The India Shelter Home Loans (ISHL) IPO, which is open from December 13–15, comes at a time when both Nifty and Nifty Bank are at a lifetime high. We list five relevant things about the home finance issue. The NBFC is promoted by PE investors WestBridge Crossover (20.3 per cent stake post-issue), Aravali Investment (26.6 per cent) and Anil Mehta (1.5 per cent). Other investment funds forming part of the public shareholding are participating in the OFS, and are offering a portion of their stake in the IPO.

At the upper end, ISHL will be valued at ₹5,278 crore, which is 3.8 times price-to-book – in line with its peers in home finance (HFC) NBFCs. The IPO will raise ₹800 crore in fresh issue for lending activities and ₹400 crore in OFS.

Retail focused affordable housing loans

ISHL primarily targets self-employed customers from the low- and middle-income groups (86 per cent of September 23 AUM), residing in Tier-II and Tier-III cities in India. The average ticket size is around ₹10 lakh, and the average LTV (loan-to-value) around 50 per cent across the years.

Geographically, Rajasthan (31.3 of Sep-23 AUM), Maharashtra (17.5 per cent), and MP (13.9 per cent) are the largest regions. Karnataka, Gujarat and UP each account for 6-7 per cent of the AUM, with a presence in other regions as well.

Macro environment – cautiously supportive

Retail credit growth in India at 14 per cent CAGR in FY18-23 has outpaced overall credit growth of 10 per cent in the period. Crisil expects this higher pace of growth to continue, especially in underbanked rural markets that ISHL operates in. The rural economy accounts for 47 per cent of GDP, and 8 per cent of overall credit, according to the RHP. With last-mile funding capacity and increasing financial inclusion metrics aided by connectivity and internet, retail lending in rural markets should record high growth.

But there are pockets of concern in the rural markets as well, which have reported ‘jobless growth’ since Covid. FMCG and auto sales have indicated a lack of volume growth in the rural segment in the last two years, supporting a weak job market view. The revised interest rates have pushed up EMIs by 20-30 per cent, which could drive delinquencies in the market as well.

Fast growing loan book with quality improvement

The NBFC registered 40 per cent AUM CAGR in the last five years, with an AUM base of more than ₹5,180 crore by September 2023 (home loan: loan against property in ratio of 57:43). The asset quality metrics have also improved, with Stage-3 assets at 1 per cent of AUM in September 2023 (stage-3 assets are NPAs which are due for more than 90 days), from 2.8 per cent in September 2022. But loans which are 30 days past due have not improved as much, accounting for 3.2 per cent in September this year, compared to 4 per cent last year. But with close to 60 per cent of current AUM built only in the last three years, the NBFC loan book may not have weathered significantly.

ISHL sources its funds primarily from term loans, accounting for 69 per cent of borrowings in September 2023, followed by financing from National Housing Board at 17 per cent, and ECB at 7.6 per cent.

High spreads on lending

With its lending profile focused on the underbanked segments, ISHL secured a 6 per cent spread in September 2023. This accounts for yields of 14.9 per cent (flat from last year) on the assets, net of borrowing costs, which increased 60 bps YoY to 8.9 per cent. Post-IPO, with an improvement in credit rating from improved capital flows, ISHL may improve its spreads as cost of borrowing eases. With the US Fed outlining an exit roadmap for high interest rates, both yields and borrowing costs may decline simultaneously in the domestic markets as well.

Peer comparison

At the upper range of the IPO price band of ₹493, ISHL is priced at 3.8 times price-to-book, which is at the lower end of the peer group range of the 3.5-4.6 times for September. Within small ticket housing financing companies, Aptus secures the highest valuation at 4.5 times, driven by yields at 8.8 per cent and an inline NPA ratio of 1.2 per cent. Aavas, with the highest loan book of ₹15,000 crore, trades at 3.6 times book value. The valuation range may be attributed to a high RoA of 7.7 per cent for Aptus, compared to 3.3 per cent for Aavas. ISHL with RoA at 4.7 per cent despite moderate spreads, points to the low impact of operational or credit costs on return metrics.

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