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GIC Housing Finance (NSE Code - GICHSGFIN) - Sep16 Katalyst Wealth Alpha Report


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GIC Housing Finance Ltd (GICHF) was incorporated as ‘GIC Grih Vitta Limited’ on 12th December 1989. The name was changed to GICHF on 16th November 1993. It’s promoted by well known domestic re-insurer General Insurance Corporation (GIC) and is a well-known company in India’s Housing Finance market.

The Company was formed with the objective of entering into the field of direct lending to individuals and other corporate to accelerate the housing activities in India. The primary business of GICHF is granting housing loans to individuals and to persons/entities engaged in construction of houses/flats for residential purposes.

We like the company on account of its steady well managed growth in a growing market. The company has become slightly aggressive in terms of expansion into states other than Maharashtra and has been consistently adding new branches outside Maharashtra. The company also seems to have managed its loan book well and has made adequate provisions. GICHF is trying to reduce the share of bank borrowings and the same will help in reducing cost of funds with consequent improvement in net interest margins (NIM).

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GIC Housing Finance (NSE Code - GICHSGFIN) - Sep16 Katalyst Wealth Alpha Report

  1. 1. Mittal Consulting GIC Housing Finance (NSE Code: GICHSGFIN) – Alpha/Alpha + stock report for Sep’16
  2. 2. Mittal Consulting Content Index 1. Company Snapshot (25th Sep’16) 2. Introduction 3. Understanding Business and Company 4. Housing finance market outlook 5. Promoters and Shareholding Pattern 6. GIC Housing Finance – Performance snapshot 7. Valuations 8. Dividend Policy 9. Risks & Concerns
  3. 3. Mittal Consulting Company Snapshot (25th Sep’16) Rating – Positive – 4% weightage; this is not an investment advice (refer rating interpretation), the rating is only for indicative purpose and please take your own decision regarding the same. CMP – 312.75 (BSE); 312.45 (NSE) Dividend yield – 1.60% BSE Code – 511676; NSE Code – GICHSGFIN Market capitalization – Rs 1,683.00 cr. Total Equity shares – 5.38 cr. Face Value – Rs 10.00 52 Weeks High/Low – Rs 337.50/181.35
  4. 4. Mittal Consulting Introduction GIC Housing Finance Ltd (GICHF) was incorporated as 'GIC Grih Vitta Limited' on 12th December 1989. The name was changed to GICHF on 16th November 1993. It’s promoted by well known domestic re-insurer General Insurance Corporation (GIC) and is a well- known company in India’s Housing Finance market. The Company was formed with the objective of entering into the field of direct lending to individuals and other corporate to accelerate the housing activities in India. The primary business of GICHF is granting housing loans to individuals and to persons/entities engaged in construction of houses/flats for residential purposes. We like the company on account of its steady well managed growth in a growing market. The company has become slightly aggressive in terms of expansion into states other than Maharashtra and has been consistently adding new branches outside Maharashtra. The company also seems to have managed its loan book well and has made adequate provisions. GICHF is trying to reduce the share of bank borrowings and the same will help in reducing cost of funds with consequent improvement in net interest margins (NIM). Lastly the valuations also seem reasonable around current levels of 310. Understanding Business and Company GICHF was promoted 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. As mentioned above the Company was formed with the objective of entering into the field of direct lending to individuals and other corporate to accelerate the housing activities in India. GICHF is a small player in the Indian housing finance industry, with less than 1% market share, and a loan book of Rs 7,910 crores as on March 31, 2016 (Rs 6600 crores as on March
  5. 5. Mittal Consulting 31, 2015). As per the report by CRISIL, its advances are largely concentrated in 4-5 states, with Maharashtra accounting for 59% of its loan portfolio as on March 31, 2016. GICHF portfolio is skewed towards the salaried customers with average ticket size of ~15 lakhs, though in recent years the share of salaried customers is trending down on account of increasing proportion of Loans against Property (LAP) given to the self-employed borrower category in the portfolio. The company is doing so to improve the average yield on advances as the margins are high compared to the loans for purchase of homes. Nevertheless, the portfolio continues to remain dominated by the Home loans (about 84% of the portfolio as on March 2016) with LAP product constituting about 16% of the total portfolio as on March 2016. GICHFs retail/individual loan segment has delivered 14% CAGR since FY 12; LAP has grown at much faster pace. The average ticket size of the loans for GICHF is ~15 lakhs and the loan to value (LTV) is ~65%. As per the management they generate business through direct selling agents (DSAs) and tie up with builders. Further, they are planning to increase focus in northern parts of the company. As per ICRA, despite increase in proportion of LAP portfolio which is considered a relatively riskier segment, comfort can be taken from the prudent credit appraisal and
  6. 6. Mittal Consulting lending policies with conservative LTV (Loan to value) and FOIR (Fixed obligations to income ratio) norms. Moreover, it does not undertake assessment of income in case of any loans and lends based on only the reported income of the borrowers. The company has 60+ branches across the country for business and has got a strong marketing team, which is further assisted by Sales Associates (SAs). It has tie-ups with builders to provide finance to individual borrowers. It also has tie-ups with corporate for various housing finance needs. Source: GICHF ARs It is good to note that in the last 4 years itself the company has doubled the number of branches from 31 at the end of Mar’12 to 60 at the end of Mar’16.
  7. 7. Mittal Consulting Source: Indianivesh Research The positive impact of aggressive expansion in branches can also be seen in loan book of the company which recorded modest 13% CAGR during FY 05-FY 12 while since FY 12 the retail loan portfolio of the company has recorded 19.5% CAGR with growth accelerating in the last 2 financial years. Housing finance market outlook Introduction – Housing is a primary necessity in every economy and is a basic indicator of growth and social well-being. Development of housing is not just important to economic growth but is also one of the tools for economic development considering the accelerator impact it has on various industries including construction and infrastructure sector; it generates demand for supporting industries and leads to creation of job opportunities. Development of housing in a country is a sign of economic welfare. For any emerging economy, development of the housing sector has its own challenges. The biggest of these challenges is access to finance. While investment in real estate is an easy candidate for borrowing, real estate lending is more opportunity-based. In India, access to finance for housing needs is largely concentric and focused at higher income groups, as that is the sector where there are formal evidences of income such as salary
  8. 8. Mittal Consulting slips or income-tax returns. Since lenders tend to lend to sectors where lending is the easiest, the lower segments of the population pyramid will remain unserved or underserved, if the system was left entirely to itself. Therefore, there is a need, in every financial system, to enable access to finance by lower segments of the population pyramid. Housing finance access – Housing finance products are classified based on the borrower segment. Access to finance is concentric where the title is clear and the income stream is determinable. The housing finance product or mortgage lending is traditional, standardized and mostly vanilla to the so called upper segment of the pyramid. Lending to the bottom of the pyramid, where clear title of ownership of property is unavailable or absent and the income streams are low and inconsistent, is mostly progressive or of small tickets. Such finance is called affordable housing finance or housing microfinance. The collaterals here are pseudo collaterals mostly and the credit underwriting is largely qualitative than relying on stream of estimated cash flows. Between the traditional mortgages lending products and affordable housing loans is micro-mortgages where the tenure and the ticket size are lower than that of traditional mortgages. As the name suggests, micro-mortgage is a smaller mortgage loan. Housing finance generally and affordable housing finance in particular, is clearly a policy priority for India. The government is dedicated to the cause of bringing financial inclusion and there are several schemes floated for the borrowers, housing finance companies and developers facilitating lending to what are commonly referred to as the ‘bottom of the pyramid.’ The various segments of Housing Finance sector are: Retail home loans, Developer Funding, Loan-against-property, Rural and affordable housing finance and Housing Microfinance. Pace of Growth – The housing loan portfolio of both banks and HFCs has grown considerably over the period of last six years and this was possible due to supportive guidelines introduced by Government of India (GoI) and Reserve Bank of India (RBI). The government has been at the forefront in pushing India’s housing finance sector. Many new initiatives and policies focused on lending for housing have been introduced in the last 12 months. The biggest highlight was to bring housing loans of up to Rs. 50 lakh under
  9. 9. Mittal Consulting affordable housing and bringing loans up to Rs 28 lakh in urban and 25 lakh in other centers under Priority Sector Lending. The decision of the RBI to increase LTV ratio to 90 per cent for loans up to 30 lakh or less was another positive step which will enable home finance companies to lend more to LMI customers thereby enabling them to own a home. As per ICRA’s estimates, the total housing credit outstanding in India as on March 31, 2016 was around Rs. 12.5 trillion as against Rs. 10.5 trillion as on March 31, 2015, indicating an annualized growth of 19% in FY16. The housing credit growth was supported by disbursements on construction linked loans, growth in the small ticket affordable housing segment and demand from Tier II/III cities and some increase in primary sales during the festive season. Source: ICRA Both banks and HFCs grew at a similar pace of 19% during FY2016. As for HFCs/NBFCs while the overall growth was at similar levels of 19%, the home loan growth for large HFCs (HFCs with Assets under management greater than Rs. 450 billion) was lower at 15% (19% in FY2015) vis-a-vis home loan growth of 36% for smaller HFCs (37% in FY2015) during the same period leading to an overall growth of 19%. The portfolio growth of small
  10. 10. Mittal Consulting HFCs benefitted from their increased focus on faster growing segments like affordable housing finance and the self-employed borrower segments and rise in new entrants. The affordable housing segment for HFCs, has grown at a fast pace. As per ICRA’s estimates, the total loan book of the all players in the affordable housing segment stood at Rs. 957 billion as on March 31, 2016 indicating a growth of 28% during FY2016. In ICRAs opinion, opportunities for growth are high for the segment given the current low penetration levels as well as the government thrust on the affordable housing segment. Overall, ICRA believes that the affordable housing segment offers good growth potential and could report reasonable returns over the long-term. HFCs market share creeping up – Despite the stiff pricing competition from SCBs (Scheduled commercial banks), HFCs market share in retail housing loans has seen a steady improvement from FY08. A comparison of housing loan growth rates for SCBs (housing loans data from RBI) and HFCs (housing loan data from NHB) shows HFCs improved their share in housing loans by ~10% between FY08-FY14 (NHB releases annual housing report with one year lag, FY16 yet to be released). Source: NHB, IDBI Capital The rising market share of HFCs confirms few key fundamental growth drivers for HFCs: a) the service proposition of fast turnaround time remains a key consideration for borrowers, b) pricing difference between SCBs and HFCs has narrowed enough to make the borrower price agnostic.
  11. 11. Mittal Consulting Increasing competition – There has been an increase in the number of new entrants in the housing finance market, including HFCs promoted by existing NBFCs, new companies started by entrepreneurs and supported by private equity players. This has led to increased competition in the industry. High competitive intensity has also led to relaxation in lending norms (for example, relaxation of Loan To Value Ratio(LTVs)/Fixed Obligation to Income Ratio(FOIRs) or higher top-up loans and introduction of new products. Further, some large lenders are offering schemes that allow customers to pay only the interest component in the initial few years, or stepped up equated monthly instalments, with an assumption that a borrower’s income levels will increase over time. While such schemes enable the borrower to take a higher loan amount, the risk in such loans is higher than conventional underwriting, hence increase the overall vulnerability. Regulatory changes – In FY2016, multiple regulatory changes were announced, starting with the lowering of risk weights (further from 50%) for housing loans, 41 HFCs getting SARFAESI license, as well as the revision in interest rate and the on-lending cap under the RHF and UHF, which are likely to support growth in the low ticket affordable housing segment going forward. With the recent notification, 41 housing finance companies are now approved under The Securitization and Reconstruction of Financial and Enforcement of Security Interest Act (SARFESAI) which is a significant step towards bringing HFCs at par with banks by enabling speedier loan recovery. The Real Estate (Regulation and Development) Act, 2016 (RERaD Act) came into force in May, 2016. The new Real Estate Regulation Law seeks to set right many shortcomings that currently plague the housing segment in India. Prominent amongst these are 1) inordinate delays in delivering homes to owners, often caused by diversion of funds to other projects / purchasing land banks, 2) illegally constructing and selling flats, the plans for which are not approved by concerned competent authority.
  12. 12. Mittal Consulting The new law seeks to pin responsibility on developer to deliver the homes on time. This is expected to push non-serious players / speculators out of the arena and bring in transparency as well as confidence in the housing market. Despite the double digit growth and the recent move by government to address key policy bottlenecks, the housing finance industry in India remains under-developed by global standards. The next few quarters are expected to be action packed for real estate and housing finance sector in India on the back of significant push to create conducive environment for investment by undertaking major policy reforms. The year is also likely to witness significant progress in the Housing for All by 2022 schemes and Smart Cities Project. Promoters/Management General Insurance Corporation of India (GIC Re) and its erstwhile subsidiaries, National Insurance Company Ltd, the New India Assurance Company Ltd, the Oriental Insurance Company Ltd, and United India Insurance Company Ltd own 42.25% equity stake in GICHF. GIC HF derives management, operational, and financial support from GIC Re and GIC Re has also committed to ensure that it will meet the financial obligations of GICHF on time. As with all Public sector undertakings there’s lack of continuity as far as Managing Director of the company is concerned; however post the appointment of Mr. Warendra Sinha as the Managing Director in FY 13 the company’s growth has improved significantly both in terms of loan book and number of branches; though it could also be just a co- incidence.
  13. 13. Mittal Consulting Shareholding pattern (as reported on BSE) Jun’16 Mar’16 Dec’15 Promoter and Promoter Group 42.25% 42.25% 42.25% India 42.25% 42.25% 42.25% Foreign Public 57.75% 57.75% 57.75% Total 5,38,51,066 5,38,51,066 5,38,51,066 GIC Re and its subsidiaries hold reasonable stake in the company at 42.25%. Given GIC’s ownership and brand sharing with GICHF, we believe GICHF is a strategically important entity for GIC and will continue to receive all kinds of support from the latter. It’s important to note that in the last more than 10 years GICHF hasn’t diluted equity at all and we like it when promoters value their stake in the company. As on 31st Mar’16, the major shareholders of the company and their stakes are as below: Name of the shareholder Category % stake in GIC Housing Finance Promoters and PAC Promoters 42.25% Life Insurance Corporation Public 4.74% Tata Investment Corporation Public 3.53% Reliance Small Cap Fund Public 3.74%
  14. 14. Mittal Consulting GIC Housing Finance – Performance Snapshot GIC Housing’s performance has been steady over the years and off-late it’s been on an uptrend on various parameters as discussed below: As can be observed from the above illustration, the company has recorded steady 21.5% CAGR in interest income and 21% CAGR in overall operating income over the last 5 years. The company’s interest expense have recorded slightly higher 22% CAGR; however on account of strong control on operating expenses and lower provisions for contingencies and NPAs the PBT of the company has recorded 27% CAGE over the last 5 years. In FY 11, there was one time investment income of Rs 88.48 crores and as a result the PBT and PAT were higher.
  15. 15. Mittal Consulting In the above illustration, we have covered some important ratios and numbers for the company for the last few years. As can be observed and as mentioned above the performance of the company has been on an uptrend not just in terms of growth but also in terms of the overall quality of growth. Loan book – As mentioned the company’s loan book has recorded 19.5% CAGR since FY 12 against 13% CAGR between FY 05 and FY 12. Further, the management expects to sustain current growth momentum of 18-20%. What is interesting to note is that as the company gained aggressiveness in expansion of branches, its disbursements have also improved significantly. The management intends to continue expanding in northern parts of India. Cost of Funds and Net Interest margin – Since FY 12 the company’s net interest margins have expanded from lows of 2.9% to current NIMs of 3.50-3.6%. As a result the net interest income of the company has recorded 23% CAGR since FY 12. Further, since the last 3 years the company has been focusing on reducing proportion of higher cost bank borrowings. Bank borrowings of GICHF have come down from 72% in FY 14 and FY 15 to around 65% currently. NHB Borrowings have increased to 25% Vs 15% in FY 15. Also, as per the management the company will consider tapping bond markets and consider CPs (commercial paper) and NCDs (non-convertible debentures) if the rates are compelling.
  16. 16. Mittal Consulting Asset quality – At least till now the housing finance companies have the best asset quality in comparison to other segments in lending space. Like other housing finance companies, GICHF is not much different in terms of asset quality and has tried to minimize the risk further by making it compulsory for all the borrowers to opt for Personal Accident insurance and Mortgages property insurance. Over the years the asset quality of GICHF has improved with Gross NPA reducing from 2.78% at the end of Mar’11 to 1.76% at the end of Mar’16. The Net NPA is NIL. Further, as per the management the company is also carrying an additional provision of Rs 83.86 crores in books, beyond what is prescribed under the guidelines. Capital Adequacy Ratio (CAR) – The Capital Adequacy Ratio of the Company as at 31st March, 2016 is 17.40% (Tier 1 Capital) as against 15.36% as at 31st March, 2015. The CAR prescribed for the present is 12%. Considering generation of internal accruals and good cushion between prescribed CAR and company’s current CAR we believe company may not require equity infusion from the promoters or the other sources for the next few years. Return on average equity (ROAE) – The ROAE for the company has been gradually improving from the lows of 12-12.5% in FY 12 to 16.20% in FY 15 and 17.89% in FY 16. Historically the company has maintained its leverage ratio in the range of 7-10x against 9- 14x for other housing finance companies and with the increase in leverage the ROAE of the company can improve further.
  17. 17. Mittal Consulting Valuations At around current price of 310, GICHF is quoting at 2.2 times book value and 13 times trailing twelve months earnings and we believe the valuations of the company are reasonable on both absolute and relative basis. The other listed housing finance companies though with better growth rates are trading in the range of 3-5.5 times book value. As discussed above, the operating metrics of GICHF have been steadily improving in terms of return ratios, loan book growth, asset quality, etc. What is also heartening to note is the way the company has been expanding its branches and has been sustaining 20% growth year on year. We believe if the company is able to sustain the growth momentum without major deterioration in asset quality there’s scope for expansion in valuations while on the earnings side GICHF can sustain 15-20% growth rate. At around current price the stock offers dividend yield of 1.6% Dividend Policy Dividend Payout ratio FY 12 FY 13 FY 14 FY 15 FY 16 Dividend Per share (in Rs.) 4.50 5.0 5.0+1.0 5.0 5.0 Dividend Payout ratio 41.05% 31.66% 33.11% 26.15% 21.62% GICHF has been consistently paying out more than 20% of its earnings in the form of dividends.
  18. 18. Mittal Consulting Over the last 5 years the absolute dividend payout hasn’t increased much from Rs 4.50/- for FY 12 to Rs 5/- for FY 16 and we believe it is appropriate considering earlier the dividend payout was very high at more than 40%. It is also important for the company to retain earnings so that adequate CAR can be maintained without diluting equity. Risks & Concerns In the lending business, as an investor it’s difficult to exactly know the asset quality or the underreporting of the bad assets by the management. While currently the asset quality of GICHF looks robust and credit rating agencies like CRISIL and ICRA have assigned good ratings, a lot remains unknown to investors. In PSUs, with Managing Directors and CEOs being changed at regular intervals there’s always this risk of bad management team replacing good team. Under the leadership of current MD the company seems to have attained some aggressiveness and this could go away with the change in MD of the company. Housing finance is a well regulated industry and in case of adverse change in provisioning or capital adequacy requirements the profitability of the company can get negatively impacted. Real estate industry has a direct bearing on housing loan demand. While till now the demand on housing finance seems to have been minimal, prolonged weakness in real estate market can hamper the growth of the company.
  19. 19. Mittal Consulting Disclosure: I don’t have any investment in GIC Housing Finance and have not traded in the stock in the last 30 days. Best Regards, Ekansh Mittal Research Analyst Ph.: +91-727-5050062, Mob: +91-9818866676 Email: Rating Interpretation Positive – Expected Absolute return of over 20% Neutral – Expected Absolute return in the range of +/- 20% Negative – Expected Absolute return of over -20% % weightage – allocation in the subject stock with respect to equity investments Research Analyst Details Name: Ekansh Mittal Email Id: Ph: +91 727 5050062 Analyst ownership of the stock: No Analyst Certification: The Analyst certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer: (here in referred to as Katalyst Wealth) is the domain owned by Ekansh Mittal. Mr. Ekansh Mittal is the sole proprietor of Mittal Consulting and offers independent equity research services to retail clients on subscription basis. SEBI (Research Analyst) Regulations 2014, Registration No. INH100001690 Ekansh Mittal or its associates including its relatives/analyst do not hold beneficial ownership of more than 1% in the company covered by Analyst as of the last day of the month preceding the publication of the research report. Ekansh Mittal or its associates/analyst has not received any compensation from the company/third party covered by Analyst ever. Ekansh Mittal/Mittal Consulting/analyst has not served as Digitally signed by EKANSH MITTAL DN: c=IN, o=Personal, postalCode=208002, st=Uttar Pradesh, serialNumber=e33474920769abd72f9d 2993a093891ef801470c906d5a8d2305 5e4851f21e07, cn=EKANSH MITTAL
  20. 20. Mittal Consulting an officer, director or employee of company covered by Analyst and has not been engaged in market- making activity of the company covered by Analyst. We submit that no material disciplinary action has been taken on Ekansh Mittal by any regulatory authority impacting Equity Research Analysis. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision A graph of daily closing prices of securities is available at (Choose a company from the list on the browser and select the "three years" period in the price chart This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Ekansh Mittal/Mittal Consulting/Katalyst Wealth is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The views expressed are those of analyst and the firm may or may not subscribe to all the views expressed therein. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. Ekansh Mittal 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 this report. Neither Ekansh Mittal, nor its employees, agents nor representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Ekansh Mittal/Mittal Consulting or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. Ekansh Mittal/Mittal Consulting and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. Mittal Consulting has incorporated adequate disclosures in this document. This should, however, not be treated as endorsement of the views expressed in the report.
  21. 21. Mittal Consulting Mittal Consulting 7, Panch Ratan, 7/128 Swaroop Nagar, Kanpur – 208002 Ph.: +91-72-75050062 Mob: +91-98188 66676 Email: