India Shelter Finance Corporation coming with IPO to raise Rs 1261.41 crore

India Shelter Finance Corporation 

• India Shelter Finance Corporation is coming out with a 100% book building; initial public offering (IPO) of 2,55,86,353 shares of Rs 5 each in a price band Rs 469-493 per equity share. 
• Not less than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on December 13, 2023 and will close on December 15, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 5 and is priced 93.80 times of its face value on the lower side and 98.60 times on the higher side.
• Book running lead managers to the issue are ICICI Securities, Citigroup Global Markets India, Kotak Mahindra Capital Company and Ambit.
• Compliance Officer for the issue is Mukti Chaplot.

Profile of the company

The company is a retail focused affordable housing finance company with an extensive distribution network comprising 203 branches as of September 30, 2023 and a scalable technology infrastructure across its business operations and throughout the loan life cycle. Its target segment is the self-employed customer with a focus on first time home loan takers in the low and middle income group in Tier II and Tier III cities in India, and affordable housing loans, i.e., loans with ticket size lower than Rs 2.5 million as per the criteria set out in the Refinance Scheme under Affordable Housing Fund for the Financial Year 2021-22 issued by the National Housing Bank, read with the Master Directions - Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2020. This helps in generating relatively high yields on advances.

The company has an extensive and well-established network of 203 branches spread across 15 states with a significant presence in the states of Rajasthan, Maharashtra, Madhya Pradesh, Karnataka and Gujarat wherein its branch vintage is five year and above, as of September 30, 2023. It has presence in states which cover 94% of the affordable housing finance market in India, as of March 31, 2023. It has increased the scale of its operations and grown its branches by adopting a strategy of deepening its penetration in regions with a substantial demand for affordable housing finance. Its vintage in these states has facilitated a better understanding of the location-specific intricacies in affordable housing finance. This experience has empowered it with insights into local businesses and property by-laws, enabling it to make better underwriting decisions based on accurate assessments of cash flows and collateral.

The company leverage technology and analytics across its operations and throughout the customer life cycle. This includes onboarding, underwriting, asset quality monitoring, collections and customer services. It has implemented a paperless approach to customer acquisition and onboarding, with tailored mobile solutions that cater to different stages of the lending process. Its iSales application integrates, streamlines and optimizes its customer acquisition process whereas its IndiaShelter iCredit application facilitates underwriting. Through its integrated approach combining digital solutions with personal interaction, overall sales and productivity is enhanced while maintaining customer relationships. To ensure customer satisfaction, it has introduced IndiaShelter iServe application, its dedicated customer service solution designed to promptly address concerns and queries from its existing customers online.  The company has an integrated customer relationship management and loan management system set up on a cloud-based platform. This provides it with connectivity and access to real time information with a holistic view of the profile of all its customers, throughout the loan lifecycle. Its information technology systems allow it to increase productivity and reduce turnaround times and transaction costs.

Proceed is being used for:

• Meeting future capital requirements towards onward lending.
• General corporate purposes.

Industry Overview

The Indian housing finance market clocked a healthy 13.5% CAGR (growth in loan outstanding) over Financial Years 2019-2023 on account of rise in disposable incomes, healthy demand, and greater number of players entering the segment. Over the past two Financial Years, housing finance segment has seen favourable affordability on account of stable property rates and improved annual income of individual borrowers. The overall housing finance segment credit outstanding is Rs 31.1 trillion as of March 2023. Rise in disposable income: India’s per capita income grew at a 10% CAGR between Financial Years 2012 and 2020. This continuous increase in per capita income, will aid housing finance demand in the country. As per IMF’s estimates, India’s nominal GDP per capita (at current prices) is projected to increase at a CAGR of 10-11% between Financial Years 2023 and 2027 which will lead to demand for homes. Healthy demand emanating from smaller markets: Faster growth in smaller districts and relatively muted demand for high ticket housing in metros have led to increased share of smaller districts (tier-II and below cities) in housing loans over the last couple of years. The top 50 districts in the country accounted for 63% of the housing loan outstanding in the country as of March 2023 compared to 73% as of March 2019. The districts where India Shelter Finance Corporation is present account for 44% of overall housing loans market. Amongst the top 50 districts, India Shelter is present in 21 districts.

India’s mortgage market can broadly be divided into two segments by ticket size of the housing loan at the time of disbursement – prime loans or normal housing loans and affordable housing loans. Affordable Housing Loans consider Loans to individuals with a ticket size of less than Rs 2.5 million as per the criteria set out in the Refinance Scheme under Affordable Housing Fund for the Financial Year 2021-22 issued by the National Housing Bank, read with the Master Directions–Reserve Bank of India (Priority Sector Lending–Targets and Classification) Directions, 2020. The former, called normal housing loans, is prominent in the metro/urban areas, and the latter which generally includes houses in the outskirts of these areas and semi-urban and rural areas i.e., defined as housing finance market focusing on low-income housing segment. The overall size of the affordable housing finance market in terms of loan outstanding was around Rs 11.5 trillion as of March 2023, constituting around 37% of the overall housing finance market. Between Financial Years 2019 and 2023, the growth in the affordable housing loans has remained subdued, with the segment having witnessed a CAGR of 7.3% as compared to overall housing loans, which has grown by 13.5% during the same time. This can be primarily attributed to a slowdown in economic activity, funding challenges due to NBFC crisis and the Covid-19 pandemic. Further, rise of hybrid work model and working from home led to an increase in demand for bigger residential homes. As a result, the sale in affordable housing took a beating whereas high-end and mid-segment housing gained the maximum in the last couple of years.

Pros and strengths

One of the Fastest Growing Assets under Management among Housing Finance Companies in India: The company primarily finance the purchase and self-construction of residential properties by first-time home loan takers through home loans and also offer loans against property. As of September 30, 2023, 70.7% of its customers were first-time home loan takers. As of September 30, 2023, home loans account for 57.6% of its AUM, while loans against property represent 42.4% of its AUM. The company achieved AUM with a growth of 40.8%, among housing finance companies in India, between Financial Years 2021 and 2023. These growth rates reflect the effectiveness of its operational model and its ability to underwrite and serve the customers in the targeted segments in Tier II and Tier III cities in India. It maintains a focus on serving low and middle-income, salaried and self-employed individuals, catering to their financial needs. It has gained domain knowledge and understanding of the specific financial circumstances and challenges faced by the low and middle-income customer segment, and its underwriting process is tailored towards assessing their creditworthiness. The company remain focused on providing loans with self-occupied residential property as collateral, and its lending portfolio showcases its commitment to serve retail customers.

Extensive and Diversified Phygital Distribution Network with Significant Presence in Tier II and Tier III cities: With over 13 years of operations as a housing finance company, the company’s distribution network has grown to 203 branches across 15 states in India, as of September 30, 2023. It has a significant presence in the states of Rajasthan, Maharashtra, Madhya Pradesh, Karnataka and Gujarat, which, as of March 31, 2023 account for 47% of the affordable housing finance market in India. The company has implemented a strategy of penetrative expansion across India by targeting areas with high economic growth and substantial demand for affordable housing finance, and a focused approach to serving low- and middle-income groups in Tier II and Tier III cities in India. As of September 30, 2023, 89.8% of its portfolio is concentrated in Tier II and Tier III cities. Its expansion strategy involves initially establishing a presence with a few branches in a new state or region and subsequently expanding its footprint based on the potential of the market as demonstrated by the performance of such initial branches. In addition to its branch-based sourcing model, it has expanded its sourcing network by forming alliances for lead generation. Its sourcing alliances contribute to the diversification of its sourcing strategy. Its targeted social media campaigns also enable it to effectively connect with prospects in real-time.

In-house Origination Model to Ensure Efficient and Seamless Operations across Various Key Functions: The company maintains a robust in-house infrastructure seeking to ensure seamless operations and independence across various key functions. During the six months ended September 30, 2023, 98.5% of disbursed loans were originated in-house. To strengthen its customer connections and build trust, it has undertaken initiatives such as prioritizing localized hiring for its branches. This helps it leverage the understanding and relationship rapport that its local employees build with customers. Its in-house origination model further enhances its operations by enabling it to conduct all aspects of its lending operations in-house, including sourcing, underwriting, valuation, collections and customer service, and reduce turnaround times and transaction costs. The implementation of its in-house origination model has provided pricing power for its loans, allowing it to offer competitive loan terms to its customers while maintaining healthy profit margins.

Technology and Analytics-Driven Company with Scalable Operating Model: The company is a technology and analytics-driven affordable housing finance company and has built a scalable operating model that enables it to expand its operations and drive growth in revenue. Salesforce is a customer relationship management system, also used as its loan origination system and is integrated with its downstream and upstream applications, including mobile applications, its in-house business rule engine and predictive dialer. Furthermore, as part of its loan origination process, it capture, process and store data extensively on cloud-based platforms, thereby streamlining its data management processes and offering its customers a seamless onboarding experience aligning with its commitment to efficiency and customer-centricity. It has implemented a paperless approach to customer acquisition and onboarding, with tailored mobile solutions that cater to different stages of the lending process. Its iSales application integrates, streamlines, and optimizes its customer acquisition process whereas its IndiaShelter iCredit application facilitates its underwriting process. 

Risks and concerns

The company may face risk of non-payment or default by customers: The company focus on first-time home loan takers in Tier II and Tier III cities in India. Such customers generally may have higher risk of non-payment or default. The company’s customers may default in their repayment obligations due to various reasons including business failure, insolvency, lack of liquidity, loss of employment or personal emergencies such as the death of an income generating family member. Further, self-employed customers to whom it lends are often considered to be higher credit risk customers due to their increased exposure to fluctuations in cash flows due to adverse economic conditions. To the extent it is unable to successfully manage the risks associated with lending to self-employed customers, it may become difficult for it to recover outstanding loan amounts provided to such customers.

Subject to periodic inspections by the NHB and the RBI: The company is subject to periodic inspections by the NHB and the RBI of its balance sheet, financials and other records, including details of disbursements, non-performing assets, grievance redressal mechanism, and branches, among others, for the purpose of verifying the correctness or completeness of any statement, information or particulars furnished to the authorities. It is also required to submit the details of complaints received from its customers and details of frauds observed on a periodic basis to NHB. The NHB, pursuant to its periodic inspections of the Company, has observed certain deficiencies/lapses in terms of compliance with applicable requirements under the policy circulars and guidelines issued by NHB and has also observed certain shortcomings and inadequacies in some of its policies and other compliances.

Face asset-liability mismatches: The company faces potential liquidity risks because its assets and liabilities mature over different periods. Assets and liability mismatch, which represents a situation when the financial terms of an institution’s assets and liabilities do not match, is a key financial parameter for it. Although it had a positive asset-liability position as of September 30, 2023, across various time buckets, it cannot assure that it will be able to continue to maintain a favorable asset-liability maturity profile in the future. A significant portion of loans to its customers have maturities with longer terms than the average terms of its borrowings. While it has not faced any mismatch in the maturity profile of its assets and liabilities, any such instances in the future may lead to a liquidity risk and have an adverse effect on its business and results of operations.

Rely on third party service providers: Technology is an integral part of the company’s operations and all its major information technology services run on a SaaS model, with information being stored on cloud servers and safeguarded by firewall implementation and monitoring by its third-party service providers. The company leverages the use of analytics and technology across its operations and throughout the customer life cycle. This includes onboarding, underwriting, asset quality monitoring, collections and customer services. It has implemented a paperless approach to customer acquisition and onboarding, with tailored mobile solutions that cater to different stages of the lending process. Salesforce is a customer relationship management system, also used as its loan origination system and is integrated with its downstream and upstream applications, including mobile applications, business rule engine and predictive dialer. Its iSales application integrates, streamlines and optimizes its customer acquisition process whereas its iCredit platform facilitates underwriting. To enhance its underwriting capabilities, it engages with third-party service providers to develop tools and integrate application programming interfaces to access supplementary information relating to its customers.

Outlook

Incorporated in 1998, India Shelter Finance Corporation, previously known as Satyaprakash Housing Finance India Limited, is engaged in the business of housing finance. The company provides loans for house construction, extension, renovation, and purchase of new homes or plots. The company also offers loans against property (LAP). The company offers loan amounts between Rs 5 lakh to Rs 50 lakh for a tenure of up to 20 years. It leverages technology and analytics across its operations and throughout the customer life cycle. This includes onboarding, underwriting, asset quality monitoring, collections and customer services. It has implemented a paperless approach to customer acquisition and onboarding, with tailored mobile solutions that cater to different stages of the lending process. Its iSales application integrates, streamlines and optimizes its customer acquisition process whereas its IndiaShelter iCredit application facilitates underwriting. To ensure customer satisfaction, it has introduced IndiaShelter iServe application, its dedicated customer service solution designed to promptly address concerns and queries from its existing customers online. On the concern side, the company’s operations are subject to extensive government regulation, and it is required to obtain and maintain a number of statutory and regulatory permits and approvals under central, state and local government rules in India, generally for carrying out its business. 

The issue has been offered in a price band of Rs 469-493 per equity share. The aggregate size of the offer is Rs 1200 crore to Rs 1261.41 crore based on lower and upper price band respectively. On the financial front, the company’s total income increased by 31.8% to Rs 6,062.31 million for the Financial Year 2023 from Rs 4,598.06 million for the Financial Year 2022. The company’s profit for the year increased by 20.9% to Rs 1,553.42 million for the Financial Year 2023 from Rs 1,284.47 million for the Financial Year 2022. Meanwhile, the company intends to penetrate further in its existing markets along with the growing size and scale of the Indian housing industry by the expansion of its branches. It aims to leverage its market presence across Tier II and Tier III cities of India to capitalize on opportunities to grow its operations and improve its market share. It aims to leverage its technological expertise by introducing a customer-centric self-onboarding journey to streamline and expedite the overall loan application experience for its customers.