Scuttlebutt Series

Inst'l Equity Research | India

Housing Finance Day July 3, 2017

We hosted the Housing Finance Day as part of the SBICAP Securities

Scuttlebutt Series, a 360-degree ringside view to the most relevant
building blocks of the Indian economy. We hosted a range of listed and
unlisted housing finance companies as well as professionals from the
housing industry aside from two regulators the National Housing Bank
(NHB) and the Maharashtra Real Estate Regulatory Authority (MahaRERA).

The housing sector and by derivative, the housing finance sector presents
the biggest multiplier effect and offers itself as the last bastion of high-
quality growth. To summarize:
Participants
At over US$230bn, the Indian housing finance industry is the only segment
REGULATORY PERSPECTIVE
within the lending pie that continues to support loan growth - for banks and
housing finance companies (HFCs) alike. Banks account for ~58% of the Maharashtra Real Estate Regulatory Authority
total housing finance industry while HFCs account for the rest. (MahaRERA)
In addition to the broader policy thrust to the housing sector, especially National Housing Bank (NHB)
towards the affordable housing segment (government schemes), the RBI
has recently enhanced its support to the housing finance sector through a
reduction in risk weights and provisioning requirements. Although
disbursements witnessed a healthy 5-year CAGR north of 20% during 2012- COMPANIES
16, loan growth slowed down considerably during FY17. Aadhar Housing Finance
Despite the growing hype around affordable housing, the supply side
Aspire Housing Finance
remains a key constraint with few incremental projects qualifying under the
affordable housing scheme. Edelweiss Retail
The Credit Linked Subsidy Scheme (CLSS) is beginning to impact demand Gruh Finance
elasticity meaningfully in the Middle Income (MIG) segment with the NHB
HDFC
improving its turnaround time (TAT) on CLSS claims to less than a week.
Claims under the CLSS currently number about 40k. LIC Housing Finance
The new-to-mortgage customer segment largely comprises of the self-
Magma Housing Finance
employed customers with limited or no credit history. Hence, a significant
portion of such incremental growth is addressed under the loans against Reliance Home Finance
property (LAP) portfolio and accrues to the smaller housing finance
companies. However, while incremental growth disproportionately accrues
to smaller HFCs, the real challenge will emerge on their ability to retain
customers within the 3-5 year vintage buckets.

In the following pages, we capture the key company-wise takeaways from the
various conference participants.

Krishnan ASV
Ph: 91-22-4348 7184
krishnan.asv@sbicapsec.com

Kaitav Shah, CFA

Ph: 91-22-4227 3349
kaitav.shah@sbicapsec.com

Ojasvi Khicha, CFA

Ph: 91-22-4227 3385
ojasvi.khicha@sbicapsec.com

SBICAP Research on Bloomberg SBICAP <GO>, www.emis.com Please refer to our disclaimer given at the last page.
Scuttlebutt Series Housing Finance Day SBICAP Securities Ltd

Table of Contents

Regulatory perspective

Maharashtra Real Estate Regulatory Authority (MahaRERA) ........................................ 03

National Housing Bank (NHB) ....................................................................................... 04

Companies

Aadhar Housing Finance ............................................................................................... 05

Aspire Housing Finance ................................................................................................ 06

Edelweiss Retail ............................................................................................................ 07

Gruh Finance ................................................................................................................ 08

HDFC Limited................................................................................................................ 08

LIC Housing Finance ..................................................................................................... 09

Magma Housing Finance............................................................................................... 09

Reliance Home Finance ................................................................................................ 10

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Scuttlebutt Series Housing Finance Day SBICAP Securities Ltd

Maharashtra Real Estate Regulatory Authority (MahaRERA)

The MahaRERA is a paradigm shift as Maharashtra already had in place a MOFA Act
(1963), which had similar provisions to RERA. The key difference between MOFA and Shri Gautam Chatterjee,
Chairperson MahaRERA
RERA was that MOFA did not have as robust a grievance redressal mechanism like
RERA and mandated certain bilateral disclosures to be made by the developers to the
buyer, whereas RERA mandates such information to be made publicly available (such as
MahaRERA website)
Pace of registration with the authority has been slow as developers are taking time to
understand the rules and get the necessary documentation in place. Only ~175 housing
projects have been registered thus far with MahaRERA and the authority is expecting
close to ~25,000 registrations by July-end. In case of brokers/agents, ~3000 have already
registered.
MahaRERA has clarified the position of the co-promoter especially in case of land owner
or financial sponsor (PE investing equity in a project to help developer buy land). In case
of such co-promoters, there will be restrictions on withdrawal of funds from sale of
apartments (they have to maintain separate designated account to which sale proceeds
will accrue and can only withdraw to the extent of cost incurred else have to wait for
project completion to get the funds). However, such co-promoters do not become liable for
all developer-related liabilities (eg. project delays, deviations etc)
Practice of soft launches (where developer pre-sells a project without any land, or other
approvals by taking a small 5-10% of project value from buyer) is a grey area which has to
be addressed as to whether such projects come under the jurisdiction of RERA. If third-
party rights have been created through such a sale, then it is likely to fall under the
jurisdiction of RERA
Withdrawal of 70% funds from designated accounts of projects (to which all sales
proceeds will accrue) will be on an actual cost-incurred basis. The total cost calculation
includes land cost, construction cost, finance costs, principal repayments, etc. The
authority is of the view that in cases of cash flow shortfall, preference should be ideally
given to ensure project completion (hence operational cost has a higher preference over
finance costs, etc in such cases)
Lenders can continue to have charge on the properties that they currently have
The on-going theory that 'large developers will become larger' post RERA is not
necessarily true, since RERA will create a level-playing field and provide an equal
opportunity to every developer. All developers have to provide quarterly disclosures on
status of projects going forward. While there is a strong likelihood that non-serious players
may exit the market, it also provides new players (start-ups, etc) the opportunity to scale
up
MahaRERA currently comprises 3 members and has scope to expand if the need arises.
Most of the complaints are largely going to fall under certain categories, which will make
dispute resolution mechanism more straightforward
The Maharashtra state government is working to decentralize approvals mechanism
where possible while also re-visiting deemed conveyance, etc

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Scuttlebutt Series Housing Finance Day SBICAP Securities Ltd

National Housing Bank (NHB)

Wholly-owned RBI subsidiary with regulatory (jurisdiction on housing finance companies) Mr. V. Sambamurthy
as well as re-financing responsibilities Deputy General Manager
85 licences issued to HFCs, 18 of which can accept public deposits
20-23 license applications cleared over the past 2-3 years; only 2-3 applications pending
now
Housing shortage of 62m units in India; mostly rural (43m units)
Affordable housing market size estimated at Rs650bn annually (500k units @ Rs1.3m /
unit)
Total outstanding individual housing loans grew 19-22% during FY12-FY16. However,
FY17 growth was lower at ~14%
Housing-for-all scheme is Rs1trn project; includes slum redevelopment, credit linked
subsidy, private /public sector partnerships & house construction subsidy
Rs7bn disbursed so far under CLSS (credit linked subsidy scheme), no finite amount
mentioned - currently Rs14bn allocated but might be expanded once utilised
West zone has done well so far in CLSS; Central Zone states such as MP, Chattisgarh etc
likely to do better from hereon
LAP (loan against property) beginning to emerge as an area of concern - however, the
NHB has initiated an ongoing study to get a clear idea of the extent of LAP in HFC
portfolios. The LAP portfolio is currently in a regulatory vacuum with uncertainty on who
has regulatory jurisdiction over LAP. Thus far, there are no separate regulations on LAP
from NHB.

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Aadhar Housing Finance

The company was co-founded in 2010 by DHFL and IFC Washington - current ownership
Mr. Yogesh Udhoji
structure consists of DHFL (12%), IFC Washington (20%), promoters (3%) and CIC Chief Finance Officer
(65%).
Aadhar commenced operations in six states - UP, MP, Bihar, CG, Orissa and Jharkhand
with maximum allowed ticket size at Rs0.6mn and subsequently expanded its operations
to states such as WB, Gujarat, MH, Punjab and Uttarakhand simultaneously raising the
maximum permissible ticket size to Rs5mn.
The company has current AUM size at Rs36bn comprising of pure mortgage loans (84%),
loans against property (13%) and about 3% project loans in syndication with DHFL (plinth
level and above-plinth level financing). Aadhar has a builder finance portfolio of ~Rs0.5bn.
AUM growth has been higher than 75% for the past couple of years (FY16 and FY17) and
is expected to remain north of 60% for the next 2-3 years.
About 68% loans are being given to Salaried segment while 32% to SENP. Typically,
yields for SENP are 120-130bps higher than salaried customers. Yield on advances
currently at 13.5%, with incremental yield at 12.9%. Yield for LAP is at 16% and project
loans at 18%. ATS for total portfolio at Rs0.75mn - with project loan ATS at Rs60mn.
LTV for aggregate portfolio stands at 66%, while loans under PMAY have an LTV of 90%
In terms of sourcing, 80-85% of the business is sourced through internal team (off-roll
employees) where compensation is a combination of fixed and variable components while
15% of the business is sourced through DSA (where commission ranges from 0.5-1.0%
depending on business volume and area). For instance, Gujarat DSA typically has 1%
commission structure while UP DSA commission is closer to 0.5%.
The current cost of borrowing is at 9.27%, confident to bring it sub 9% in next 12-18
months as AUM size grows and ratings improve. Not able to borrow from ECB currently
due to lower net worth. Borrowing mix banks (60%), NCD (20%), commercial paper (10-
15%) and ~5% securitization (started last year).
Credit underwriting is mostly decentralized at branch level.
The company has a customer base of ~53k. The company does not have strict income
criteria or designation/job profile restrictions. Typically, salaried customers include
advocates/police/army who otherwise have a negative profile in the industry. TAT for
salaried customers 4-6 days while for SENP 10-15 days.
The company expects to complete merger with DHFL Vysya Housing Finance Ltd. in the
next 2 months - approval pending with NCLT. Subsequent plans to get listed over the next
2-3 years. Currently, no ESOPs to management. Post merger, they may commence with
ESOP plans.

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Aspire Housing Finance

Aspire is promoted by Motilal Oswal Financial Services Ltd (MOFS) and focuses on the Mr. Kalpesh Ojha,
affordable housing segment. The company has presence in 9 states with no further plans CFO
to expand beyond these 9 states for the next 12 months. The company operates through
120 branches and plans to add 40 more branches by March 2018. The current employee Mr. Nikhil Trivedi,
strength is at 1,150. Manager Finance &
Compliance
Current AUM stands at Rs41bn with ATS of Rs0.9mn and monthly disbursement rate of
Rs2.0bn-Rs2.5bn. Large-ticket developer financing at about 5% of the overall portfolio.
GNPA currently in the range of 0.6-0.8% is expected to grow to 1.0% as AUM continues
growth trajectory. The company increased collection team size from 20 to 48 during
demonetization to counter recovery challenges.
Key challenge for the company is 15% cheque bounce rate which is typical for affordable
housing finance segment
The TAT for salaried customers is 3-4 days and for self-employed customers is in the
range of 7-10 days
The company charges ~1.7% loan processing fees and pays 0.5% on sanction amount to
sales force as incentive. Insurance cross-sell at 98% in volume terms and 130% in value
terms as multiple insurance plans are sold to customer
Yield on advances is currently at 13.2% and cost of funds at 9.5% which management
expects to be sub-9% by FY18 when existing high-cost NCD matures
Cost-to-income currently in the range of 37-38% and expected to be near 35% over the
next 12 months

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Edelweiss Retail
Commenced operations as retail finance arm of Edelweiss in 2010 - aggregate AUM of
Mr. Anil Kothuri
Rs57bn as of FY17. It has two companies under this: Edelweiss Housing Finance CEO & President
Company and Edelweiss Retail Finance. The HFC focuses on mortgage lending, while
Retail Finance covers secured and unsecured lending to SMEs.
Current loan book stands at ~Rs65bn (housing loan book at Rs45bn and the residual
Rs20bn in SME loans). The housing loan book comprises of Rs20bn of pure-play
mortgage loans and Rs25bn of Loan against Property (LAP). The SME book comprises of
equal portions of secured and unsecured lending. The target for FY18 is to reach
Rs100bn loan book (30% home loans; 40% LAP and 30% SME loans).
In terms of physical presence in the mortgage segment, the company is currently present
in 63 cities across India (22 in TN, 20 in AP/Telangana, 13 in Gujarat and the rest in
Maharashtra and Karnataka). The target is to reach ~100 cities in 2 years, by ramping up
coverage in the existing states and adding MP and Rajasthan to the coverage states. Of
the 63 cities, the company does LAP business in only 16 centres.
Given that the company has been expanding in the recent years, most of its workforce is
hired laterally - a number of employees are laterally hired from a south-based competitor.
The current employee strength of the company is 850. Balance scorecard approach that
uses sanctions, collections, cross selling and many other metrics is used for quarterly
performance appraisal of the employees.
The key difference between secured SME lending versus typical LAP is that in case of
secured SME lending, the LTV is in 125% to 80% range after assessing and grading the
customers based on the business profile.
The company mostly serves the self-employed segment, with ~75%-80% of home loan in
self employed segment. Average ticket size of home loan is ~Rs1.2mn-1.3mn at
origination and LTV is ~50% at the time of origination. The low LTV is explained by the
segment of customer that Edelweiss serves. A Tier-3 town self employed segment
generally thinks of home loan to fill the gap between his corpus and the house price and
hence unlike big cities, salaried buyers in this segment go for lower LTV. The current
incremental blended yield on home loans is ~10.5%. In the LAP portfolio, average ticket
size is Rs5mn, while LTV is ~50%.
The yields in home loans are in ~10.5% range, ~11.5% in LAP, ~14% in secured SME and
~20.5% in unsecured SME.
Credit underwriting decision is very much decentralized, considering the self employed
segment that the company primarily serves. Up to Rs2mn loan is approved by the branch
manager. This means ~90%-95% loan cases are dealt at the branch level only. The
company uses Assessed Income in case of home loans, given that the borrowers may
not have well established banking / financial trails to have a clean or well defined credit
history. In case of LAP, the company uses declared income only and no assessed or
proxy incomes.
The company has GNPA ratio of 1.6% in home loans and 0.95% in LAP.
In terms of sourcing, DSAs contribute ~45%, loan camps contribute ~30% and the rest is
sourced by branch and direct employees. DSA commission is at ~0.4% in home loans.
This appears lower than many HFCs but largely on account of portfolio concentration in
the metros. In LAP, 70% of the business is sourced through DSAs while the rest comes
from direct employee selling and cross-selling to Edelweiss group customers.
Home loan prepayment rates are ~1.75% per month, while the same for LAP is ~2%. The
interesting point here is that Edelweiss largely promotes fixed rate home loans and hence
makes fee income on prepayments. The fixed rate assets are matched by fixed rate
liabilities like NCDs.
Processing fee, insurance cross selling and prepayment penalty together contribute to fee
income.
The company expects to manage ~3% spread in home loans and ~2.5% in LAP.

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Gruh Finance
Present in 11 states with 186 branches - however, 70% of the business accrues from the Mr. Suresh Iyer
states of Gujarat and Maharashtra GM (Operations)
Committed to continue growing the book organically at 25% (similar to the past run rates)
68% of the business is through vintage channel partners, with a solid understanding of
Gruh Finances risk appetite, which employ customized filters
Average ticket size is at Rs0.8mn-Rs0.9mn
Affordable housing is still largely noise since the supply side has not yet taken off
Greater developer and customer awareness of PMAY - CLSS is a key indicator
25% of aggregate CLSS subsidy claims with NHB are from Gruh Finance (9.5k claims out
of 40k claims)
Overall customer base at 197k - hence, 5% of existing stock of customers qualify for
CLSS claims
Structurally, with higher competitive intensity, spreads are expected to compress

HDFC Limited
Prepayment rates in HDFC customers largely in line with longer-term trends - balance
Mr. Conrad Dsouza, Member
transfers only in case of competitors offering excessive top-ups of Executive Management,
Competitive intensity from SBI is highest in Tier 2/3 centres largely on account of SBIs CIRO
distribution strength - this customer segment largely comprises of PSU employees /
Mr. Subodh Salunke, Senior
government employees with a preference for self-construction GM & Regional Business Head
Tier 2/3 centres do not witness resale too often - largely dominated by self-construction (Mumbai & Vidharba)

RERA will raise buyer confidence and instil developer discipline - registration of under-
construction properties will precede that of new launches
Risk of developer funding will reduce structurally (at least basis the Maharashtra RERA
blueprint) on account of ring-fencing of cash flows (70% escrow)
MIG CLSS - while 35% of HDFCs annual disbursements may qualify from a ticket-size
perspective, there are other binding conditions such as dual ownership that may limit this
proportion
RBI notification on lower risk weights was not overly significant - NHB may replicate these
across the board (across ticket sizes)

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LIC Housing Finance

LICHFs moat is around a strong brand connect with customer and a very competitive Mr. Sudipto Sil,
pricing Deputy CFO
Total disbursement growth is at 7-8%
Margins are slightly high largely on account of lower cost of funds - share of public
deposits has risen to 60%
Although churn rate has increased, LICHF expects 11-12% loan book growth with stable
margins
a) Delay in registrations and b) uncertainty pertaining to GST are contributing to slower
growth
CLSS -> out of 34k accounts of NHB, LIC has done about 4k claims
13% of the portfolio is exposed to LAP (70% salaried and 30% self-employed like
doctors). ATS for LAP portfolio at Rs1.2mn with average tenure at 15 years
Operating expenses expected to trend lower for FY18. Previous fiscal had INR0.5bn one-
off related to compensation.
Hopeful of provision write-back next year

Magma Housing Finance

Magmas housing finance business (Rs9bn AUM) is in the scale-up mode. While the
Mr. Manish Jaiswal,
business has seen a cycle, Magma has de-risked its business over the past couple of President & CEO, Mortgage &
years, to lower ticket sizes and reinforced its systems and processes. SME
70% of business is to self-employed category. Average ticket sizes are closer to Rs1.5mn.
Mr. Sanketh Godha,
Average yields in the business are at 14% with pure-play mortgage loans yielding 12%. Investor Relations
On PMAY: Magma believes this could be a game changer for companies financing
affordable housing. However, the key challenge is on the supply side, which is expected to
pick up from the next year onwards.
The awareness of such schemes is negligible amongst the lower strata of people.
Magma plans to move to more own sourcing. Balance transfer is a rampant issue
especially amongst DSA sourced loans.
In terms of loan growth, 30% loan CAGR is achievable over the medium term in the
housing and SME vertical.
With scale now targeted, management believes that opex could come down by a third
over a longer term period. Cost-income in this business is at 50% currently.

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Reliance Home Finance

Reliance Home Finance is the newly created separate legal entity of Reliance Capital. Mr. Ravindra Sudhalkar,
Earlier, this business was part of Reliance Commercial Finance under Reliance Capital. MD & CEO
The company plans to independently list by Q2/Q3 FY18. All Reliance Capital
shareholders will be allotted one share of Reliance Home Finance for each share of Mr. Abhishek Nalwaya,
Head IR
Reliance Capital. Post-listing, 51% will be owned by Reliance Capital and 49% by
investors.
Reliance Home Finance is present in 44 centres across the country from where it caters to
~95 locations using the hub-and-spoke model. The company will open 4-5 new branches
in FY18 and ~20-25 new branches in FY19. The company has employee strength of ~900
and it expects to add 50-100 employees in FY18.
The company has total AUM of Rs110bn (intention to grow to Rs200bn by FY18 and
ultimately to Rs500bn by FY20). The company primarily caters to self-employed class,
consisting of ~75%-80% of its total loan base. The company is present in three segments:
Home loan, Loan Against Property and Construction Finance. In terms of regional
exposure, Western India is ~60%, Northern India is ~20%, Southern India ~15% and
Eastern India ~5%.
The company want to maintain an incremental loan mix of 60:20:20 between mortgage
loans, LAP and construction finance
In terms of sourcing, LAP: 70% through DSA and 30% through direct selling. In Home
loan, 60% through DSA and 40% through direct selling.
DSAs are paid ~0.75% in home loans and 0.95% in LAP
LTV at origination is 53% in home loans and 48% in LAP
Average ticket sizes are at Rs1.3mn (affordable housing), Rs6mn in the case of mortgage
loans, Rs7mn in the case of LAP and Rs70mn for construction finance.
The company has a NIM of ~3.4% and it targets to maintain the same. The current RoE is
17.7%, with FY17 PAT of Rs1.7bn while FY16 PAT was ~Rs1bn.
The company targets to achieve RoEs in the 16%-20% rage and expects to bring down
cost-to-income ratio to 40% in the medium term.

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SBICAP Securities Limited

(CIN): U65999MH2005PLC155485 | Research Analyst Registration No INH000000602
SEBI Registration No.: NSE Capital Market: INB 231052938 | NSE Derivatives: INF 231052938 | BSE Capital Market: INB 011053031
Currency Derivatives: INE 231052938 | CDSL: IN-DP-CDSL-370-2006 | IRDA/IR2/2014/241

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Analyst Certification
The views expressed in this research report (Report) accurately reflect the personal views of the research analysts (Analysts) employed by
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The Analysts engaged in preparation of this Report or his/her relative:-
(a) do not have any financial interests in the subject company mentioned in this Report; (b) do not own 1% or more of the equity securities of the
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The Analysts engaged in preparation of this Report:-
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Name Qualification Designation Sector

Krishnan Asv B.Com (Hons.), PGDM (Finance) Lead Analyst Banking

Kaitav Shah B.Com, M.M.S. (Finance), CFA Lead Analyst Banking

Ojasvi Khicha B.B.A., M.B.A. (Finance), CFA Associate Banking

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Scuttlebutt Series Housing Finance Day SBICAP Securities Ltd
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Krishnan.asv@sbicapsec.com I Kaitav.Shah@sbicapsec.com I Ojasvi.Khicha@sbicapsec.com July 3, 2017 | 12