IPO: India Shelter Finance Corporation

India Shelter Finance Corporation, an affordable housing finance company, is coming out with its IPO (initial public offering) on December 13, 2023. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Its three-year average ROE is 12 per cent, and its three-year average net interest margin is 5.5 per cent.
  
• Growth: Over the last three years, it grew its AUM (assets under management) by around 41 per cent annually and PAT by about 33 per cent annually.
  
• Valuation: The stock will be priced at a P/B of 2.4 times, compared to its peers' average of 4.3 times.
  
• Overview: The Indian housing finance industry is projected to grow 13-15 per cent annually between FY23-26 on the back of government initiatives, supportive policies, and rising income. However, intense competition remains a threat to the company.

About the company

Incorporated in 1998, India Shelter Finance Corporation is an affordable housing finance company primarily providing housing loans (58 per cent of AUM) and loans against residential properties (42 per cent). It is present in 15 states and has access to nearly 94 per cent of the Indian housing finance market.

Strengths of India Shelter Finance Corporation

• It has registered a solid annual AUM growth of around 41 per cent over the last three years.
  
• Low LTV ratio: It uses mortgages as collateral against loans and has maintained an average loan-to-value (LTV) of 50 per cent as of September 30, 2023. For the uninitiated, the LTV ratio is how much of the property value the loan covers.

Weaknesses of India Shelter Finance Corporation

• High NPAs: It reported an average net NPA of 1.3 per cent in the last three years and a net NPA of 2.1 per cent in FY22. Also, its provision coverage ratio stood at 28.7 per cent as of September 30, 2023.
  
• The housing loan sector is highly competitive . Several other players, including banks, offer similar services.

Risk report

Management

• Is the company free from regulatory penalties?
  Yes, the company is free from regulatory penalties.
• Does the company provide for its non-performing assets (NPAs) adequately? Specifically, is the provision-to-gross NPAs ratio more than 50 per cent?
  No, its provision coverage ratio stood at 28.7 per cent as of September 30, 2023. However, the company is a housing finance company and provides loans against mortgages.
• Do the top five managers have stock as a significant part of their compensation (more than 50 per cent)?
  No. While ESOPs have been offered in the past, stock-based compensation does not form a significant part of the top five managers' compensation.

Financial strength and stability

• Does the company have a fresh slippage-to-total advances ratio of less than 0.25 per cent? (fresh slippages are loans that became NPAs in the last financial year)
  No, the ratio stood at 0.04 per cent as of FY23 and 0.7 per cent as of September 30, 2023.
• Did the company generate a current return on equity (RoE) of more than 12 per cent and a return on assets (RoA) of more than one per cent?
  Yes, it reported an ROE and ROA of 13.4 and 4.1 per cent, respectively, in FY23.
• Has the company increased its loan book by 20 per cent annually over the last three years?
  Yes, it grew its loan book by 41 per cent annually between FY21 and FY23.
• Has the company increased its net interest income (NII) by 20 per cent annually over the last three years? (Net interest income is the difference between the revenue that is generated from a company's assets and the expenses associated with paying out its liabilities).
  Yes, its NII grew by 32 per cent annually between FY21 and FY23.
• Is there a direct relationship between the increase in the loan book and the increase in net interest income (NII)?
  Yes, higher advances have translated into higher net interest income. Over the last three years, its NII grew 32 and advances grew 41 per cent.
• Is the company's capital adequacy ratio more than 15 per cent?
  Yes, its capital adequacy ratio stood at 49 per cent as of September 30, 2023.
• Can the company run its business without relying on any external funding in the next three years?
  Yes, its capital adequacy ratio stood at 49 per cent as of September 30, 2023. The healthy cash reserves and the IPO proceeds would ensure the sustainability of business operations.
• Did the company generate an average net interest margin (NIM) of over 3 per cent in the last three years? (Net interest margin or NIM denotes the difference between the interest income earned and the interest paid by a financial institution relative to its interest-earnings assets like cash).
  Yes, its average three-year net interest margin (NIM) is 5.5 per cent.
• Is the company's average gross NPA ratio (Gross NPAs/Total advances) over the last three years less than 1 per cent and the average net NPA ratio (Net NPAs/Total advances) less than 0.5 per cent?
  No, its three-year average gross NPA is 1.7 per cent, and its three-year average net NPA is 1.3 per cent.
• Does the company have a cost-to-income ratio of less than 50 per cent?
  No, it reported a cost-to-income ratio of 80 per cent in FY23.

Growth and business

• Will India Shelter Finance Corporation be able to scale up its business?
  Yes, the housing finance industry is projected to grow 13-15 per cent annually, driven by urbanisation and government support.
• Does the company have a loan book of more than Rs 1,00,000 crore?
  No, its AUM stood at Rs 5,181 crore as of September 30, 2023.
• Does the company have a recognisable brand truly valued by its customers?
  No, many banks and NBFCs operate on a larger scale, have better brand recall, and offer competitive rates to customers.
• Does the company have a credible moat?
  No, there are other players that offer similar services on a larger scale.
• Is the level of competition faced by the company relatively low?
  No, India's financial sector is highly competitive for both public and private players.

Valuations

• Is the company's price-to-earnings ratio lower than its peers' median level?
  Yes, it will trade at a price-to-earnings ratio of 26.3, lower than its peers' median level of 29.9.
• Is the company's price-to-book ratio lower than its peers' average level?
  Yes, it will trade at a price-to-book ratio of 2.4, lower than its peers' median level of 4.3.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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