«MANAGEMENT: MR. GAGAN BANGA – VICE CHAIRMAN AND MANAGING DIRECTOR, INDIABULLS HOUSING FINANCE LIMITED MR. ASHWINI K. HOODA - DEPUTY MANAGING ...»
“Indiabulls Housing Finance Limited Q4 FY16
Earnings Conference Call”
April 25, 2016
MANAGEMENT: MR. GAGAN BANGA – VICE CHAIRMAN AND
MANAGING DIRECTOR, INDIABULLS HOUSING
MR. ASHWINI K. HOODA - DEPUTY MANAGING
DIRECTOR, INDIABULLS HOUSING FINANCE LIMITED
MR. MUKESH GARG - CHIEF FINANCIAL OFFICER,
INDIABULLS HOUSING FINANCE LIMITED
MR. PINANK SHAH - HEAD TREASURY, INDIABULLS
HOUSING FINANCE LIMITED
MR. RAMNATH SHENOY - EXECUTIVE VICE PRESIDENT
INVESTOR RELATIONS, INDIABULLS HOUSING
MODERATOR: MR. ISHANK KUMAR - UBS SECURITIES INDIA
Ishank Kumar: Good Evening, Everyone and Thank You for joining us today. I would like to welcome the management team of Indiabulls Housing Finance. We have with us Mr. Gagan Banga – Vice Chairman and Managing Director; Mr. Ashwini Hooda – Deputy Managing Director; Mr.
Mukesh Garg – Chief Financial Officer; Mr. Pinank Shah – Head (Treasury); and Mr.
Ramnath Shenoy – Executive Vice President (Investor Relations). I now invite Mr. Banga to provide Key Highlights of the Results. Over to you, sir Gagan Banga: A very Good Day to all of you and I Welcome You to the Fiscal 2015-2016 Earning Call. I am very pleased to announce that we are only the second private Non-Bank Housing Finance Company in the finance sector in India to cross Rs.20 billion in annual profits in the financial history of India so it is indeed a very-very proud moment for the Management Team of Indiabulls. I will first discuss the emerging macroeconomic landscape for the housing industry and brief you all on a few qualitative developments and initiatives which are specific to Indiabulls Housing.
I will just run you through some key developments. In the 2016 Budget, 100% of profits from construction of Affordable Housing was exempted from tax. This one step has the potential to completely change the residential real estate market dynamics. Historically the Affordable Housing sub-segment operated at a margin of about 20% whereas the Premium Housing segment which saw most of the structured developers had a substantially higher profit margin of nearly between 25% and 30%. Complete waiver of income tax implies that profit margins from Affordable Housing will now shot up to approximately 30% equaling or even over taking the profit margins in Premium segments. This will obviously result is in the focus of organized developers and efficient finance being directed towards Affordable Housing. All of which should lead to an increase in supply and continued moderation of prices, buyers would also be further reassured of timely completion as the builder will have to deliver in three years of time to avail of tax exemption and the builder would generally have the financial and execution
with all to also be able to deliver on these projects. So you would see a bunch of large developers coming in to the Affordable Housing market.
The real estate bill is also another very-very big positive. I firmly believe that the regulatory change has always promoted transparency, discipline and regulatory change always brings in scale to industry. Real estate bill will bring about welcome structural changes to the sector and will also help attract very efficient finance so; it should be relatively happy hunting ground for players such as us.
Guidelines around ring-fencing of collection from buyers and regulatory focus on driving timely completion and delivery will assure buyers. This will require developers to have more structured requirements around finance and will generally require all the large guys to also focus hard on efficiently financing their working capital.
The Budget has also increased the tax reduction limits for the first time buyer purchasing flat in the Affordable Housing market. The increase in tax deductions to Rs.4 lakhs now translates to reducing the effective yield to 4% for a 9.4% Housing Loan. I have several times in the past highlighted the importance of this narrowing gap between effective mortgage yields and the average rental yields as they exist. Average rental yields as per data provided NHB and other sub-sources is at about 3.1% for urban India. Thus, today with this revised additional tax advantage for only Rs. 1,800 more in interest expense in lieu of rent, a family can buy a house of their own instead of renting one.
Within the next two years average generally expected lending rate should further fall and my sense is that the Housing Loan yields will actually slip below rental yields. The last time this happened was in 2003 to 2005 and we are all aware of the bull market that that set-up for real estate in India especially on the sales side. So I expect a replication of that to happen in the course of the next 12 months to 24 months.
In other extremely positive development especially for Indiabulls Housing, is the removal of distribution tax on pass through securitization cash flows. We are one of the largest sellers of mortgage pools in the market. Clarification on tax on PTC structures will attract large monies from long-term investment seekers like insurance companies, provident funds as well as banks and the softening yields will result in our margins remaining steady to expanding and most imply we getting a access to a much larger source of monies which is perfectly asset and liability matched.
The Governor in the last Monitory Policy has also reiterated his focus on addressing structural liquidity especially at the long end of the yield curve. This is a very-very important development for us structurally because we have shied away from borrowing short and lending long. This should result in the flattening of the yield curve and in parallel what the government has also been doing is that it has been urging insurance companies, provident funds and
pension funds to invest 15% of their corpus towards Affordable Housing and infrastructure development.
All of this put together should ensure that long-term rates should remain reasonably benign in a environment in which rates are anyways falling and that should enable a player like Indiabulls to not only pass on the benefits to existing borrowers but to also go with a very attractive proposition to new borrowers.
The key developments of the housing sector build-on pre-existing drivers such as favorable demographics of a young population, large unmet housing demand, rising urbanization and improving affordability with wage inflation steady at between 10% and 11% in India and now with falling inflation and wage inflation staying steady, I think the affordability will only go up in the next couple of years. All these factors and the governments particular focus on Housing for all should accelerate the demand for loans and should sustain the housing sector for the next decade or so.
The other point which is extremely relevant as a large HFC is that our market share is still growing and on incremental basis our market share stands at around 6% to 7% of the overall mortgage market including banks and housing finance companies. So while we are one of the most dominant housing finance companies given the modest market share that we still have and the overall nature of market in which there are several players occupying unique positions, our ability of being able to grow slightly ahead of the market remains quite strong and therefore, we are in a position to reiterate our guidance which we had given at the start of last year of being able to grow across financial parameters of between 20% and 25%. We believe that we will be in fiscal 2017 also be able to grow across parameters between 20% and 25%.
Sell down transactions which are representative of the most efficient utilization of capital for every Rs.100 of loans that we sell down the retention on the book is about 10% with a very high Tier-I. I think we are in a position where we can push sell down of our loans very-very aggressively and actually elongate the process for our next capital raise. Our estimation has been that for the next six years to seven years, we do not need to raise capital and the management team today sees to elongate that period from six years to seven years to about a decade while leading to a natural uptick in return on equity.
Besides efficient utilization of capital, the other important line to enhance earnings is fee income. We have spoken in the past about insurance cross selling being an important element of our fee income. To increase that fee income line we have also very recently tied-up with HDFC Life. We were already partnering with them for a couple of products and with this type of a relationship we hope to open up new fee income avenues and more cross sell of insurance to our customers also helps us minimize risk across whole host of risk like death, accident and even job loss. Now that sets the macroeconomic environment for us.
Moving on to more specific numbers for the quarter and the financial year. Our PAT for 2015has gone up to Rs.23.45 billion from Rs.19 billion for fiscal 2014-2015. This is an yearon-year growth of 23.3% and is exactly in the middle of the guided range.
In early March we had declared an additional fifth interim dividend of Rs.9 per share to help our shareholders realize their dividend income in a tax efficient manner so, we have not declared a dividend this quarter.
We continue to remain on our guided target on profits with PAT for quarter four fiscal 2016 at Rs.6.76 billion which is growth of 22.6% over quarter four FY15 in which we had made Rs.5.51 billion. Our loan book stands at Rs.686.83 billion as compared to Rs.522 billion which is a growth of around 31%. Our asset mix has also tended in favor of Home Loans with Home Loans now becoming almost 52% of the book.
Over the last two quarters our housing loan book as per our guided strategy has increased from 50% to 52% and we are poised to make the most of growth opportunities which I have articulated just a few minutes back and I am hopeful that through the course of fiscal 2018 we should be able to get our Home Loans to about 60% of our loan assets without disturbing our margins.
Revenues have grown to Rs.92.26 billion, as compared to Rs.72.53 billion in fiscal 2015 which is a 27% growth. For the quarter, our revenue stood at Rs.26.47 billion which is a growth of 25% over quarter four of FY15. NII most importantly has grown to Rs.37.94 billion which is a growth of 27.8% over FY15 where NII had been reported at 29.67 billion. I would like to reiterate that NII for us does not include fee and other charges. The NII for quarter four is at Rs.11.16 billion, which is a growth of sequentially a growth of 15% over quarter three NII which was at Rs.9.7 billion. NII has sequentially grown faster than the 10.3% growth in loan assets. This is largely on the back of our margins having inched up from 316 basis points to 318 basis points and not only do margins remain at the higher end of the guided range of 300 basis points to 325 basis points, it is also a demonstration of the company’s ability of being able to manage the migration of Home Loan from 50% to 60% without making a dent on the spreads.
The total income for FY16 splits as income from operations at Rs.78.42 billion and other operating income at Rs.4.48 billion and other income of Rs.9.36 billion. We have already shared in the past that other income generally is a function of all the cash management that we have to do for the liquidity that we maintain on the balance sheet.
The income line split for quarter four FY16 is income from operations of Rs.22.33 billion other operating incomes of Rs.1.68 billion and other income of Rs.2.46 billion. The fee income for the full year has shown a very robust increase of 35% to Rs.5.23 billion and fee income for the quarter has shown an exceptional increase of 47% to Rs.1.9 billion from Rs.1.29 billion same time last year.
Page 5 of 20 Indiabulls Housing Finance Limited April 25, 2016 The disbursals for fiscal 2016 stood at Rs.263.58 billion as compared to Rs.203.04 billion for fiscal 2015 a growth of 29.8%. Home Loans is the bulk of this at Rs.135 billion, LAP is Rs.64 billion and corporate mortgage loans are Rs.64 billion, this does not include two loans which we underwrote and sold down within the same quarter. The disbursal number for quarter four fiscal 2016 is Rs.91.37 billion which splits as Rs.49.99 billion for Home Loan, Rs.21 billion for LAP and Rs.19.96 billion for corporate mortgage loans again not having two corporate mortgage loans which we originated and sold down within the quarter.
Our operating expenses of fiscal 2016 was Rs.5.98 billion compared with Rs.5.18 billion and is in line with what we have guiding that our operating expenses will grow much slower than our net interest income and our book. Our operating expenses have grown by only 15.5% as a result our cost to income ratio is down to 14.3%, a fall from 16.4% in fiscal 2015.
Despite being able to bring down our cost to income ratio to 14.3% we have been able to increase our man power by about 13% and also pay our people well so, our staff related expenses are up 27%. So we have been able to get greater efficiencies from our other expenses.