“The only thing constant in life is change”. This seems all the more true in case of the mortgage finance industry, which has been continuously evolving every decade. Over the next few years, we foresee metamorphosis in the mortgage finance industry`s dynamics propelled by new growth catalysts, both in terms of customer segments and geographical presence. We anticipate humungous growth opportunities in the highly under-served self employed and LAP segments. Geographically, the next leg of growth will come from footprint expansion into Rajasthan, Madhya Pradesh, Uttar Pradesh, Chattisgarh and West Bengal. These potent catalysts will be further bolstered by structural growth drivers including the government and regulatory incentives. We prefer players with niche presence in tier II/III cities underpinned by optimal product mix which can cash on and build scale in emerging growth segments.
Dewan Housing Finance (DHFL) is a dominant player in niche markets (Tier II & III cities) with strong foothold in the limited competition low and middle income (LMI) segment. The company has built a lucrative model (bolstered by strategic inorganic expansion) that caters to a gamut of potential customer base, portending humungous growth opportunities. We estimate it to sustain loan CAGR of 20% plus, which along with improving NIMs (aided by recent rating upgrade), will lead to an impressive 23% PAT CAGR and improve RoE to over 19% in FY17E. Initiate coverage with ‘BUY’ and TP of INR642 (assigning 1.75x FY16E P/Adj. B), implying >50% upside.
Indiabulls Housing Finance (IHFL), a prominent mortgage financier (with AUM of INR450bn), emerged much stronger after down-sizing riskier assets post FY09. The company is undergoing structural metamorphosis with steady 20% plus asset growth, credit rating upgrades and active sell-downs supporting its best-in-class NIMs. We believe an optimal product strategy with stringent risk mitigants to manage NPLs, stable franchise, high liquidity and low gearing will help sustain superior return ratios (RoA/RoE of 4%/30% plus). Moreover, high dividend yield and consistent earnings delivery, will lend predictability and result in further re-rating of the stock. We initiate coverage with ‘BUY’ and target price of INR653 (upside > 30%) assigning it 3.1x FY16E adjusted book based on Gordon growth model.