Leveraging PMAY And Branch Expansion Will Strengthen Future Prospects

Key Takeaways

• Strategic expansion in Tier 2 and Tier 3 cities, with a focus on PMAY initiatives, could drive significant revenue and AUM growth.
  
• Operational efficiency and improved net interest margins through cost reduction and variable-rate borrowings may bolster earnings stability.
  
• Rising customer delinquency and geographic concentration expose the company to asset quality concerns and regional risks, impacting growth and margins amidst competitive pressures.

Catalysts

A housing finance company, provides housing loans in India.

• Expansion efforts with plans to consistently open 40-45 branches annually in Tier 2 and Tier 3 cities suggest potential for sustained AUM growth of 30-35%, which could lift future revenue.
  
• Continued reduction in operational expenses as indicated by a drop in OpEx to AUM ratio denotes potential improvements in net margins as the company's scale increases.
  
• Stability in borrowing costs and an improved cost of funds spread versus peers by narrowing the gap from 0.7% to 0.4% indicates better net interest margins, thus positively impacting earnings.
  
• Utilization of government initiatives like PMAY for affordable housing can boost loan disbursements particularly in Tier 2 and Tier 3 cities, enhancing revenue growth.
  
• A focus on maintaining a high percentage of variable-rate borrowings (90%), with efforts to increase the variable-rate book, mitigates interest rate risks, potentially stabilizing net interest income.

India Shelter Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming India Shelter Finance's revenue will grow by 26.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 47.2% today to 43.2% in 3 years time.
• Analysts expect earnings to reach ₹6.4 billion (and earnings per share of ₹59.76) by about March 2028, up from ₹3.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, down from 25.3x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 24.3x.
• Analysts expect the number of shares outstanding to grow by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.18%, as per the Simply Wall St company report.

India Shelter Finance Future Earnings Per Share Growth

Risks

• Rising customer delinquency, with 30 DPD increasing to 3.7% and overall 1+ DPD up by 100 bps year-on-year, indicates asset quality concerns, potentially impacting net margins and profits.
  
• Competitive pressure from larger financial institutions and potential balance transfers by customers could lead to increased interest rate competition, affecting revenue and earnings growth.
  
• Geographic concentration in Tier 2 and Tier 3 cities exposes the company to regional economic downturns, which could impact its growth plans and, by extension, revenues.
  
• High reliance on variable rate borrowings versus a largely fixed-rate asset base increases interest rate risk, which may squeeze margins if funding costs rise or if rate cuts by RBI are not fully passed on by banks.
  
• Operational challenges, such as the staff turnover experienced in the MP region or higher collection efforts, could drive up operational expenses, thereby pressuring net margins.

Valuation

• The analysts have a consensus price target of ₹894.4 for India Shelter Finance based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹14.8 billion, earnings will come to ₹6.4 billion, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 15.2%.
• Given the current share price of ₹814.1, the analyst price target of ₹894.4 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.