HDFC Ltd is the Big Daddy in the world of Housing Finance and everybody knows that. HDFC, which is an acronym for Housing Development Finance Corporation, has over 4 decades of history and a super-excellent track record of consistent growth & quality of assets. Over the last many years, HDFC has used it's strong Cash Flows & market position to invest in many other business ventures like setting up an Asset Management company (Mutual Fund), Insurance JVs for Life as well as General Insurance, bought stake in certain Real Estate Projects, even started a venture to offer Educational Loans. All these business ventures now constitute nearly 35% of HDFC's consolidated Total Income.
On the other hand, the Indiabulls Group was born just about 15-16 years ago. It's entry into Financing business happened about 3 or 4 years after that. But Indiabulls did not start with Housing Finance in the business of Financing. Initially it was primarily into Business Loans, Personal Loans, Commercial Vehicle Loans, etc. Most of these Loans were high-risk products, but offered higher rates of interest. The Indiabulls Group took a major hit in this business during the 2008-09 economic meltdown phase and then decided to focus more on Housing Finance & Mortgage Loans business from FY'10 onwards. This business carried lower rates of interest, but came with longer business visibility as well as security of being asset-backed. By the time FY'13 was On, the Housing Finance & Mortgage portfolio of the company became over 75% of the company's total Loan Book and hence the company decided to register as a Housing Finance Company. Being a HFC, the company was able to raise resources at lower rate of interest compared to other lenders. During this HFC Registration, the company's name changed from Indiabulls Financial Services Ltd. to Indiabulls Housing Finance Ltd. and the shares of the older company were delisted & after a brief period relisted with the new identity during the year 2013.
In the field of Housing Finance, HDFC has nearly 35 extra years of history than Indiabulls Housing Finance Ltd. (IbHFL) and hence is no surprise that the former is nearly 5-6 times the latter in every Financial Number terms. So instead of just comparing the respective numbers of the two companies, I decided to see how is the smaller company growing in size compared to the larger one.
The chart alongside shows the progress made by IbHFL's certain important financial numbers in terms of a Percentage of HDFC's corresponding financial numbers for different successive 12-month periods over the last 3 years or so. What that means is, if the Percentage number is improving between two successive periods means that IbHFL has grown faster than HDFC during that period and if the Percentage number remains steady, then it means that both have grown at almost equal pace during that period. I have considered only the Consolidated numbers for both the companies.
One look at the chart and it's very much clear that the Percentage numbers for all the 3 parameters of Total Income, Interest Cost and Net Profit have shown some smart improvement, in stages, between the 12-months period ending March'13 to 12-months period ending December'15. On the Total Income front, IbHFL's Total Income was about 12% in March'13, but has increased to about 17% by December'15. On the Net Profit front too, the numbers have increased from about 19% to almost 24% during the same period. Interest Cost, which forms the biggest cost for any Financier, reflects similar increase as the Net Profit. This clearly shows that during this period over the last 3 years or so, IbHFL has grown substantially faster than HDFC. Yes, IbHFL being much smaller than HDFC, will allow the former to be much more nimble footed. But still we cannot deny the fact that IbHFL has scaled up to a respectable size to be amongst the Top-5 Housing Lenders within a short span of time. IbHFL has also managed to keep a tab on it's Interest Cost and also it's Loan Book is in a good shape. Fortunately, Housing Finance & Mortgage Lending business is relatively safe as it is backed by an asset and hence the quality of Loan Book rarely goes terribly bad, unless the Real Estate market goes in complete doldrums. Thankfully the Indian economy is growing at a decent pace and hence we can safely assume that nothing of that sort is going to happen with the Indian Real Estate market in the near foreseeable future.
Now let's look at the progress made by IbHFL's Market Cap compared to that of HDFC's in Percentage terms over the last 2+ years. At the end of December'13, IbHFL's Market Cap was just about 6% of HDFC's. At that point, the former was clearly way way undervalued. Over the last 2 years or so, IbHFL's stock has smartly outperformed not just HDFC, but most other Financial Sector companies of decent size. Currently, IbHFL's Market Cap is about 15% of HDFC's number, which means it has closed the Huge undervaluation to a good extent. But there is still some more to go as IbHFL's Net Profit forms almost 24% of HDFC's Net Profit as on Dec'15. So even if both the companies are to be assigned equal P/E Ratio, IbHFL's stock needs to move up by another 50% or so before HDFC's stock makes further move higher. In fact I will go to the extent of saying that since IbHFL has been consistently growing faster than HDFC and if it continues to do so in future quarters & years, then it deserves to trade at a P/E Ratio higher than HDFC. Still....let's just say that there is still a substantial scope for outperformance by IbHFL on the Market Cap front in the coming quarters.
IbHFL's stock currently trades at around the Rs.630-640 level and trading at a P/E Ratio of just about 11 or so. If IbHFL continues to grow it's bottomline at near about 20% Y-o-Y in the coming quarters on a consistent basis, then I won't be surprised to see IbHFL's stock trading in 4-digits sometime before the end of 2016 or in early 2017. I very much think that IbHFL certainly deserves it and hopefully the market will give it to Indiabulls Housing Finance Ltd someday.
On the other hand, the Indiabulls Group was born just about 15-16 years ago. It's entry into Financing business happened about 3 or 4 years after that. But Indiabulls did not start with Housing Finance in the business of Financing. Initially it was primarily into Business Loans, Personal Loans, Commercial Vehicle Loans, etc. Most of these Loans were high-risk products, but offered higher rates of interest. The Indiabulls Group took a major hit in this business during the 2008-09 economic meltdown phase and then decided to focus more on Housing Finance & Mortgage Loans business from FY'10 onwards. This business carried lower rates of interest, but came with longer business visibility as well as security of being asset-backed. By the time FY'13 was On, the Housing Finance & Mortgage portfolio of the company became over 75% of the company's total Loan Book and hence the company decided to register as a Housing Finance Company. Being a HFC, the company was able to raise resources at lower rate of interest compared to other lenders. During this HFC Registration, the company's name changed from Indiabulls Financial Services Ltd. to Indiabulls Housing Finance Ltd. and the shares of the older company were delisted & after a brief period relisted with the new identity during the year 2013.
In the field of Housing Finance, HDFC has nearly 35 extra years of history than Indiabulls Housing Finance Ltd. (IbHFL) and hence is no surprise that the former is nearly 5-6 times the latter in every Financial Number terms. So instead of just comparing the respective numbers of the two companies, I decided to see how is the smaller company growing in size compared to the larger one.
One look at the chart and it's very much clear that the Percentage numbers for all the 3 parameters of Total Income, Interest Cost and Net Profit have shown some smart improvement, in stages, between the 12-months period ending March'13 to 12-months period ending December'15. On the Total Income front, IbHFL's Total Income was about 12% in March'13, but has increased to about 17% by December'15. On the Net Profit front too, the numbers have increased from about 19% to almost 24% during the same period. Interest Cost, which forms the biggest cost for any Financier, reflects similar increase as the Net Profit. This clearly shows that during this period over the last 3 years or so, IbHFL has grown substantially faster than HDFC. Yes, IbHFL being much smaller than HDFC, will allow the former to be much more nimble footed. But still we cannot deny the fact that IbHFL has scaled up to a respectable size to be amongst the Top-5 Housing Lenders within a short span of time. IbHFL has also managed to keep a tab on it's Interest Cost and also it's Loan Book is in a good shape. Fortunately, Housing Finance & Mortgage Lending business is relatively safe as it is backed by an asset and hence the quality of Loan Book rarely goes terribly bad, unless the Real Estate market goes in complete doldrums. Thankfully the Indian economy is growing at a decent pace and hence we can safely assume that nothing of that sort is going to happen with the Indian Real Estate market in the near foreseeable future.
IbHFL's stock currently trades at around the Rs.630-640 level and trading at a P/E Ratio of just about 11 or so. If IbHFL continues to grow it's bottomline at near about 20% Y-o-Y in the coming quarters on a consistent basis, then I won't be surprised to see IbHFL's stock trading in 4-digits sometime before the end of 2016 or in early 2017. I very much think that IbHFL certainly deserves it and hopefully the market will give it to Indiabulls Housing Finance Ltd someday.
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