India Shelter Finance Corporation IPO: A dive into the affordable housing champion
India Shelter Finance Corporation Limited – IPO Note

Price Band: Rs 469-493

Issue Date: 13th Dec-15th Dec

Recommendation: Apply

Company Overview: 

India Shelter Finance Corporation Limited (ISFCL), established in 1998, specializes in housing finance, targeting the self-employed in low and middle-income groups, especially in Tier II and Tier III cities. The company provides various housing finance products, emphasizing loans with ticket sizes below Rs. 10.5 lakhs. With a presence in 15 states and a branch network of 203 as of September 2023, ISFCL focuses on affordable housing, leveraging a scalable technology infrastructure for operational efficiency. The company’s strategic approach includes generating relatively high yields on advances, contributing to financial sustainability and profitability. ISFCL’s mission aligns with promoting homeownership and addressing the specific housing needs of its target demographic.

The Objective of the Issue:

• ISFCL aimed to raise Rs 1,200 crore through the IPO, with Rs 800 crore through a fresh issue of shares and Rs 400 crore through an offer for sale (OFS) by existing investors.
• The fresh raised capital will be used to strengthen ISFCL’s capital base and cater to its onward lending requirements, supporting future growth and expansion plans.
• A portion of the funds may also be utilized for general corporate purposes like debt repayment, working capital needs, and potential acquisitions.

Outlook and Valuation:

• ISFCL’s robust financial performance, experienced management team, and focus on social impact provide a strong foundation for future growth.
• The Indian affordable housing market is expected to grow at a healthy pace, driven by government initiatives and rising urbanization.
• ISFCL’s extensive reach and focus on Tier II and Tier III cities position them well to tap into this market potential.
• With a loan book standing at Rs. 4,359 Crores as of FY23, ISFCL demonstrates a substantial growth runway given its potential for accelerated expansion. The company has exhibited remarkable growth in Assets Under Management (AUM), achieving a commendable CAGR of 41% from FY21 to FY23. Additionally, ISFCL has delivered a respectable Return on Assets (ROA) of 4.1% in FY23.
• Despite its robust performance, the company’s valuation, based on Price-to-Book (P/B), indicates a discount compared to peers, standing at 2.6x FY23 post-issue Book Value Per Share (BVPS).
• Analyzing the company’s Price-to-Book Value (P/BV) of 3.48x and Price-to-Earnings (P/E) ratio of 27.7x, we observe a fair valuation that aligns with its growth prospects and risk profile. This balanced valuation underscores the company’s potential for sustained growth and presents a compelling investment opportunity.
  

  ISSUE OFFER
  Price band (INR)	Rs 469-493
  Bidding date	13-15 December
  Sector	NBFC
  Total IPO size (Cr)	1200
  Fresh issue (Cr)	800
  Offer for sale (Cr)	400
  Market lot	30
  Face value (INR)	5
  Listing on	NSE, BSE
  Retail Allocation	35%

Competitive Strengths:

• Extensive and Diversified Physical Distribution Network with Significant Presence in Tier II and Tier III cities.
• Targeting this underserved segment aligns with their social mission and creates a loyal customer base.
• A track record of steady growth in loan portfolio, revenues, and profitability inspires investor confidence.
• Strong loan book with low non-performing assets (NPAs) minimizes risk and ensures financial stability.
• Established by the government of India, ISFCL benefits from a stable shareholder base and potential access to cheaper funds.
• Over 200 branches across 17 states provide a strong physical presence and customer access.
• Deep knowledge of Tier II and III markets and local lending practices allows for customized solutions.
• Efficient Technology Adoption: Leverage digital platforms for loan processing and customer service, improving speed and cost-effectiveness.
• Commitment to affordable housing promotes financial inclusion and poverty alleviation, boosting brand image.
• Implement green practices and ethical lending policies, further enhancing positive perception.

Key Strategies:

• Expand and diversify the distribution network to achieve deeper penetration in key states.
• Strengthen market presence through strategic expansion in targeted regions.
• Utilize the existing technology stack to achieve scalability.
• Enhance efficiency and productivity across branches through innovative technological solutions.
• Diversify the borrowing profile to optimize borrowing costs.
• Explore a mix of funding sources for financial stability and risk mitigation.
• Focus on optimizing borrowing costs for improved financial performance.
• Strategically manage expenses related to borrowing to enhance overall financial efficiency.
• Invest in initiatives to enhance brand equity in the affordable housing finance sector.
• Build a strong and reputable brand to foster customer trust and loyalty.
• Prioritize sustainability initiatives in business practices.

Key Concerns:

• Economic downturns increase the risk of non-payment or default by borrowers, particularly from the low-income segment.
• Customers in the low and middle-income strata, especially first-time home loan takers in Tier II and Tier III cities, may face challenges in meeting repayment obligations during economic uncertainties.
• ISFCL’s customer base comprises 30% salaried and 70% self-employed individuals.
• Intense competition, especially in the context of expansion into new geographies, may impact ISFCL’s financials in the long term.
• Differing market dynamics, regulatory landscapes, and customer needs in new geographies may pose challenges.
• A major proportion of ISFCL’s Assets Under Management (AUM) is concentrated in three states, posing geographic concentration risk.
• Over-reliance on specific regions increases vulnerability to localized economic conditions.
• Historical negative cash flows and the potential for future negative cash flows are inherent to ISFCL’s business model.

Comparison with Listed Industry Peers: 

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