Can GIC Housing prove its mettle?

In an annual shareholder meeting, when someone stands up and says the managing director is grossly underpaid, it is in some sense a direct recognition of our work,” says Warendra Sinha, managing director, GIC Housing Finance, who joined the company in 2013. The comment wasn’t without reason. It was around 2012 that GIC Housing’s parent company, General Insurance Company, was looking for a suitable candidate at the top. Sinha, with past experience in marketing, emerged as a suitable choice, who could scale up the business and deal with the rising non-performing assets (NPAs). When he took charge in 2013, the NBFC’s gross NPAs were close to 3% and the loan book, a mere Rs.4,000 crore. GIC Housing, with just 30 branches, was hardly known in the housing space. “Today, we have a book size of close to Rs.8,000 crore. What the company did in 23 years, we did in a much shorter span,”(See: Chasing growth)says Sinha. Not just that, Sinha kept his shareholders happy by paying generous dividends, even as the stock price zoomed three-fold.

Branching out
While demand has been conducive — the small and medium-housing loan sector has grown at 16-18% in the last three years, GIC has expanded its loan book by 20% annually. This has been on the back of aggressive branch expansion. It has more than doubled its network to 60 branches across India, albeit strategically. “We identify markets and open branches in places where there is relatively high demand and limited competition. For instance, we consciously focused on Mumbai suburbs beyond Borivli and Thane,” explains Sinha.

But even with the expansion, direct selling agents (DSAs) bring in close to 80% of the business. “We spend very less on branches, recruiting — maybe two to three people to start with. Rather, we incentivise our channel partners to bring in business. That, along with opening 6-7 new branches every year, has helped us grow faster,” adds Sinha. 

Low base has definitely helped the numbers, but increasing reach has also played a part. Earlier, GIC Housing was largely present in the West. “Over the last two years, we have expanded in the North and East, which is helping us grow,” says Sinha, adding that these new branches have helped offset lower demand in the West. GIC is further looking to add more branches in these regions to meet its growth target of 18-20%. “We are selectively picking markets in the middle-income group and restricting ourselves to tier-2 cities,” shares Sinha, adding that the plan is to target markets that will benefit from the government’s “housing for all” scheme. 

Explaining GIC’s push, Anil Sachidanand, MD and CEO, Aspire Home Finance says, “In the housing finance business, it is difficult to procure business without a branch. A branch in a tier-2 city typically requires six or seven employees and can break-even with a total disbursement of about Rs.2 crore, which means you need 20 customers annually with an average ticket size of Rs.10 lakh.” 

GIC has been prudent, relying on smaller branches, about 400-500 sq ft, to keep costs down. Its revenue per employee figure, at Rs.3.36 crore an employee, is among the highest in the industry. In terms of scale though, it still lags behind peers, with GRUH Finance and Can Fin Homes having close to 200 and 110 branches, respectively. Both also have a loan book in the range of Rs.10,000-11,000 crore, higher than GIC’s Rs.7,912 crore. Big housing finance companies such as LIC Housing have a loan book of over Rs.1.25 lakh crore. Moreover, where LIC Housing and HDFC’s average ticket size stands at around Rs.20-22 lakh, for GIC, GRUH and Can Fin it is around Rs.10-18 lakh. 

A large part of this has to do with the smaller ecosystem. “Within housing finance, we have kept our focus on smaller borrowers, staying away from the markets serviced by larger housing finance companies (HFCs) and banks, particularly private sector banks,” says Sinha. GIC largely operates out of tier-2 cities such as Lucknow, Dehradun, Ludhiana, Raipur, Kolhapur, Boisar, Trichy, Coimbatore and Bhubaneswar among others, with the average ticket size at around Rs.15 lakh.

Playing conservative
Mid and small housing finance companies though, have logged better growth. Between FY11 and FY15, mid and small HFCs’ loan book grew about 31% annually compared to 25% growth logged by larger HFCs. And now, with the demand tapering, these players are better off. “It is not that the business in our segment (low to medium-income group) has not been impacted. If you look back about 2 years from now, we were growing at 30-35%. From that point, the industry demand has corrected by almost 50%, to 15-20% currently,” says Sudhin Choksey, MD, GRUH Finance. But to put things in perspective, in the March quarter of FY16, GRUH Finance reported 24% year-on-year growth in disbursement to Rs.1,080 crore. Similarly, GIC grew its loan book by 20%, its seventh successive quarter of 20-plus growth.   

Deo Shankar Tripathi, CEO, Aadhar Housing Finance too says, “Despite the slowdown, we could see companies in the low income group like Aspire and Aadhar growing in the region of 50-60%. Above that, in mid-income segments, companies like GIC, GRUH, Can Fin and others are growing in the region of 15-25%.”

GIC, has stayed with the salaried class, who account for 80% of its book. While this reduces the risks, it means competing with banks, who enjoy the advantage of low cost funding. “Our largest competitor is SBI. Today, they must be disbursing home loans at 9.35% as against our rate of 9.65%. While this certainly creates competition, we try to counter this through aggressive marketing with DSAs, ease of sanction, value-added services like free accident and home policies and other measures like developing partnership with the local bodies and institutions to help procure business,” says Sinha.   

Tripathi, however, says that GIC’s approach means compromising on yields. “If you look at companies like GIC Housing, Can Fin and a few others, they are focusing on the salaried class or the class-1 borrower because of income proof. Here, the risk is low, but the drawback is that the companies have low yields as they have to compete with the banks.”

GRUH, on the other hand, has less than 60% exposure to salaried customers. “Our average ticket size is around Rs.8.92 lakh, which means people who earn about Rs.25,000-30,000 per month. Typically, they are self-employed or working in the government sector and reside in smaller towns. They construct houses on a plot no more than 500-600 sq ft, which can be constructed in the range of Rs.10 lakh,” says Choksey. Others like Repco have even lower exposure, allowing them to earn higher yields and make higher spreads in the region of 3-4%.

Higher yields
Lending is all about the spread or the difference between the cost of borrowing and yield on loans. GIC has been gradually looking to improve this. Today, it borrows close to 70% of its funds from banks at close to 9.3-9.4%. About 20% of its fund requirements come from the National Housing Bank at the subsidised rate of 8.65%, which means the blended cost of funds is about 9.2%. Adding 0.8-0.9% as the operating cost, the margins are thin on a pure home loan. But despite this, GIC has a spread of close to 2.4%.

“If you look at our portfolio not all the loans are disbursed at 9.65%, some get higher yields. For instance, the loans against property have yields upwards of 12%,” says Sinha, adding that GIC is selectively targeting the non-salaried class, where yields are high. Besides, he says, some fixed rate loans locked at say 12% in the past add to the overall yield. 

It is loan against property (LAP) though, that has been yielding the best returns. As against 10-11% yield on a pure home loan, LAP can return close to 12-13%. Thanks to its increasing exposure to the latter, GIC makes close to 11.7% yield on its advances as against the average cost of funds at 8.2%. Moreover, from 9% in FY15, contribution of LAP has grown to about 16% now. In fact, despite the reduction in overall home loan rates — it reduced the rates by 30 basis points to 9.65% recently — the spread has improved by 15 basis points to 2.7% in the quarter ended March 2016. This is because cost of funds has dropped by 30 basis points too. 

But while LAP promises higher yields, it can be risky. To mitigate some of the risks, GIC has been providing loan for only 60% of the property value besides restricting itself to retail borrowers. “We have learned from the past and have reduced the risk in three ways. First, by restricting LAP to retail clients with sound credit profile. Second, by disbursing loan only for the 60% of the property value, thus keeping a large safety net, and third, by having independent property valuers on the panel, who ensure that the properties are assessed properly,” says Sinha.

How they stack up
With the growing loan book, GIC should be able to bring down its operating costs. As of now, at 25%, its cost to income ratio is higher than LIC Housing and GRUH Finance’s 15-18%. Increasing book size should help absorb some of the fixed costs such as rent, salaries and other expenses, leading to higher net margins. Moreover, GIC Housing is less leveraged at 10x compared with LIC Housing at 12x and GRUH Finance at 11.5x. According to NHB, housing finance companies can leverage up to 16x their equity. However, banks prefer to take a cut-off of 10-12x equity before disbursing term loans to HFCs. Hypothetically, if GIC Housing increases its leverage to what its peers have, with an interest income spread of 2.4%, it would mean a 300 basis points increase in return on equity (RoE) and a 20% increase in earnings after tax. Analysts expect this to happen gradually as there is scope for further leverage. 

But the hitch in the story is the bad loan problem. At 1.7%, GIC’s NPA is the highest in the industry compared to its peers. Putting the issue in perspective, Sinha explains, “We have strengthened our recovery process and have delegated the responsibility of recovering money. Of the NPAs of Rs.140 crore, we have recovered close to Rs.100 crore. If you remove the remaining Rs.40 crore from the legacy, our gross NPAs would actually be less than a percent.”  While there is merit in what Sinha says, one cannot ignore that even at 1%, its NPA is worse off compared with 0.5% for LIC Housing, whose book size is 16 times that of GIC’s. Thus, as the smallest player, GIC’s bad loan coupled with high cost to income is a big worry.    

Not surprising then, that the stock is trading at 1.9x its book value. This is a steep discount to LIC Housing, which is trading at 2.5x. Can Fin Homes too, is trading at 3.6x. Not to forget that LIC Housing and GRUH Finance generate RoE of 20% and 28%, respectively (See: Spoiling the show).

Sinha has done well in reining in the bad loan issue during his tenure but the job is far from done. For now, investments are in no hurry to rerate the stock and a lot will depend on what Sinha’s successor brings to the table. Till then, investors have no reason to be at home with GIC Housing Finance.