IPO Size: Rs. 1,200 cr  

• Rs. 800 cr is fresh issue for capital, towards onward lending
• Rs. 400 cr is offer for sale (OFS) by PE funds Nexus (28% stake to drop to 19%) and Madison (12% to reduce to 10%)

Price band: Rs. 469-493 per share

M cap: Rs. 5,278 cr, implying 23% dilution

IPO Date: Wed 13^th Dec to Fri 15^th Dec 2023, Listing Wed 20^th Dec 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Affordable Home Loan Company

Westbridge promoted (55% pre-IPO holding, 47% post) India Shelter is a retail focused home loan financier, with assets under management (AUM) of Rs. 5,200 cr, of which, 70% are to self-employed individuals. It has 2 lending products - home loan (58% of AUM) and loan against property (LAP, 42% of AUM), both with average ticket size of Rs.10 lakh, disbursed through 203 branches in tier 2/3 cities of Rajasthan, Maharashtra, Madhya Pradesh, Karnataka and Gujarat.

Financial Performance

FY23 net interest income stood at Rs. 293 cr, with PAT of Rs. 155 cr and an EPS of Rs. 17.5. H1FY24 NII stood at Rs. 180 cr, with Rs. 107 cr PAT and an EPS of Rs. 12. Spread has reduced from 6.6% in FY23 to 6.0% in H1FY24. Company’s net NPAs of 0.72% (as of 30.9.23) may be comparable to some housing finance companies, but poorer than small finance banks. Also, home loans are considered the safest lending product, and it makes up 58% of India Shelter’s loan book. Thus, its asset quality ought to be better.

Mid-Single Digit Margin

India Shelter earns average yield, as high as 14.7%, yet its net interest margin (NIM) stood at only 5.8% in FY23 and 6.6% in H1FY24. Housing Finance peers Aptus and Home First clock NIMs of 10% and 6.5% respectively.

One of the reasons for lower margin is higher cost of borrowing at 8.9%, due to A+ credit rating, one notch lower than both Aptus and Home Plus’ AA- rating.

In-Line Pricing

India Shelter’s BVPS stood at Rs. 153, as of 30.9.23, which will rise to Rs. 203 post money. This leads to a PBV multiple of 2.4x, on a post money basis and of 2.3x, on FY24E basis. Home loan companies Aptus and Home First, with larger AUMs of Rs. 8,000 cr each, are ruling at FY24E PBV multiples of 4x, partly due to high NIMs. As against this, India Shelter’s margins stands lower at 6.6%.   

We find valuation multiple of 4x or so unsustainable, once AUM growth tapers on a larger base, as seen for larger home loan peer Aavas (PBV multiple down to 3.3x from 6x+ earlier). Also, when BFSI industry stocks are ruling at lower multiples, fundamentals cannot justify the premium. Anyways, share price of Aptus is down 8% in 2.2 years, and is still ruling below Aug 2021’s IPO price of Rs. 353. Thus, India Shelter’s IPO pricing looks inline and not seen very attractive.

Overhang of Exit of Financial Investors

Nexus and Madison, holding 29% combined post IPO stake, will look to exit, once 6 months lock-in expires, as Nexus first invested in India Shelter in Feb 2014 and Madison has been a shareholder since Oct 2017. Thus, post listing overhang of large shareholder exit will remain on the share price.