Headquartered in Haryana, India Shelter Finance Corporation Ltd. (ISFC) is a retail-focused affordable housing finance company with an extensive distribution network comprising 203 branches as of September 30, 2023, and a scalable technology infrastructure across its business operations and the loan life cycle. The company’s target segment is the self-employed customer focusing on first-time home loan takers in the low and middle-income group in Tier II and Tier III cities in India, and affordable housing loans, i.e., loans with ticket sizes lower than Rs. 2.5 million as per the criteria set out in the Refinance Scheme under the Affordable Housing Fund for the Financial Year 2021-22 issued by the National Housing Bank. The company primarily finances the purchase and self-construction of residential properties by first-time home loan takers through home loans and also offers loans against property. Its main focus is serving low and middle-income, salaried, and self-employed individuals, catering to their financial needs. With over 13 years of operations as a housing finance company, the company has a significant presence in the states of Rajasthan, Maharashtra, Madhya Pradesh, Karnataka, and Gujarat’s affordable housing finance market in India.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
- to meet future capital requirements towards onward lending; and
- for general corporate purposes.
Fastest growing AUM among Housing Finance Companies in India, with high yields along with granular and retail-focused portfolio
ISFC achieved AUM growth of 40.8% between FY21-23, registering the highest growth among housing finance companies in India. The strong growth rate reflects the effectiveness of its operational model and the ability to underwrite and serve customers in the targeted segments in Tier II and Tier III cities in India. The company maintains a focus on serving low and middle-income, salaried, and self-employed individuals, catering to their financial needs. They have gained domain knowledge and understanding of the specific financial circumstances and challenges faced by the low and middle-income customer segment, and their underwriting process is tailored towards assessing their creditworthiness. As of September 30, 2023, 100% of their loans catered to the retail segment. ISFC reported the second-highest total income-to-advance ratio at 16.8% compared to its peers and during the same period, it also reported the third-highest yield on advances at 14.9%. The company has been able to maintain a consistently high yield of more than 14% on its portfolio, driven by its commitment to deliver strong financial performance during the last three financial years.
Diversified borrowing profile with a demonstrated track record of reducing financing costs
The housing finance company focuses on maintaining a long-term and diversified borrowing profile by engaging with multiple lenders to ensure timely funding throughout the year. This approach mitigates the risk of relying on a single funding source and enables them to negotiate favourable borrowing costs. ISFC demonstrated the ability to improve its borrowing costs, even in environments characterized by rising interest rates. Their average borrowing costs reduced to 8.3% as of March 31, 2023, from 8.7% as of March 31, 2021. The company leverages its NHB borrowings to support its lending activities, ensuring a reliable and cost-efficient source of funding. In line with its commitment to diversification and innovative financing models, it has also embraced co-lending initiatives that involve partnering with other financial institutions to provide joint lending solutions. Furthermore, as a portion of its portfolio is eligible for priority sector lending, it has carried out securitization and direct assignment transactions, thereby transferring credit risk and ensuring the optimization of its results of operations.
Valuation and Outlook:
The housing finance sector of India comprises Public Sector Banks, Private Sector Banks, Housing Finance Companies, NBFCs, and other players (including foreign banks, Small Finance Banks, etc.), Of the total Rs. 31 trillion credit outstanding of the housing loans market, HFCs had the second highest market share of 34% in FY23. Within the player groups, HFCs are expected to register strong growth due to their higher market share, deeper penetration in tier-II and tier–III cities, and adequate liquidity support. ISFC’s profitability increased in FY23 owing to improved credit costs and an increase in interest yields. Going forward, borrowing costs are expected to stabilize in FY24 and the overall profitability of housing loans is still expected to be sustained, on account of higher interest income. The company plans to expand its branch staff, extend the branch network within existing geographical areas, and explore opportunities in adjacent markets for diversification. Their credit and risk management policies which is backed by technology and data analytics have helped them to maintain asset quality, leading to a fall in its GNPA to 1.0% as of September 30, 2023, compared to 2.8% as of September 30, 2022. Amongst its peer set, ISFC had the second-highest annualized RoA of 4.7% for the six months ended September 30, 2023. Furthermore, the company has posted steady growth in its top and bottom lines. As the lender will utilize the net proceeds of the fresh equity shares issue to meet future capital requirements towards lending, we are positive about the IPO. At the current adjusted P/BV multiple of 2.5x, we believe the company is attractively valued and advise investors to “Subscribe” to the issue from a long-term perspective.