Akme Star Housing Finance Ltd Management Discussions.
Global Economic Review
Following a robust growth of 3.8% in 2017 and in the first half of 2018, the global economy slowed significantly in the second half of 2018, reflecting a confluence of factors affecting major economies like the financial market correction, tightened Monetary Policy and other non-economic factors. Owning to this global economy growth expected to maintain Moderate in near Term and then pick up modestly.
Monetary policies across key developed economies saw incremental acts of normalization coupled with rate tightening measures. Emerging markets and developing economies are expected to sustain momentum till 2020, on the contrary, economic activities in advanced economies is projected to continues slowly.
Crude prices remained volatile since August 2018 as a result of multiple factors including the American policy pertaining to Iranian exports and softening global demand.
Oil prices dropped from a four year peak of US$ 81 per barrel in October 2018 to US$ 61 per barrel in February 2019.
While advanced economies are showing signs of a slowdown, emerging economies like India and China are expected to fuel the worlds economic growth engines.
Global growth is expected to remain at 3.3% in 2019 while bounce back to 3.6% in 2020. The unwinding of the US fiscal stimulus and the fading of the favorable spill-overs from US demand to trading partners will be offset by a pickup in growth in emerging markets and developing economies.
Global oil supply is expected to increase gradually, lowering oil prices to US$ 68.76 a barrel in 2019 and to US$ 60 a barrel in 2023. (Source: World Economic Outlook)
Indian Economy Overview
Indian economy started the year with a growth of nearly 8% in the April to June 2018 quarter. The growth has however tapered down by the end of the financial year. The growth in the October - December 2018 hit a low of 6.6% on the back of a weak consumer demand and lower government spending. The economy faced various headwinds with the inflation reaching near 2 year high levels, driven by surging oil prices. On the back
of rising inflation the Reserve Bank of India increased the Repo Rate by 25 basis points in June 2018 and August 2018. However in order to drive the slowing economy the rates were reduced by 25 basis points each in February 2019 and April 2019. Finally the RBI cut the rates yet again in June 2019 by another 25 basis points, moving to a more accommodative stance.
The New Government with a strong mandate at the centre will have a clear runway to drive reforms and growth which should augur well for the economy, on a long term basis, despite the near term uncertainty around the monsoon.
Indias revenue receipts are estimated to touch 28-30 trillion (US$ 385-412 billion) by 2019, owing to Government of Indias measures to strengthen infrastructure and reforms like demonetization and Goods and Services Tax (GST).
Housing Finance Industry
Housing finance has been one of the fastest growing sectors within the financial services space. Housing finance companies (HFC) have been able to capture a large section of the growth within the sector. As per CRISIL , there are two reasons for the fast growth - first is the ability of HFCs to tap the massive opportunity in affordable housing, and second is the slower credit growth at banks providing HFCs the room to ramp up faster and continue gaining market share.
The Financial services sector and HFCs in particular have seen challenging times since the Q3 of FY 19. Given the headwinds being faced by the sector, the credit growth has dried up leading to HFCs preferring to raise money through securitization.
Structural growth opportunities - The housing finance sector has steadily grown at 18% in the last seven years, according to the 2017 India Housing Finance Report. The sector has further growth in store with the Government focusing on Housing for All, through various schemes such as the The Pradhan Mantri Awas Yojana" (PMAY) which aims to build over 2 crore affordable homes across 305 rural and urban centers.
Recent Development in Housing Finance Industry
Benefits to Affordable home buyers extended -For making more homes available under affordable housing,
the benefits under Section 80 - IBA of the Income Tax Act is being extended for one more year, i.e. to the housing projects approved till 31 March, 2020.
Additional boost from exemption of tax on Notional Rent - Investors used to shy away from property market as they were charged tax on the notional rental income from their second homes irrespective of whether they put the property on rent or not. The exemption on notional rent is likely to attract more investors in the home market.
Tax Benefits - Developers who build affordable homes are exempted from paying taxes on their profits for five years starting 2016 instead three years.
TDS threshold for deduction of tax on rent has been increased from 1.80 lakh to 2.40 lakh.
Challenges faced by HFCs
Some of the key challenges faced by the housing finance companies are as under:
Risk of increasing borrowing rate
The housing finance sector could experience some headwinds with the credit drying up and the borrowing costs increase. There are indications that inflation will rise over the medium-term, which will subsequently have an impact on this sector.
Impact of RERA
Implementation of the Real Estate Regulation and Development Act (RERA) was a big step in streamlining the real estate sector. However, new home projects took a big hit. Launch of new projects was down by 41% across the country, according to a July 2017 report by Knight Frank. A slowdown in new projects would consequently result in lesser people taking home loans. But most experts feel the RERA jolt is temporary and would be resolved over the medium-term
There may be a growth in loan disbursement in the affordable housing category, but the amount of bad loans, also known as non-performing assets (NPAs), has risen sharply. Data suggest that the NPAs have risen starkly in the affordable housing sector.
Rising Repossessed Assets
Stock of Repossessed Assets have increased due to lower salability of the assets leading to elongated recovery time.
Key Government Initiatives
Bank recapitalization scheme:
The Indian Government announced a capital infusion of Rs 41,000 crore through recapitalization bonds in FY2018-19.
CAR Requirements: NHB proposed to increase the minimum CAR from 12% at present to 15% and reduce maximum leverage from 16 times at present to 12 times in a phased manner by March 2022.
Relaxation in securitization Norms: Reduction in holding period for securitization by RBI from 12 months to 6 months for loans having original maturity of 5 years or more is likely to provide RS 6,00,000 million of additional portfolio available for securitization.
Expanding infrastructure: The Government of India invested Rs 1.52 trillion to construct 6,460 kilometres of roads in 2018. Its expenditure of Rs 5.97 trillion (US$ 89.7 billion) towards infrastructural development for 2018-19 is expected to strengthen the national economy.
Increasing MSPs: The Indian Government fixed MSPs of 22 mandated kharif and rabi crops and Fair and Remunerative Price for sugarcane. The Indian Government committed to provide a 50% return over the cost of production for all mandated crops, strengthening the rural economy.
The Insolvency and Bankruptcy code (Amendment), Ordinance 2018: Passed in June 2018, the ordinance provides significant relief to home-buyers by recognizing their status as financial creditors. The major beneficiary was MSMEs, empowering the Indian Government to provide them with a special dispensation under the code.
Liberalization of Foreign Direct Investment (FDI) policy fuelled inflows of as much as US$ 269 billion in the last five years in India.
India is likely to outperform the global average economic growth and sustain its 7% growth momentum to emerge as a US$ 4 trillion economy by 2024. A combination of favourable demographics, rising urbanisation and shift from the unorganised to the organised sector are expected to drive growth in private consumption. Discretionary spending is expected to increase owing to the presence of a large middle- class and growth of an affluent class. The Governments focus on rural India in the election year 2019 is expected to provide an impetus to rural consumption. The rise in social sector spending, improvement in agricultural productivity, increase in financial
inclusion and adoption of digital technologies are expected to strengthen rural demand.
Mortgage finance sector review
Over the last seven years, housing finance companies have been gaining market share due to their focus on niche segments such as the self-employed and affordable housing segments, which have been largely served by HFCs and enjoy higher growth potential. The Indian housing finance market grew at a five-year CAGR of 18% with the pace of growth of HFCs and NBFCs higher at a five-year CAGR of 20%, compared to a five-year CAGR of 16% for banks. In the last five years (fiscals 2013 to 2018), housing credit growth remained steady despite a, tough operating environment, subdued real estate demand and low affordability, attributed to construction-linked housing loans (and thus disbursements being linked to construction stages), secondary sales and low mortgage penetration in India. The total housing credit outstanding stood at 18.2 lakh Crore as on December 31, 2018, with YoY growth of 16%. Housing loan portfolio growth for housing finance companies (HFCs) and NBFCs reduced to 13% YoY for the period ended December 31, 2018 owing to lower disbursements following the liquidity crisis faced by HFCs in Q3 FY2019 and the portfolio sales made by HFCs through securitization of the total loan disbursed by NBFCs, mortgage loans (housing loans and loans against property taken together) comprised more than 50% of the total volume of Rs 1.44 lakh crore witnessed in 9M FY2019.
1. Presence in underserved areas with high potential and low penetration
2. Capability of assessing informal segments with better assets quality (lower NPAs compared to sectoral average while serving to informal segment)
3. Fully in-house sourcing and execution model which leads to superior business outcome
4. Positive asset-liability mismatch and no reliance on Commercial Paper
5. Low leveraged Balance Sheet with a high net worth
6. Capability of leveraging latest technologies
7. Improving Credit Rating
8. Experienced Board of Directors and professional management team
9. Diversified shareholding base and listing on the stock exchanges.
1. Geographical concentration: The Company has a presence in 4 States with Rajasthan accounting for 73.68% of the AUM as on March 31, 2019. The concentration on Rajasthan has declined marginally over the last few years (51.03% as on March 31, 2016) and is likely to decline further as the Company plans to expand its operations in other areas. As of March 31, 2019, the Company was present in 4 States with 30 branches covering 30 districts.
2. Relatively vulnerable borrower profile: ASHFL operations are focused on low and middle income self-employed borrower (65% of the portfolio as on March 31, 2019), who are relatively more vulnerable to economic cycles and have limited income buffers to absorb income shocks. However, considering the secured nature of the portfolio with moderate loan to value ratios (51% as of March, 2019) and the assets being largely self-occupied residential properties along with the low ticket size (8.5 lacs as on March 31, 2019) its losses on default are expected to be limited. The Company has adequate risk management tools and portfolio monitoring systems.
Increasing aspiration of people to own homes Low credit penetration in semi-urban and rural India Provision of credit linked subsidies that could amplify construction activities Governments focus on affordable housing to strengthen demand Rising income levels and improving borrower affordability through tax incentives
1. Liquidity crunch could impact credit availability Rise in cost of fund could impact NIMs
Managing risks at AKME
The Companys performance could be adversely affected in the event of economic slowdown.
India has emerged as the fastest growing major economy (6.8% growth in FY2018-19). The per capita income for FY2018-19 stood at Rs. 10,534 a month with an annual rise of 10%. The Ministry of Commerce & Industry is creating an action-oriented plan highlighting specific sector level interventions to bolster Indias march towards becoming a US$ 5 trillion economy before 2025. Financial Services is
included as one of the champion sectors by Ministry.
An inability to provide adequate services may result in customer attrition.
The Company has adopted technology driven CRM module and have dedicated separate service department to manage customers queries, which also resulting customer referrals and accretion.
The inability to mobilize funding at competitive costs can affect prospects.
The Company had a net worth of Rs 27.44 Crore and a total debt of Rs 41.96 Crore as on March 31, 2019. It reported a positive ALM.
Stronger fundamentals helped moderate the average cost of funds from 11.10% in FY2017-18 to an average 12.23% in FY2018-19.
Long-term rating upgrade will help in raising long-term funding.
The inability to accurately assess customers could impact revenues.
The Company does not finance any under-construction properties. It funds only properties that are 85%-90%
complete or ready-to move in properties. For Tier 2 and 3 cities, we check builder history, projects completed, customer reputation, loan from financial institutions on the current property for construction and seek
feedback from existing financiers. These realities helped moderate risks and achieve a GNPA that is the lowest in the industry.
High operational expenditure could impact the bottom line.
ASHFL invested in branch network, technology, recruitment and business sourcing resulting in an operating expenditure of 100 to 150 basis higher over the larger mortgage finance companies, which was compensated by asset quality, customer longevity (average tenure around eight years) and a superior fee income ratio.
Technology obsolescence risk
The obsolescence of technology could impact companys competency in technology led business environment
ASHFL invested in technology as a business enabler by investing proactively in upgrading existing technology and bringing in new technology.