’s able to generate high ROA? I have not studied Indiabulls in detail but only way to generate high NIM/ROA is to do project finance and builder lending as well high loan against property.

If % of project finance and developer loans is high, I highly doubt the quality of assets here. Juicy dividends and 25% growth notwithstanding.

(SAMIR SHAH) #31

You are right, Nikhil. The latest earnings update puts the figure of Commercial Mortgage at 21%, and Home Loans at 76%, with Commercial Vehicle Loans at 3%. They claim that majority of Incremental loans are home loans. Commercial Mortgage seems to be developer financing, and not loan against property.

Also, I could not understand one line: “Loans sold (outstanding as on 30th Sep, 2014): Rs. 5,238 Cr. â on which spread at 3.4% p.a. isto be earned over the life of the loan”.

If they sold the loans, then how could they earn money over the life of the loan? The spread ought to have been discounted to present value and then the loan sold. It does not seem right.

(Pranav Singh) #32

Hi Samir,

According to RBI guidelines on securitization, the profit on premium transactions have to be amortized over the tenure of the loan. So, company would have got all the cash from the buyer of the loan, but for accounting purposes has to amortize all the profit that they made on selling the loans over the tenure of the loans. Hope this helps.

Buffet once said that he invests only in high quality finance businesses because these businesses are highly leveraged. This leverage results in magnifying the quality of the management, both good and bad. So, I keep away from banks and NBFCs with corporate governance issues.

~Pranav

â isto

(Vivek Gautam) #33

Sandeep,

Are you still holding on to IBHL? Congratulations on your fantastic conviction n hopefully fantastic returns.

Now that IBHL enjoys AAA rating and is running professionally under Gagan Banga keenly awaiting your take on it at CMP.

There has been flurry of upgrades from Edelweiss n UBS on it. Will the current rally be run by HFC and will IBHL play an important part?

Views invited from all as its still one of the cheapest HFC stock available with tailwinds like interest rate cut and fancy for HFC stocks currently can it keep on raising new high?

Results are due on 19 Jan 2014.

(sandeep) #34

Hi Vivek,

I wasn’t active in the forum for quite a long time and so haven’t participated actively in the discussions further.

Yes I am glad that my conviction has finally paid off. Lot of developments have happened in the recent past which are driving the share price.

First being the craze for HFC’s in the market. Second one is being one of the cheapest HFC stock with a staggering 7-8% dividend yield and projected earnings growth of 20% at EPS level. There have been many apprehensions on the management’s’ integrity in the market and that seems to be receding with the consistency in their earnings coupled with the dividends. Also point to be noted is that this is not a 100% HFC and they still have 20% commercial mortgage loans and negligible CV loans in their books. But to my knowledge mortgage loans are mainly loans given against property. Also management has clearly indicated their stand on the incremental loans which would be only from the HF segment. Recently promoters have divided their stakes among all the Indiabulls group companies which made all the brokerage houses to upgrade the ratings.

Also I always believe that a quality company cannot remain cheap for long especially when the sector is in bull run. And it would infact outperform the expensive ones like GRUH and Repco when there is no mayhem in the market and the future and economic growth is clear. In the similar lines , I see KTIL also outperforming GATI,BLUEDART and TCI for the next 2 years. It is pretty much cheap in the logistics space as there is not much clarity on the debt part at the consolidated level. Though we may not allocate higher % of the portfolio as more clarity is needed.

Coming back to IBHFL, this one may not deliver consistent and staggering returns over the longer period of 8-10 years like GRUH and REPCO but I still believe it will outperform these GRUH,REPCO etc. over the next two years. My target for this one remains 1000rs which was touched in 2008 bull run.

(Vivek Gautam) #35

Thanks sandeep

I have gone through the concall n presentataion on RB.Impressive to say the least.

But is the taxation rate on lower side to around 20-21% due to their strategy of booking MF losses earlier and now no tax to be given on MF profit.Could you explain this aspect pl?

Also on 600 Cr exposure to Kasliwal owned Shriram Infragroup building Palais Royale which is still stuck up by BMC & softening of premium property prices in Mumbai & exposure to HDIL group?

But they seem to be the only fin group tpo recover fully their loan from infamous Deccan Chronicle group?

(Hemant V Bhatia) #36

_Ashwini Kumar Hooda, Deputy MD,_add the call:Highlights by Capital Mkt;

  • The cumulative disbursement of the company have cross Rs 1 lakh crore mark in the quarter ended December 2014. Disbursements were Rs 5350 crore for Q3FY2015 and Rs 13885 crore for 9MFY2015.Disbursements in 9MFY2015 were mainly contributed by segments such as retail mortgage at Rs 4200 crore, home loans at Rs 2700 crore, loan against property at Rs 1500 crore, and large ticket loans at Rs 1130 crore etc.
  • About 80% of the home loan portfolio of the company has below Rs 50 lakh exposure and is toward affordable housing sector.The company has maintained spread stable at 340 bps.The company has employee strength of over 4000 employee at end December 2014.
  • The branch network of the company is optimally distributed. It has about direct sales staff of 2000 employees that operates 800 builders sites on regular basis.The company has tapped External Commercial Borrowing (ECB) window to raise US$ 200 million for lending in the affordable housing segment.
  • The rating upgrade in the first half of FY2015 has helped the company to reduce the cost of borrowings, which has declined to 9.88%, which is below base rate of banks.About 93% of the borrowing of the company is long-term. Bond issuance has been contributing increasingly to the borrowing of company.The company has raised about Rs 3500 crore from bond issuance in last 12-months.
  • Over the next 12-18 months, company expects about 55-60% of borrowings to be contributed by bond issuance, 25-30% from banks borrowing and rest from portfolio sale-down. As the company, the borrowing mix between bonds: bank would shift from 43:52 currently to 60:40 over next 12-18 months.
  • Insurance companies have communicated to the company about their interest to invest into the bonds with the view to finance affordable housing projects.The company has completed about Rs 700 crore of securitization deals in Q3FY2015.
  • Against the gross NPAs of Rs 411 crore, the company is holding excess provisions of Rs 604 crore. The provision coverage ratio stood at 147% at end December 2014.During last three years, GNPA moved in the range of 0.7-0.9%, while NNPA hovered in the range of 0.3-05%.Total provisions stands at 1.6X of regulatory requirement.
  • Credit cost stood at Rs 74 crore in Q3FY2015 compared with Rs 32 crore in Q3FY2014.The company has policy of deploying assets of about 15-20% of advances in to liquid assets.As per the company, the CRAR ratio would be 17.7-18% with Tier I at 17% at end March 2015.
  • Company does not have any capital raising plans for FY2016.Company expects loans book, NII and PAT growth at 20-25% for Q4FY2015.
(sandeep) #37

Yes. They indeed have a good recovery team which was clearly evident through their recovery of entire amount from DC. All the exposure of 600 cr to these groups is a known aspect to market from long back and is already discounted with lower PE compared to others. But now the tailwinds are changing and they can only throw positive surprises of recovery from these entities.

In regards to Lower Tax payments , it may be due to their booked losses earlier but I really don not have more information to comment further on this aspect. Definitely a point to investigate further.

(Vivek Gautam) #38

CLSA , CS, IIFL, Motilal Oswal, Edelweiss all recommend buying IBHFL post results on 19 Jan 2014. Anyone aware of any other recommendation for this scrip?

It’s PE is till 10 odd n with AAA rating by several agencies,ROE of 27% , ROA of 4% , div yield of 5% imply PE should increase further. HFC are flavour of this rally IMHO .

(Vivek Gautam) #39

CS ,CLSA,IIFL,Motilal Oswal recommend it post results on 19 Jan. any other recommendation by any other research house?

(Hemant V Bhatia) #40

Gagan Banga, CEO addressed the call:Highlights by Capital Mkt;

  • The company is one of the least leveraged companies with the leverage ratio (Borrowings net of cash & cash equivalents and investments in liquid debt instruments to networth) at 5.9X at end March 2015.The company has maintained spread at 330 bps.Cash position of the company stood at Rs 9631 crore, which is deployed in liquid funds.
  • The rating upgrade in the first half of FY2015 has helped the company to reduce the cost of borrowings by 35 bps to 9.7% in FY2015.The cost of funds for the company has declined 130 bps since the rating upgrade. Of which, about 60-70 came from decline in bond yields and 60-70 bps was contributed by ratings upgrade.As per the company, the rating upgrade has further scope left for reducing the cost of funds by another 25 bps.
  • About Rs 4103 crore incremental borrowing was contributed by bonds, while company raised Rs 1252 crore though External Commercial Borrowings (ECBs) in FY2015.About 80% of the homes loans have ticket size of below Rs 50 lakh, enabling the company to raise ECBs.The company has borrowings target of Rs 12000 crore for FY2016, of which about Rs 6000 crore would be raised through bonds, Rs 2500 crore from sell down and Rs 3500 crore through ECBs/Bank term loans.
  • Disbursements increased to Rs 20000 crore in FY2015 from Rs 14000 crore in FY2015.The company expects to maintain 20-25% growth in all financial parameters in FY2016.The company is confident to touch the balance sheet level of Rs 1 lakh crore by FY2018.The company expects to maintain the GNPA in the range of 0.7-0.9%, while NNPA in the range of 0.3-0.5% in FY2016.The cash position will continue to be at 15-20% of the assets in FY2016. The CRAR ratio will be maintained in the range of 17.5-18%.The company expects the credit cost to be steady at 50 bps in FY2016, which includes excess provisions of 15-20 bps to be funded by lower cost of funds.
  • The company has added 15 branches in FY2015 taking the branch count to 220 branches at end March 2015. The company proposes to add 25 branches in FY2016.The employee count of the company increased 20% to 4800 employee in FY2015. The company expects about 15-20% staff growth for FY2016.