MANAGEMENT'S DISCUSSION AND ANALYSIS
For the purpose of the Management Discussion and Analysis, IBHFL (IBHFL) is defined as the consolidated entity consisting of the Holding Company and its subsidiaries. The terms 'the Company' and 'Indiabulls' also refer to the consolidated entity. HFC refers to Housing Finance Company.
Your company has completed 15 years of operations and I wish to thank you for your unwavering, patient and understanding support through this period. Today, IBHFL is India's second most profitable private sector company amongst its Housing Finance Company (HFC) and Non-bank Finance Company (NBFC) peers. We stand out on every key quantitative and qualitative parameter. With improving macroeconomic environment and healthy outlook for the housing finance sector, the company is poised to enter a golden stretch which will pave the path towards your company further consolidating its position as a reputed and a profitable financial powerhouse.
Mid-2013 was economically a brcarious time for the country. India was plagued with double digit inflation; soaring current account deficit (CAD) and a sliding currency. US Fed's decision to begin tapering its quantitative easing programme exerted further brssure on the capital markets and induced flight of capital out of the country. With weak economic fundamentals, India was seen to be overly dependent on unreliable foreign investment to finance its growth ambitions; leading to the country being bracketed along with Turkey, Brazil, South Africa and Indonesia as the "Fragile Five".
Two years on, the landscape has undergone a sea change. 2014 saw a shift in the country's political spectrum with the ushering in of a new government that contested the elections on a platform of economic growth. The new government has shaken off legislative and policy-making inertia and has moved to put the country on a path of sustainable economic growth. Fortunately, wider macros have increased the government's dexterity as sharp oil price correction helped rein in spiraling inflation.
FY 2014-15 saw growth picking up as lower interest rates and a decline in inflation spurred demand. The government has moved to kick-start stalled infrastructure projects and the forecasted normal monsoons should lead to a rebound in the vital agriculture sector.
Inflation is expected to average 5.8% this year aided by low crude oil prices, a good monsoon and the government's adherence to fiscal discipline. CAD is expected to remain at 1.1% of GDP, with the expected uptick in imports, driven by economic growth, being balanced by lower crude oil prices. With the economic outlook being conservative for many developed countries, export growth is likely to remain muted. To keep the CAD in check, the government should religiously adhere to its divestment targets and not rely on low crude oil prices to brvail.
Fiscal deficit for the year is expected to marginally decline to 3.9% of GDP. The drag from government's plans to raise public investment to push growth will be balanced by the positive impact from diesel deregulation, reduction in petroleum subsidies and expected increase in tax and excise collections.
The budgeted fiscal deficit at 3.9% of GDP is higher than the Finance Commission's suggestion of 3.6% as the government chose to increase capital expenditure to revive the investment cycle. This increased outlay will go towards the crucial sectors of roads, railways, power and rural development. These are vital sectors and have a telling effect on economic growth due to their high multiplier effect.
The shift to the new monetary policy arrangement between the Reserve Bank of India (RBI) and the government would also be keenly watched. To keep inflation within the targeted 4% (+/-) 2%, would require food inflation to be tamed. While low crude oil prices are aiding in this direction, its effect would wear out over time. In the long run, the government has to focus on upgrading infrastructure ofagriculture and ancillary sectors.
The government is keen to play the role of a business enabler and has made the right moves in its first year in office. Clarity in policy making and efficient implementation will go a long way in promoting growth and inclusive development.
Industry Overview Interest Rate Scenario
Aided by considerable moderation in inflation numbers and a subsiding current account deficit, the RBI got the leeway to cut interest rates. Heralding a change in the direction of interest rates, the Reserve Bank of India (RBI) cut the repo rate twice, by 25 basis points each time. This gave the needed fillip to the government's growth agenda and quelled industry clamour for a cut in interest rates.
The consumer price index rose 5.37 per cent in February, marking a fifth consecutive month of staying within the RBI's target of 2 to 6 per cent. With inflation expected to remain within the 4% (+/-) 2% target, under the new monetary policy arrangement, the RBI has the necessary macro support to direct interest rates downwards.
Housing is a key socio-economic challenge for the country with incremental urban housing demand estimated at 45 million units by 2022. The Government has announced 'housing for all by 2022' as one of its headline missions. Another key area of focus for the government is increasing the number of business hubs in the country - ambitiously termed the '100 smart cities plan'. Both of these rebrsent tremendous opportunities for the sector.
Local governments in many states have moved swiftly to ease building permissions' related bottlenecks. In an effort to direct money towards the housing sector, the central government has eased REIT norms and aligned investment objectives of large public pools of capital.
With global investors showing renewed interest, fiscal 201516 may well be a turnaround year for the real estate sector. The easing of interest rates would both increase buyer affordability, spurring demand, and also strengthen the financial performance of real estate companies.
Housing Finance Sector
The government encourages home purchase by offering tax deductions against principal and interest repayments towards a Home Loan. On account of the reduction in tax outflow, these deductions lower the effective borrowing rate for home loan customers. In this year's budget the government enhanced these deductions to a total of Rs. 3,50,000, split as Rs. 2,00,000 for principal repayment and Rs. 1,50,000 of interest repayment. This means that for the company's target segment, which is a housing loan of Rs. 24 Lakhs for a house purchased at Rs. 30 lakhs, the effective interest rate, after adjusting for the tax saved due to the deductions, works out to only 5.0%. At these rates purchasing a house outright makes very prudent financial sense. This argument becomes even starker when compared against rental yields which average at 3.1% for the top 8 cities of the country. Thus for as little as Rs. 3,500 more per month in interest cost, one can buy a Rs. 30 Lakh house instead of renting one.
Over the last two years, with the savings brference moving back to investment in financial securities, residential price inflation has considerably moderated. With wage inflation remaining robust at 10%+ level, affordability, defined as "house price" divided by "annual salary", has considerably improved for the house buyer. All of this bodes well for the housing loan market and many industry observers and participants have forecasted a 20%+ growth over the next few years.
Housing loans, and the larger segment of mortgage-backed finance, will remain a very attractive sector in the country for the next many years. India's mortgage-to-GDP penetration remains one of the lowest amongst developing nations at a mere 9% compared to 15%-30% for developing south-east Asian peer countries, and 80%+ levels for developed countries. Business owners from the burgeoning SME segment are beginning to leverage on their real estate assets to borrow more efficiently. Housing Finance Companies (HFCs), which are specialist non-bank finance companies (NBFCs) focused on mortgage financing, are growing at a faster pace as they are both growing with the market and also from expanding market share due to their specialized focus.
In National Housing Bank (NHB), the housing finance sector has a prudent and a supportive regulator. Good regulations only increase customer comfort, trust and satisfaction. This year, the NHB moved to extend waiver of br-payment charges to all loans to individuals; this was restricted to only housing loans earlier. This has had the effect of clearing up incidences of hidden charges and has made the industry even more customer oriented than it was before.
The change in FDI rules has already begun rewriting the script for the Housing Sector. Under the new rules, the minimum built-up area for projects in which foreign investment is allowed will be reduced to 20,000 square metres from the earlier 50,000. For serviced plots, there is no minimum land requirement now compared to 10 hectares earlier, while the minimum capital investment by foreign companies has been cut from $5 million to $10 million. Under the earlier rules, the government allowed 100% FDI in real estate development but with strict riders, including a lock-in period of three years during which the investment cannot be repatriated. All of these underline the governments focus on the real estate, especially the residential sector.
Indiabulls Housing Finance Limited (IBHFL) is India's second most profitable private sector company amongst its Housing Finance Company (HFC) and Non-bank Finance Company (NBFC) peers. IBHFL is AAA rated and is focused on mortgage backed low-risk lending for affordable housing, through a pan-India brsence of 220 branches.
At the end of the financial year 2014-15, ending March 31, 2015, IBHFL balance sheet size was Rs. 57,231 Crs, a growth of 29% over last year.
For FY 2014-15, IBHFL reported a PAT of Rs. 1,901.2 Crs., growing by 21% over FY 2013-14 PAT of Rs. 1,568.5 Crs.
IBHFL is amongst the best capitalized companies amongst our HFC, NBFC and banking peers with a capital adequacy of 18.4%. The company stands out on every key quantitative and qualitative parameter:
• Dual AAA rating: Highest long - term rating supported by sustained financial performance and strong business fundamentals.
• Focus on profitability in each business segment: RoE
of 29% with net earnings of Rs. 1,901.2Crs
• Focus on stakeholder value creation: Annualised total return of 47% p.a. since IPO in 2004. Since listing IBHFL has distributed dividends of over Rs. 4,300 Crs of which Rs. 2,932 Crs has been distributed over last three years.
• Focus on low-risk lending evident in superior asset quality: Gross NPA of 0.85% and Net NPA of 0.36%
Prudent business practices - adequate provision
buffer:Rs.221.0 Crs excess provisions over regulatory requirements. Total provisions to GNPA ratio of 139%
• Strong fundamentals and foundation: Moderate leverage of 5.9x. One of the best capitalized amongst peers with capital adequacy ratio of 18.4%
• Conservative conduct of business - Robust liquidity buffer: Liquidity levels of over 15% of loan book (Rs. 9631.2 Crs as on date) to negate chances of business disruption
• All this has ensured that we have been a prominent and relevant mortgage lending player over the last 10 years: to date, we have disbursed over Rs. 1 lakh crores.
Strong macros like low mortgage-to-GDP penetration; large existing and growing demand for housing and government's focus on and incentives for the sector, mean that the housing sector will sustain the robust growth demonstrated over the last few years. All business parameters of IBHFL are tuned in to make the most of this.
The company is focused on low-risk, affordable housing loans. The company's reliance on external channels of sourcing and operations is minimal with 80% of the loans sourced through in-house channels and 100% of the loans being underwritten by in-house credit managers. IBHFL has effectively leveraged technology to boost operational productivity and efficiency. Many key work flow processes are accessible to employees through hand-held devices and through mobile apps. This lets the team to remain focused on their core business activities and not get bogged down trying to negotiate operational steps. Customers can easily access their account information and issue instructions through an online portal and need not ever visit the branch.
The company's focus on low-risk, affordable housing will also help it maintain a high-quality loan portfolio and minimize client delinquencies and defaults. The gross NPA for 2014-15 stood at 0.85% of the total assets, while net NPA remained low at 0.36% of total assets.
Of the Company's total loan assets at the end of FY 2014-15, mortgage loans constituted around 76% and corporate loans contributed to another 22%. Retail mortgage loans constituted of home loans and loans against property. The home loans were disbursed at an average ticket size of Rs. 24 Lacs, with average LTVs of 71%. The loans against property had an average ticket size of Rs. 71 Lacs, with average LTVs of 49% at origination.
The investments of the Company are monitored by the Investments Committee of the Board of Directors. The committee helps the Company deploy excess funds from time to time to generate optimal returns for the Company, while also reviewing all investments and ensuring they comply with the investment policy of the Company. On 31st March 2015, the cash and bank balances and current investment of the Company stood at Rs. 9,631 Cr, as against Rs. 7,341 Cr at the end of the brvious year.
Stable, long-term and diversified liability profile
IBHFL has maintained an optimal liability mix. IBHFL depends on long term as well as medium term funding from various sources to ensure it has sufficient liquidity and appropriate working capital at all times.
Total borrowings of the Company grew from Rs. 35,540 Cr in 2013-14 to Rs. 47,487 Cr in 2014-15 - an increase of 34%. The Company fully utilized and drew down the RBI approved external commercial borrowing (ECB) limit of USD 200 million. Bonds along with ECB contribute 45% of incremental borrowing in the last 12 months.
The Company believes in maintaining a strong and healthy relationship with its stakeholders. Among its lenders, the Company now counts 132 strong relationships: 26 PSU banks, 17 Private and Foreign banks and 89 Mutual Funds, Provident Funds, Pension Funds, Insurance Companies and others.
Accounting Treatment of securitized and assigned loans
The Company has sold down loans amounting to Rs. 16,231 Cr. since inception. In FY 2014-15, the Company sold down loans amounting to Rs. 2,546 Cr. The outstanding securitized/ assigned loan book as of 31 March 2015 stood at Rs. 6,195 Cr. The Company earns a sbrad of 3.4% on these loans. The income on assignment/securitization of loans is recognized over the life of the underlying loans and not on an upfront basis.
The sell down of loans happens as either securitization or direct assignment transactions. In securitization, the loans are pooled and sold down to an SPV. The SPV issues securities, which are Pass Through Certificates (PTCs), against this pool of loans securitized. The proceeds from the sale of these PTCs are used by the SPV to purchase the pool from the originator (IBHFL). The PTCs are shown as 'investments' on the balance sheet of the investor. The investor receives the contracted payments on these PTCs out of the repayment proceeds from the underlying pool of loan assets. In direct assignment, the loans are sold down directly to the investor and they appear as 'loan assets' on the books of the investing entity.
In both types of transactions, the sold down loan assets do not appear on the balance sheet of the originator (IBHFL).
Asset Liability Management
The Asset Liability Management committee of the Board of Directors actively reviews the assets and liabilities position of the Company and gives directions to the finance and treasury teams in managing the same. Under the Schedule III of the Companies Act, 2013, the classification of assets and liabilities into current and non-current is based on their contracted maturities. The classification of assets and liabilities by the Company into various maturity buckets reflects adjustments for brpayments and renewals in accordance with the ALM guidelines issued by National Housing Bank. The ALM position of the Company in accordance with NHB Guidelines is as under.
As of 31st March 2015, the assets and liabilities of the standalone entity IBHFL with maturity up to 1 year amounted to Rs. 17,910 Cr and Rs. 17,354 Cr respectively. Assets and liabilities with maturity between 1 to 5 years amounted to Rs. 27,044 Cr and Rs. 26,883 Cr respectively, while those with maturity over 5 years amounted to Rs. 12,184 Cr and Rs. 12,901 Cr respectively.
Prudential Norms for Housing Finance Companies
National Housing Bank (NHB) regulates the HFCs and issues guidelines on income recognition, asset classifications, provisioning, provisioning for bad and doubtful debts, capital adequacy, accounting and disclosure policies, and fair practice code and asset liability management. The Company is in compliance with all applicable regulatory norms and guidelines.
Capital Adequacy Ratio
IBHFL is required to maintain capital adequacy of 12% on its risk weighted assets as per NHB regulations. IBHFL has maintained consistently high levels of capital adequacy over the last few years. The capital adequacy ratio for the current financial year was 18.35%, as compared to 19.14% of that of the brvious year. Tier I and Tier II capital adequacy at the end of financial year 2014-15 was at 15.24% and 3.11% respectively, as compared to 15.05% and 4.09% of the brvious year.
Experienced Senior Management Team
The senior management team of the Company has remained unchanged since the start of its different business lines. The Company has recruited laterally from within the industry to bring on capable leaders who continue to grow the business. Over time, the Company has also paid attention to developing a second line to the senior management team. As a result, today the middle and the senior management team of the Company have rich experience within the financial services industry, have been with the Company for several years and form the stable and reliable backbone of the Company.
IBHFL truly believes that employees are an organization's greatest asset. This is perhaps more true of financial services companies than many other sectors. Experienced credit underwriters, sales' and operations' teams are reservoirs of in-depth, many times location specific, market knowledge and thus rebrsent valuable intellectual property. Human resources is a very important function within the company and actively interacts with various business functions to maintain high levels of employee engagement.
This year we have begun providing healthy food to employees at subsidized cost. We have recruited over 300 graduates from institutions all across the country and have setup online training and e-learning tools.
All of the Company's loan recovery efforts are carried on in-house, with no cases being allocated to external collection agencies. This experienced collection team has been a big factor in the Company being able to maintain healthy asset quality.
Internal Control Systems
The Company has adequate system of internal controls for business processes, with regard to operations, financial reporting, fraud control, compliance with applicable laws and regulations, etc. Regular internal audits and checks ensure that responsibilities are executed effectively. The Audit Committee of the Board of Directors actively reviews the adequacy and effectiveness of internal control systems and suggests improvement for strengthening the existing control system in view of changing business needs from time to time.
Your Company has a well-defined risk governance structure which includes periodic reviews and close monitoring to enable building a sustainable business/franchise which takes care of the interests of all stakeholders. IBHFL has a clearly defined risk management policy that lays down guidelines for all operational areas. Combrhensive annual risk review exercises go towards continually updating the risk management policy. The policy defines role of the company's Risk Management Committee which oversees all aspects of the business, especially credit underwriting.
As a responsible corporate citizen your company believes in giving back to the society. Indiabulls Foundation has contributed extensively in the fields of Health, Education and Rural Development. Understanding the benefits of a literate economy, Indiabulls Foundation has offered scholarships to deserving students to enable them to continue their studies beyond the 12th standard. Indiabulls Foundation has also donated sophisticated e-Learning systems and computers to Tribal Asharam Schools. Indiabulls Foundation has also set up free medical health camps, mobile medical vans and has helped over 600 children with Cleft Surgeries.
Statements in this Management Discussion and Analysis Report describing the Company's objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. Actual results might differ materially from those either exbrssed or implied.
The Company is not under any obligation to publicly amend, modify or revise any forward looking statements on the basis of any subsequent developments, information or events.