Housing Finance Industry Analysis and Valuation

Housing Finance - Financial Services Sector

INDEX• EIC Analysis

• Economy• Industry• Company

• Relative Valuation

• Discounted Cash Flow

Economic Analysis

• Gross domestic savings remained above 30 per cent of GDP

• India’s High Net Worth Individual (HNWI) population to double by 2020

• Robust Assets under Management (AUM) growth

Indian Advantage

Indian Advantage

Growing Demand: • Rising incomes• Financial inclusion drive• Investment corpus Innovation• cross-utilization of channels• Product innovation

Indian Advantage

Policy Support• National Rural Financial Inclusion Plan (NRFIP)• new banking licenses and increased the FDI limit• Jan Dhan YojanaInvestments/Developments• international financial centers (IFCs)• Mumbai as a global financial center• Bandhan Financial Services Pvt. Ltd raised Rs 1,600cr• Yes Bank MOU with US OPIC ltd• JP Morgan acquired 4.11% in Mahindra & Mahindra fin. services

Porters Five Force

Growth Drivers

• GNS to continue growing at a healthy pace

• Indian Households are major contributors

• Innovative & Customized products

Opportunities

• Untapped potential at the bottom of the pyramid

• Rural Credit segment

Housing Finance

• Important segment of credit portfolio of banks• Very competitive• Rapid growth = Concerns in RBI• Subprime Lending crisis

Introduction- Housing

• Total housing credit outstanding (Mar’14) over Rs. 9 trillion, which grew by 20% over Rs. 7.5 trillion as on previous year

• low-income housing segment (monthly household income of Rs. 7,500 – 20,000) is estimated at 22 Million units

• estimated opportunity size of Rs. 11,000 billion and a potential size of the mortgage market being Rs. 8,800 billion

Economic Momentum

• Growing purchasing power of lower and middle income group individuals

• Acceleration in GDP growth has raised the demand for housing

• Weighted Average Lending Rate

Growth Opportunities

• overall housing shortage at 63 million dwelling units• mortgage penetration from formal lending sources is 9%,

while the remaining 91% of the houses are built using own funds and from informal sources

Housing Shortage

Lack of Formal Finance

Re-emergence

• Market share of housing finance companies in fresh housing loans granted has steadily increased to 46% in FY13 from 41% in FY09

• 20 new companies have obtained registration from National Housing Bank (NHB) taking the total number of housing finance companies from 43 (Jun-09) to 63 (Sep-14)

HDFC L IC Repco GRUH DHFL GIC Indiabul l s CanFin

45.49

20.28 20.6

5.84

44.39

19.66

49.27

37.32

Earn

ing

Per S

hare

Company/EPS HDFC LIC Repco GRUH DHFL GIC india bulls canfin

EPS 45.49 20.28 20.6 5.84 44.39 19.66 49.27 37.32

Earning Per Share: Earnings per share (EPS) is the portion of a company's profit that is allocated to each outstanding share of common stock, serving as an indicator of the company's profitability.EPS = net income / average outstanding common shares

P/E Ratio: The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative to its per-share earnings.

Company/PE HDFC LIC Repco GRUH DHFL GIC india bulls canfin

P/E 25.64 21.05 33.64 41.27 9.99 9.66 14.63 22.24

HDFC LIC Repco GRUH DHFL GIC india bulls canfin0

5

10

15

20

25

30

35

40

45

P/E Ratio

Return on Capital Employed: A financial ratio that measures a company's profitability and the efficiency with which its capital is employed. Return on Capital Employed (ROCE) is calculated as:ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed


ROCE 13.89 10.62 11.8 11.962 11.09 10.77 11.468 10.246


2

4

6

8

10

12

14

Current Ratio: Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run.CA = Current Assets/Current Liabilities


ROCE 0.41 0.1 2.946 12.09 5.23 3.462 6.008 9.27


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4

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8

10

12

14

Long term Debt Equity Ratio: A debt ratio used to measure a company's financial leverage.The D/E ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity.

The formula for calculating D/E ratios can be represented in the following way:Total liability/Shareholder’s Equity


Current Ratio 2.68 times 8.54 times 4.652 times 8.788 times 8.522 times 4.78 times 4.304 times 7.09 times

HDFC L IC Repco GRUH DHFL GIC india bul l s canf in

2.68

8.54

4.652

8.788 8.522

4.78 4.304

7.09

Interest Coverage Ratio: Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. It is calculated by:Interest Coverage Ratio: EBIT / Interest Expense

Company/PE HDFC LIC Repco GRUH DHFL GIC India Bulls Canfin

ICR 1.26 times 1.31 times .29 times 1.51 times 1.23 times 1.282 times 2.636 times 1.296 times

HDFC LIC Repco GRUH DHFL GIC india bulls

canfin0

0.5

1

1.5

2

2.5

3

1.26 1.31

0.29

1.51 1.23 1.282

2.636

1.296

RELATIVE VALUATION…?


• Value an asset by looking at how similar assets are priced



• Disregarding non-similar assets



• Disregarding non-similar assets

• Standardizing prices, usually by converting into some multiples.

RELATIVE VALUATION• In relative valuation, the value of an asset is derived from

pricing of ‘comparable assets’, ‘standardized’ using a common variable.

RELATIVE VALUATION• In relative valuation, the value of an asset is derived from

pricing of ‘comparable assets’, ‘standardized’ using a common variable.

• Steps:• Find comparable assets that are priced by the market• Scale the market prices to a common variable (standardize)• Adjust for differences (in fundamentals) across assets – risk,

growth

Comparing PE across Housing Finance

Company Name P/E Expected growth rate (%)

HDFC Ltd. 31.73 10.11 LIC Housing Finance Ltd. 16.07 5.40 REPCO Home Finance Ltd. 33.39 11.79 GRUH Finance Ltd. 45.85 15.17 Dewan Housing Finance Corporation Ltd. 5.06 17.45 GIC Housing Finance Ltd. 9.91 5.55 Indiabulls Housing Finance Ltd. 12.94 31.01 CanFin Homes Ltd. 25.63 13.91

P/E Ratio = Market Value of equity / Equity earnings

INDUSTRY P/E RATIO : 27.70

Company Name P/E Predicted P/E Under/Over Valued

HDFC Ltd. 31.73 23.31 36.11 LIC Housing Finance Ltd. 16.07 24.26 -33.75 REPCO Home Finance Ltd. 33.39 22.98 45.33 GIC Housing Finance Ltd. 9.91 24.23 -59.12 Indiabulls Housing Finance Ltd. 12.94 19.11 -32.31 CanFin Homes Ltd. 25.63 22.55 13.68


Predicted P/E:1. Coefficient of Determination2. Derive regression line3. Use expected growth rate to calculate Predicted P/E4. Comment

• PEG Ratio = PE Ratio / Expected growth rate

Comparing PEG across Housing Finance

Company Name Market Value of Equity Book Value per Share P/BV HDFC Ltd. 1,207.05 196.67 6.14 LIC Housing Finance Ltd. 441.50 154.92 2.85 REPCO Home Finance Ltd. 659.10 130.21 5.06 GRUH Finance Ltd. 257.20 19.58 13.14 Dewan Housing Finance Corporation Ltd. 215.85 318.22 0.68 GIC Housing Finance Ltd. 189.40 122.62 1.54 Indiabulls Housing Finance Ltd. 719.85 182.59 3.94 CanFin Homes Ltd. 830.55 289.70 2.87

Comparing other Equity multiples

Price to Book Ratio = Market value of equity / Book value of Equity

Price to Sales Ratio = Market value of equity / Revenues

Discounted Cash Flow valuation(DCF)?

• “Discounted cash flow is a valuation method used to estimate the attractiveness of an investment opportunity”

• Discounted cash flow(DCF) analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment.

DCF Analysis Process

• Step -1 Forecasted period and forecasting revenue growth• Step -2 Free Cash Flows to Firm [FCFF]• Step -3 Calculating the discount rate • Step -4 Coming up with a fair value

Assumptions

• 1. Sales growth rate [SMA]• 2. Sales growth factor • 3. Long term sales growth rate = 3% • 4. Int. rates on long term debts• 5. Depreciation as % of NFA • 6. Effective tax rates = 30%• 7. Payout ratio• 8. Working capital would grow wrtx. to sales growth factor• 9. Risk free rate = 8%• 10. Market Rate of return = 9% • 11. Other Income would grow as an average of past year data• 12. Issue of equity share would grow as an average of past 5 years data

Case – 1 Can Finance

Forecasted period and revenue growth

Calculation for free cash flow to firm

Calculation for Discount rate

Coming up with a Fair value

Performance of Companies

Company Price per Share (in Rs.)

External Funds

Internal Funds

Sales Growth (%)

1. Can Fin 952 88% 12% 37.35%

2. DHFL 5833 95% 5% 57.16%

3. India Bulls 178 95% 5% 27.97%

4. HDFC 191 95% 5% 22.16%

5. LIC 798 95% 5% 16.8%

6. GIC 299 85% 15% 5.6%

7. GRUH 670 90% 10% 32.45%

8. REPCO 2656 90% 10% 23.47%

THANK YOU!

Housing Finance Industry Analysis and Valuation

Economy & Finance

Transcript of Housing Finance Industry Analysis and Valuation