India Shelter Finance Corporation

Focused on low-ticket housing loans

Financing to low- and middle-income first time home loan takers in Tier II and Tier III cities

India Shelter Finance Corporation incorporated on 26 October 1998 is retail focused affordable Housing Finance Company (HFC). The self-employed category is the target customer segment from low- and middle-income group in Tier II and Tier III cities. It has an extensive distribution network comprising 203 branches spread across 15 states which accounts for 94% of the affordable housing finance market in India. The employee base stands at 2997 employees across operations.

The company primarily finances the purchase and self-construction of residential properties by first-time home loan takers through home loans and offers loans against property (LAP). The home loans account for 57.6% of AUM with 70.7% of customers being first-time home loan takers. The LAP represents 42.4% of AUM. About 75.7% of the loan portfolio has a ticket size below Rs 15 lakh and 95.0% is below Rs 25 lakh.

The company has exhibited a strong two-year CAGR growth of 40.8% in terms of assets under management (AUM) from FY2021 to FY2023. Its AUM further jumped 43% to Rs 5181 crore end September 2023.

The company leverages technology and analytics across operations and throughout the customer life cycle from onboarding, underwriting, asset quality monitoring, collections and customer services aiding increased productivity and reduced turnaround times and transaction costs.

An end-to-end in-house business sourcing is helping to directly connect with customers, minimize turnaround times, increases customer retention and mitigate the risk of fraudulent activities.

The credit and risk management policies, backed by technology and data analytics throughout business processes has helped to maintain healthy asset quality. The company has been able to maintain average sanction loan to value (LTV) on portfolio low at 50.9% with 55.1% for home loans and 45.3% for LAP.

The company has well diversified sources of borrowings including public and private sector banks, refinancing from the NHB, external commercial borrowings and the issuance of non-convertible debentures. The credit rating of the company is healthy at A+. The company has been able to maintain healthy spreads at 6.0% in H1FY2024.

Rupinder Singh is the MD&CEO of the company, with extensive experience in mortgage financing. Anil Mehta is the individual promoter and WestBridge Crossover Fund and Aravali Investment Holdings are Corporate Promoters.

The Offer and the Objects

The initial public offer (IPO) consists of fresh issue to raise Rs 800 crore through issuance of 1.71 crore equity shares at the lower band of Rs 469 per share (face value Rs 5 per share) and 1.62 crore equity shares at the upper band of Rs 493 per share.

The issue also consists of Offer for Sale (OFS) to raise Rs 400 crore through issuance of 0.85-0.81 crore equity shares. The promoters are not participating in the OFS. The promoter shareholding in the company would decline to 48.3% post- IPO from 56.9% pre-IPO.

The issue is to be made through the book-building process and will open on 13 December 2023 and will close on 15 December 2023.

The company proposes to utilize the net proceeds from the Fresh Issue towards augmenting the capital base to meet future capital requirements, arising out of the growth of business and assets. The company expects to receive the benefits of listing the Equity Shares on the Stock Exchanges, including to enhance brand image among existing and potential customers and creation of a public market for the Equity Shares in India.

Strengths

The company has showed strong growth in AUM with high yields, and granular, retail focused portfolio. Rising urbanization, growing disposable income and favorable demographics are expected to lead to higher mortgage penetration going forward.

The company has an extensive and diversified phygital distribution network with a significant presence in Tier II and Tier III cities accounting for 89.8% of the portfolio.

The technology and analytics-driven scalable operating model enables the company to expand operations and drive growth in revenue, increase productivity and reduce turnaround times and transaction costs.

About 97.9% of the loan book has one or more borrowers as women and their involvement in financial decisions is leading to better management of household expenses and disciplined approach towards credit.

About 98.5% of disbursed loans originated in-house in H1FY2024 providing pricing power for loans, healthy margins, reduced turnaround time and better asset quality.

The asset quality is strong with GNPA at 1.00% and NNPA at 0.72% end September 2023. About 68.9% of customers have a credit score of 650 or higher.

The capital adequacy ratio of the company is strong at 48.7% with Tier I ratio at 47.9% helping to keep leverage ratio substantially lower at 2.4 times and providing strong headroom for growth.

Weaknesses

The company primarily serves customers in the low and middle-income category and 70.7% of customers are first-time home loan takers in Tier II and Tier III cities in India. Such customers generally may have a higher risk of default due to various reasons including business failure, insolvency, lack of liquidity, loss of employment or personal emergencies.

The self-employed customers accounting for 70.6% of AUM are often considered to be higher credit risk customers due to their increased exposure to fluctuations in cash flows due to adverse economic conditions.

Three states Rajasthan (31.3% of AUM), Maharashtra (17.5%) and Madhya Pradesh (13.9%) together contributed to 62.7% of AUM and 57.6% of branches end September 2023 and any adverse developments in these states could have an adverse effect on business.

Government, RBI , and NHB has various policy initiatives facilitating the provision of housing and housing finance and any change in these incentives may have an adverse effect on business.

Valuation

India Shelter Finance Corporation has exhibited strong loan growth among peers with healthy asset quality and return on asset (RoA). P/E at price band of Rs 469-493, works out to 25.0 to 26.3 times of EPS of Rs 18.7 for TTM ended September 2023.

Post-issue, the book value (BV) will be Rs 203.2 and adjusted BV (ABV) net of net NPAs works out to Rs 200.3. The scrip is being offered at price to Adj BV multiple of 2.5 times.

Among peer NBFCs, Aptus Value Housing Finance India is trading at P/ Adj BV multiple of 4.3 times (consolidated basis), Aavas Financer 3.5 times and Home First Finance 4.9 times.

In terms of PE, Aptus Value Housing Finance India is trading at 27.0 times its EPS for TTM ended September 2023 (consolidated basis), Aavas Financers at 25.6 times and Home First Finance at 34.0 times.

RoA of the company was strong at 3.6% for TTM ended September 2023 compared with 3.1% for Aavas Financier, 3.3% for Home First Finance and 7.0% for Aptus Value Housing Finance India.

RoE of the company was low at 9.2% for TTM ended September 2023 on account of low debt to equity ratio at 2.4 times. RoE of Homes First Finance stood at 13.7%, Aavas Financiers at 13.2% and Aptus Value Housing Finance India at 15.6%.

The company has maintained healthy asset quality Net NPA ratio at 0.72% compared with 0.66% for Aavas Financiers, 0.89% for Aptus Value Housing Finance India and 1.20% for Home First Finance.

AUM of the company has surged 43% year on year to Rs 5181 crore end September 2023. The AUM of Home First Finance jumped 33% to Rs 8365 crore, followed by Aptus Value Housing Finance 28% to Rs 7604 crore and Aavas Financers 22% to Rs 15320 crore.

The net interest margin (NIM) of the company was healthy at 6.0% for H1FY2024. NIM of Home First Finance was at 5.5%, Aavas Finance at 8.0% and Aptus Value Housing Finance India at 13.3%.