Motilal Oswal Financial Services

Indiabulls Fianacials Services

CMP: INR238

Growth momentum continues; Stable spreads and asset quality

Indiabulls Financial Services (IBULL IN, Mkt. Cap USD1.4b, CMP INR238, Not Rated)

2QFY13 reported PAT growth of 31% YoY and 13% QoQ to INR3b, driven by lower

operating expenses (incl. provisions declined 12% YoY and 1% QoQ) and lower tax

provisions (effective tax rate of 22%). AUM growth remained strong and asset

quality stable.

Key highlights

AUM growth remains robust:

AUMs grew by 30% YoY and 5% QoQ to INR310b.

The overall AUM mix remained stable QoQ with 71% of the loans in mortgages

segment, followed by 21% in corporate loans segment and 8% in commercial

vehicle segment. For FY13, the management remains confident of achieving

~25% AUM growth.

Spreads stabilizing:

While AUM growth remained healthy, NII grew by just 15%

YoY and 9% QoQ to INR5.07b. The YoY moderation in NII growth could be

attributed to change in the portfolio towards more secure mortgages segment

and within that towards the salaried segment from the high yielding unsecured,

SME and CV loan portfolio. However, on a sequential basis, NIMs have improved

to 6.6% from 6.5% in the previous quarter. Incremental spreads on mortgages

portfolio are ~300bp (blended basis at ~350bp). On a steady state basis, it

targets spreads to remain at ~325-350bp.

Asset quality remains healthy:

GNPA and NNPA were 0.76% and 0.31% (largely

flat QoQ). Provisions for the quarter stood at INR240m (v/s INR279m in

1QFY13), which included INR30m towards specific provisions, INR80m for

standard asset provisions, write offs of INR30m and INR100m towards floating

provisions. As on Sep’12, the outstanding pool of floating provisions stood at

INR1.2b.

Operating leverage boosts profitability:

Operating expenses remained well

under control thereby boosting the overall profitability. The overall cost to

income ratio (including provisioning expenses) declined sharply on a YoY basis to

25% from 32% in 2QFY12 and 27% QoQ. As a result, lower opex has helped

IBULL to offset decline in topline due to margin compression led by change IN

AUM mix.

Status of Reverse Merger:

The management expects the process of reverse

merging Indiabulls Financial Services with Indiabulls Housing Finance Company

to get completed in current financial year provided all the approvals are in

place. The management has also proposed to change the name of the new

merged entity and the same will be listed on the bourses by the end-FY13. All

these measures along with revamp of the board of the Housing Finance

company with induction of more independent directors will also help change

investors perception towards governance.

Valuation and view

Despite high interest rates, rigid property prices and stiff competition in the

housing finance segment , IBULL has been able to sustain a healthy growth

momentum in the individual mortgage segment and has become a sizable

player, which is commendable.

23 Oct 2012

2QFY13 Results Update |Sector: Financials

Financials

Management remains confident of maintaining the healthy growth momentum

and expects spreads to remain at current levels if not improve. We believe the

HFC status, would help IBULL to contain its cost of funds making it more

competitive in the market and also reduce capital requirements.

The stock currently trades at 1.4x FY13E BV and 1.3x FY14E BV. Not Rated.

AUM growth remains strong

AUM mix remains largely stable (%)

23 Oct 2012

Financials

Borr. mix remains largely skewed towards bank borr. (%)

Asset quality remains healthy

Opex (incl. prov.) as % of net inc. has declined considerably

Net gearing (x) has increased steadily

2QFY13 Conference call highlights

On Growth:

- The AUM growth for the quarter stood at 30% YoY and 5.5% QoQ to INR310b.

The growth was mainly driven by the mortgages segment with focus on the

salaried class.

- Disbursements during the quarter stood at ~INR33b, of which ~50% were

towards mortgages, ~24% towards LAP, ~15% in the corporate segment and the

balance in the CV segment.

- To enhance distribution reach and boost growth in mortgages, IBULL has tied

with Yes Bank in India and internationally tied up with Doha Bank to meet needs

of NRIs in UAE, Qatar and Dubai.

- The management remains confident of maintaining 25% AUM growth in FY13

and maintain a 20-25% AUM growth going forward.

On Asset quality:

- GNPA’s remained stable at ~0.8% QoQ. Asset quality trends are expected to

remain healthy.

- Provisions for the quarter stood at INR240m, which included INR30m towards

specific provisions, INR80m for standard asset provisions, write offs of INR30m

and INR100m towards floating provisions.

- Total outstanding floating provisions stood at INR1.2b. As on date, the company

has fully provided for on a 90-day outstanding basis.

- The management expects to maintain GNPAs in the region of 70-100bp (v/s

76bp currently) and NNPAs in the region of 30-50bp (v/s 31bp currently).

23 Oct 2012

Financials

On Spreads:

- On a YoY basis, the spreads are lower due to incrementally higher share of

mortgages to salaried class.

- Incremental yields on the disbursements in the mortgage portfolio stood at

~13.3% and the cost of funds stood at ~10.3%. Hence the incremental spreads

stood at ~300bp and on a blended cost of funds basis it stood at ~350bp. The

management intends to maintain spreads between 325-350bp.

- NIM for the quarter stood at 6.6% v/s 6.5% in 1QFY13.

On Zero-coupon bonds:

- As on September 2012, IBULL had INR19.79b worth zero coupon bonds were

outstanding with an average tenor of 10.8 months.

- Average cost on these bonds is ~10.5%. The company had raised these bonds to

fund the housing finance company.

- In 2QFY13, IBULL adjusted premium / discount on redemption of ZCBs worth

INR480m against securities premium.

Other highlights:

- The management expects to bottomline growth in FY13 to be in line with AUM

growth of ~25%.

- The company has a stated dividend policy of paying out 40-50% of declared

profits to its shareholders.

The prepayment rate has come down on a YoY basis to 1.7-1.8% per quarter

from 2.2-2.5% during the year ago quarter.

23 Oct 2012

Financials

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Financials

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23 Oct 2012