Indiabulls Housing Finance: Fast-growing financial services company is a good long-term pick
Indiabulls Housing Finance, a fast-growing financial services company has transformed itself from being a diversified lender to a focused mortgage player.
The net interest margin (NIM) also improved to 5.78 per cent from 5.42 per cent year-onyear (y-o-y). The ratings upgrade—it is a AAA-rated company now—helped Indiabulls reduce its incremental borrowing costs and, thereby, improve the margin.
The company has transformed itself from being a diversified lender to a focused mortgage player. With the focus on mortgage loans, contributions from the segment increased further in the fourth quarter.
While the contribution of mortgage in the overall asset mix of the company has gone up from 74 per cent to 76 per cent y-o-y, the share of commercial vehicle financing declined from 5 per cent to 2 per cent y-o-y. The company is winding down this line of business.
The share of corporate lending book also made a marginal increase from 21 per cent to 22 per cent y-o-y. This focus on the mortgage business is helping Indiabulls keep its asset quality in check. Its gross nonperforming assets (NPAs) and net NPAs stand at 0.85 per cent and 0.36 per cent respectively.
Similar improvement is visible in the company’s return ratios as well. Its return on equity (ROE) and return on assets (ROA) improved from 3 per cent and 0.8 per cent respectively in 2008-09 to 30.8 per cent and 4 per cent respectively in 2014-15. Last quarter, Indiabulls reported a 34 per cent y-o-y growth in its assets under management (AUM).
Being a relatively small and aggressive player in the mortgage market, the company is expected to report an AUM growth of around 23 per cent in the next three years. With a strong capital adequacy ratio—a measure of a financial institution’s stability—of 18.4 per cent, it doesn’t need to raise funds in the near future to maintain its growth momentum.
Due to its high growth potential and high asset quality, Indiabulls Housing Finance is a good long-term pick. At 11-times its trailing earnings per share, this growth stock is still valued at reasonable level. And with a high dividend yield, at around 6 per cent, the downside risk in this counter is also limited.
Indiabulls is also talking with an insurance company for a tie-up and any announcement on that front can be a short-term trigger for this counter.