analysis of financial housing companies-tauseef padvekar
TRANSCRIPT
A REPORT ON
“ANALYSIS OF FINANCIAL HOUSING COMPANIES”
SUBMITTED AS SUMMER INTERNSHIP PROJECT REPORT FOR THE AWARD OF
“MASTER OF MANAGEMENT STUDIES”
UNDER THE GUIDANCE OF
MR. KALPESH DODIA
RESEARCH DEPARTMENT
MAX NEW YORK LIFE INSURANCE
SUBMITTED BY
TAUSEEF PADVEKAR
MMS-MARKETING
2008-10
N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH
MIRA ROAD (E), MUMBAI-401104
N.L.Dalmia Institute Of Management Studies And Research 1
N.L.Dalmia Institute of Management Studies & Research
“Srishti” Sector-1, Mira Rd. (E) Mumbai-401104
CERTIFICATE
This is to certify that Mr. Tauseef Padvekar, Student of Master of Management studies (Marketing) of N.L.Dalmia Institute of Management Studies & Research has satisfactorily completed Summer Internship Project on Analysis of Financial Housing Companies under my supervision and guidance as partial fulfilment of requirement of MMS course, 2008-2010.
_________________________________________
Mr. Kalpesh Dodia(Project Guide)Max New York Life Ltd.
N.L.Dalmia Institute Of Management Studies And Research 2
ACKNOWLEDGEMENT
Working on this Project with MAX NEW YORK LIFE INSURANCE has been a
wonderful experience. It was a great privilege working with the firm and getting a
firsthand knowledge of some of the functions performed by them.
I am very grateful to Prof. P.L.Arya, Director, N.L.Dalmia Institute of Management
Studies and Research for giving me this opportunity.
I acknowledge with special thanks the help of my project guide Mr. KALPESH
DODIA for his valuable guidance and assisting me in completion of the project. I also
thank him for sharing lots of his knowledge and ideas, which were useful for my
project.
I am thankful to all the officials of MAX NEW YORK LIFE INSURANCE, who were
forthcoming and enthusiastic to answer all my queries. I would like to take this
opportunity to thank them for their kind cooperation and patience.
TAUSEEF PADVEKAR
MMS(MARKETING) 2008-10
N.L.Dalmia Institute of Management Studies and Research
N.L.Dalmia Institute Of Management Studies And Research 3
EXECUTIVE SUMMARY
This project consists of two parts; the first part provides information about Life
Insurance, the Life Insurance industry and Max Newyork Life Insurance Ltd one
of the upcoming and major private players in the life insurance sector. It describes
what Life insurance is, how the Life Insurance industry has evolved over the years in
India as well as globally and at what stage the industry is, it also provides information
about Max Newyork Life Insurance Ltd; its history, Values, mission, corporate
structure, management team and the products offered by the company. The next half
gives an in-depth analysis and understanding of the current status of the Financial
Housing Sector in the country with a focus on the performances of the three major
players HDFC, LIC Housing Finance and Dewan Housing Finance.
The real estate industry in India has grown on the back of fast developing housing
segment. The housing sector is the most dynamic segment of the real estate industry
compared to commercial and other property development segments.
The Indian housing market is facing an acute demand-supply mismatch. It is also
estimated that most of this shortage pertains to the economically weaker sections and
low-income groups. Home loans to Gross Domestic product (GDP) Ratio in India is
7.25% as against 80% in developed countries like United States and United Kingdom,
according to Assocham. This indicates a huge growth potential for the housing sector
and in turn presents a fantastic growth opportunity for the financial housing
companies.
On the other hand, the subprime crisis in the US has shown how hazardous the
mortgage market can be if not handled properly. The Indian housing finance sector
has been insulated from this subprime crisis owing to various factors like availability
of plain vanilla financial products in the market, limited exposure of Indian financial
system to highly leveraged structured products, timely measures by the authorities to
control asset bubbles etc.
However, the industry has become over crowded, with players of all sizes. The entry
of banks into the sector has further intensified competition. Increasing competition
has forced various small sized housing finance companies, which faces squeeze on
N.L.Dalmia Institute Of Management Studies And Research 4
margins to reconsider their strategy, thereby providing an opportunity for inorganic
growth for other developing housing finance companies.
This report gives a brief idea about the growth prospects of Indian Financial Housing
sector along with valuation, relative comparison and investment strategy of three
major housing finance companies- HDFC, LIC Housing Finance and Dewan Housing
Finance.
N.L.Dalmia Institute Of Management Studies And Research 5
INDEX
Sr.
NoTOPIC
Page
No
1 Objective 7
2 Life Insurance
Introduction 8
Types Of Life Insurances 11
Benefits Of Life Insurance 13
History Of Life Insurance 15
Companies in India 18
3 Max New York Life Insurance Ltd
Overview 19
Management 21
Organisation flow chart 23
Products 24
4 World Economy Outlook 31
5Analysis of Financial housing
Companies
Indian Housing Sector 33
Current Scenario 35
6 Company Valuation
LIC Housing Finance Ltd 40
Housing Development Finance Corporation Ltd 45
Dewan Housing Finance Corporation Ltd 50
7 Comparative Analysis 55
8 Conclusion 57
N.L.Dalmia Institute Of Management Studies And Research 6
9 Bibliography 58
OBJECTIVE
1) To get a brief overview of the Insurance Industry
2) Analysing the Financial Housing Companies
LIC Housing Finance Ltd
Housing Development Finance Corporation Ltd
Dewan Housing Finance Corporation Ltd.
N.L.Dalmia Institute Of Management Studies And Research 7
LIFE INSURANCE
AN INTRODUCTION
Life insurance or life assurance is a contract between the policy owner and the
insurer, where the insurer agrees to pay a sum of money upon the occurrence of the
insured individual's or individuals' death or other event, such as terminal illness or
critical illness. In return, the policy owner agrees to pay a stipulated amount called a
premium at regular intervals or in lump sums.
As with most insurance policies, life insurance is a contract between the insurer and
the policy owner whereby a benefit is paid to the designated beneficiaries if an
insured event occurs which is covered by the policy.
The value for the policyholder is derived, not from an actual claim event, rather it is
the value derived from the 'peace of mind' experienced by the policyholder, due to the
negating of adverse financial consequences caused by the death of the Life Assured.
To be a life policy the insured event must be based upon the lives of the people
named in the policy.
Insured events that may be covered include a serious illness.
Life policies are legal contracts and the terms of the contract describe the limitations
of the insured events. Specific exclusions are often written into the contract to limit
the liability of the insurer; for example claims relating to suicide, fraud, war, riot and
civil commotion.
N.L.Dalmia Institute Of Management Studies And Research 8
Life-based contracts tend to fall into two major categories:
Protection policies - designed to provide a benefit in the event of specified
event, typically a lump sum payment. A common form of this design is term
insurance.
Investment policies - where the main objective is to facilitate the growth of
capital by regular or single premiums. Common forms are whole life,
universal life and variable life policies.
Parties to contract
There is a difference between the insured and the policy owner (policy holder),
although the owner and the insured are often the same person. The policy owner is
the guarantee and he or she will be the person who will pay for the policy. The
insured is a participant in the contract, but not necessarily a party to it.
The beneficiary receives policy proceeds upon the insured's death. The owner
designates the beneficiary, but the beneficiary is not a party to the policy. The owner
can change the beneficiary unless the policy has an irrevocable beneficiary
designation.
N.L.Dalmia Institute Of Management Studies And Research 9
Contract terms
Special provisions may apply, such as suicide clauses wherein the policy
becomes null if the insured commits suicide within a specified time. Any
misrepresentation by the insured on the application is also grounds for
nullification.
Life insurance contracts are written on the basis of utmost good faith. That is,
the proposer and the insurer both accept that the other is acting in good faith.
This means that the proposer can assume the contract offers what it represents
without having to fine comb the small print and the insurer assumes the
proposer is being honest when providing details to underwriter.
Costs, insurability, and underwriting
The insurer (the life insurance company) calculates the policy prices with intent to
fund claims to be paid and administrative costs, and to make a profit. The cost of
insurance is determined using mortality tables calculated by actuaries. Mortality
tables are statistically-based tables showing expected annual mortality rates. It is
possible to derive life expectancy estimates from these mortality assumptions. Such
estimates can be important in taxation regulation. The three main variables in a
mortality table have been age, gender, and use of tobacco.
The insurance company receives the premiums from the policy owner and invests
them to create a pool of money from which it can pay claims and finance the
insurance company's operations. Rates charged for life insurance increase with the
insurer's age because, statistically, people are more likely to die as they get older.
The insurer investigates each proposed insured individual unless the policy is below a
company-established minimum amount, beginning with the application process. This
investigation and resulting evaluation of the risk is termed underwriting.
N.L.Dalmia Institute Of Management Studies And Research 10
TYPES OF LIFE INSURANCES
Life insurance may be divided into two basic classes – temporary and permanent or
following subclasses - term, universal, whole life and endowment life insurance.
TEMPORARY TERM
Term assurance provides for life insurance coverage for a specified term of years for a
specified premium. The policy does not accumulate cash value. Term is generally considered
"pure" insurance, where the premium buys protection in the event of death and nothing else.
The three key factors to be considered in term insurance are: face amount (protection
or death benefit), premium to be paid (cost to the insured), and length of coverage
(term).Various insurance companies sell term insurance with many different
combinations of these three parameters.
PERMANENT TERM
Permanent life insurance is life insurance that remains in force (in-line) until the
policy matures (pays out), unless the owner fails to pay the premium when due (the
policy expires OR policies lapse). The policy cannot be canceled by the insurer for
any reason except fraud in the application, and that cancellation must occur within a
period of time defined by law (usually two years). Permanent insurance builds a cash
value that reduces the amount at risk to the insurance company and thus the insurance
expense over time
The four basic types of permanent insurance are whole life, universal life, limited
pay and endowment.
a) Whole life coverage
Whole life insurance provides for a level premium, and a cash value table included in
the policy guaranteed by the company. The primary advantages of whole life are
guaranteed death benefits; guaranteed cash values, fixed and known annual
N.L.Dalmia Institute Of Management Studies And Research 11
premiums, and mortality and expense charges will not reduce the cash value shown in
the policy. The primary disadvantages of whole life are premium inflexibility, and the
internal rate of return in the policy may not be competitive with other savings
alternatives.
b) Universal life coverage
Universal life insurance (UL) is a relatively new insurance product intended to
provide permanent insurance coverage with greater flexibility in premium payment
and the potential for a higher internal rate of return. A universal life insurance policy
includes a cash account. Premiums increase the cash account. Interest is paid within
the policy (credited) on the account at a rate specified by the company. Mortality
charges and administrative costs are then charged against (reduce) the cash account.
c) Limited-pay
Another type of permanent insurance is Limited-pay life insurance, in which all the
premiums are paid over a specified period after which no additional premiums are
due to keep the policy in force. Common limited pay periods include 10-year, 20-
year, and paid-up at age 65.
d) Endowments
Endowments are policies in which the cash value built up inside the policy, equals the
death benefit (face amount) at a certain age. The age this commences is known as the
endowment age. Endowments are considerably more expensive (in terms of annual
premiums) than either whole life or universal life because the premium paying period
is shortened and the endowment date is earlier.
N.L.Dalmia Institute Of Management Studies And Research 12
BENEFITS OF LIFE INSURANCE
Life insurance is a unique investment that helps you to meet your dual needs - saving
for life's important goals, and protecting your assets. The core benefit of life
insurance is that the financial interests of one’s family remain protected from
circumstances such as loss of income due to critical illness or death of the
policyholder. Simultaneously, insurance products also have a strong inbuilt wealth
creation proposition.
Life insurance is the only investment option that offers specific products tailor made
for different life stages. It thus ensures that the benefits offered to the customer reflect
the needs of the customer at that particular life stage, and hence ensures that the
financial goals of that life stage are met.
Life Insurance is also an effective tool to save tax.
Social benefits:
Insurance cover for the employees of a company is an important aspect of social
security benefits package. It includes insurance policies relating to medical benefits,
compensation to worker's as well as provident funds.
Economic benefits:
a) If an estate owner has not accumulated enough assets for his family,
Insurance quote helps create an instant estate for the sake of the Family’s
security.
b) Life Insurance provides the option to pass equal assets to the children who
are not active in the Family business at the time the family business is passed
on.
c) Life Insurance policies can help secure the future of children for
college/educational purposes as the amount of life Insurance Policy increases
on a minor’s or parent’s life.
d) The growth of a cash-value policy is tax-deferred - you do not pay taxes on
the cash value accumulation until you withdraw funds from the policy.
N.L.Dalmia Institute Of Management Studies And Research 13
e) Life Insurance can be useful in paying estate taxes, along with other estate
settlement amounts. Federal Estate Taxes are due nine months after death.
f) If there’s a Business Transfer, life insurance can provide ready cash to
finance a transaction between business owners who are ready to buy the
deceased owner’s share from his or her estate after death.
g) If there’s a home mortgage, one can pass the family residence to their
spouse/children to free them of any mortgage if one has a Life Insurance
Policy for the same. It is preferred to have a decreasing term policy that
decreases in face amount as the mortgage balance is paid down.
h) Life Insurance helps retain your Business from the loss of a key employee.
Untimely death of a key employee can pose severe financial loss to the
business.
i) The right insurance proceeds can provide liquidity to pay off personal loans
or business loans.
j) Charitable Remainder Trusts provide tax benefits. Life Insurance helps
replace a charitable gift.
N.L.Dalmia Institute Of Management Studies And Research 14
HISTORY
ORIGIN OF INSURANCE
Insurance began as a way of reducing the risk of traders, as early as 5000 BC in
China and 4500 BC in Babylon. Life insurance dates only to ancient Rome; "burial
clubs" covered the cost of members' funeral expenses and helped survivors
monetarily. Modern life insurance started in late 17th century England, originally as
insurance for traders: merchants, ship owners and underwriters met to discuss deals at
Lloyd's Coffee House, predecessor to the famous Lloyd's of London.
The first insurance company in the United States was formed in Charleston, South
Carolina in 1732, but it provided only fire insurance. The sale of life insurance in the
U.S. began in the late 1760s.
Insurance in India
The history of Insurance industry in India can be divided into three parts: part1 from
1818-1956, part2 from 1956-2000, part3 from 2000 onwards.
Part1 (1818-1956)
The origin of life insurance in India can be traced back to 1818 with the establishment
of the Oriental Life Insurance Company in Calcutta. It was conceived as a means to
provide for English Widows.
In 1912, insurance regulation formally began with the passing of Life Insurance
Companies Act and the Provident Fund Act.
By 1938, there were 176 insurance companies in India. But a number of frauds during
1920s and 1930s tainted the image of insurance industry in India. In 1938, the first
comprehensive legislation regarding insurance was introduced with the passing of
Insurance Act of 1938 that provided strict State Control over insurance business.
Part2 (1956-2000)
In 1956, Government of India brought together 245 Indian and foreign insurers and
provident societies under one nationalised monopoly corporation and formed Life
Insurance Corporation (LIC) by an Act of Parliament, viz. LIC Act, 1956, with a
N.L.Dalmia Institute Of Management Studies And Research 15
capital contribution of Rs.5 cr. From 1956-2000 the Insurance industry consisted of
only two state insurers: Life Insurers i.e. Life Insurance Corporation of India (LIC)
and General Insurers i.e. General Insurance Corporation of India (GIC).
The (non-life) insurance business/general insurance remained with the private sector
till 1972. The General Insurance Business (Nationalisation) Act, 1972 nationalised
the general insurance business in India with effect from January 1, 1973. The 107
private insurance companies were amalgamated and grouped into four companies:
National Insurance Company, New India Assurance Company, Oriental Insurance
Company and United India Insurance Company. These were subsidiaries of the
General Insurance Company (GIC)
Part3 (2000-onwards)
With the presence of only two companies the penetration level of the insurance
industry in India was very less. To overcome this problem the Indian govt undertook
insurance reforms in the year 1999-2000. Private companies were allowed into the
business of insurance with a maximum of 26 per cent of foreign holding. On July 14,
2000 Insurance Regulatory and Development Authority bill was passed to protect
the interest of the policyholders from private and foreign players. With the entry of
private players the insurance industry has been growing rapidly. The entry of the
State Bank of India with its proposal of bank assurance brings a new dynamics in the
game.
The insurance sector in India went through a full circle of phases from being
unregulated to complete regulation and then currently being partly deregulated. It is
governed by a number of acts.
a) The Insurance Act, 1938
N.L.Dalmia Institute Of Management Studies And Research 16
The Insurance Act, 1938 was the first legislation governing all forms of insurance to
provide strict state control over insurance business.
b) Life Insurance Corporation Act, 1956
Even though the first legislation was enacted in 1938, it was only in 19 January 1956,
that life insurance in India was completely nationalized, through a Government
ordinance. The Life Insurance Corporation of India was created on 1 September,
1956, as a result and has grown to be the largest insurance company in India as of
2009.
c) General Insurance Business (Nationalization) Act, 1972
The General Insurance Business (Nationalization) Act, 1972 was enacted to
nationalize the 100 odd general insurance companies and subsequently merging them
into four companies. All the companies were amalgamated into National Insurance,
New India Assurance, Oriental Insurance, and United India Insurance which were
headquartered in each of the four metropolitan cities.
d) Insurance Regulatory and Development Authority (IRDA) Act,
1999
Till 1999, there were not any private insurance companies in Indian insurance sector.
The Govt. of India then introduced the Insurance Regulatory and Development
Authority Act in 1999, thereby de-regulating the insurance sector and allowing
private companies into the insurance. Further, foreign investment was also allowed
and capped at 26% holding in the Indian insurance companies.
N.L.Dalmia Institute Of Management Studies And Research 17
Existing Insurance Companies/Corporations in India
1. Bajaj Allianz Life Insurance Company Limited
2. Birla Sun Life Insurance Co. Ltd
3. HDFC Standard life Insurance Co. Ltd
4. ICICI Prudential Life Insurance Co. Ltd.
5. ING Vysya Life Insurance Company Ltd.
6. Life Insurance Corporation of India
7. Max New York Life Insurance Co. Ltd
8. Met Life India Insurance Company Ltd.
9. Kotak Mahindra Old Mutual Life Insurance Limited
10. SBI Life Insurance Co. Ltd
11. Tata AIG Life Insurance Company Limited
12. Reliance Life Insurance Company Limited.
13. Aviva Life Insurance Co. India Pvt. Ltd.
14. Sahara India Life Insurance Co, Ltd.
15. Shriram Life Insurance Co, Ltd.
16. Bharti AXA Life Insurance Company Ltd.
17. Future Generali Life Insurance Company Ltd.
18. IDBI Fortis Life Insurance Company Ltd.
19. Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd
20. AEGON Religare Life Insurance Company Limited.
21. DLF Pramerica Life Insurance Co. Ltd.
22. Star Union Dai-ichi Life Insurance Comp. Ltd.
23. National Insurance Company Ltd.
N.L.Dalmia Institute Of Management Studies And Research 18
Max New York Life Insurance Company Ltd.
Overview
Max New York Life Insurance Company Ltd. is a joint venture between New York
Life; a Fortune 100 company and Max India Limited; one of India's leading multi-
business corporations. The company has positioned itself on the quality platform. In
line with its vision to be the Most Admired Life Insurance Company in India, it has
developed a strong corporate governance model based on the core values of
excellence, honesty, knowledge, caring, integrity and teamwork. The strategy is to
establish itself as a Trusted Life Insurance Specialist through a quality approach to
business.
Incorporated in 2000, Max New York Life started commercial operation in 2001. In
line with its values of financial responsibility, Max New York Life has adopted
prudent financial practices to ensure safety of policyholder's funds. The Company's
paid up is Rs. 1,782 crore.
Having set a Best in Class Agency Distribution Model in place, the company is
spearheading a major thrust into additional distribution channels to further grow its
business. The company has multi-channel distribution that includes the agency
distribution, partnership distribution, bancassurance, distribution focused on
emerging markets and alliance marketing through employed sales force. The
company currently has 33 bancassurance relationships, 14 corporate agency tie-ups
and direct sales force at 14 locations. Max New York Life has put in place a unique
hub and spoke model of distribution to deepen rural penetration. The company has
133 (13 hub office, 120 spoke offices) offices dedicated to emerging markets in
Punjab and Haryana. Max New York Life offers a suite of flexible products. It now
has 36 products covering both life and health insurance and 8 riders that can be
customized to over 800 combinations enabling customers to choose the policy that
best fits their need. Besides this, the company offers 6 products and 7 riders in group
insurance business. The company currently has more than 15,362 employees.
N.L.Dalmia Institute Of Management Studies And Research 19
Vision: To be the most admired Life Insurance Company in India.
Values: The Company has a strong corporate governance model based on the core
values of excellence, honesty, knowledge, caring, integrity and teamwork.
Mission: To be among top 5 pvt life insurance companies by profitable new business
sales, brand choice, employer of choice, principal of choice for distributor and
suppliers.
Promoters
Max New York Life Insurance Company Ltd. is a joint venture between New York
Life, a Fortune 100 company and Max India Limited, one of India's leading multi-
business corporations. Since its inception in 2000, the organization has progressed
and positioned itself on the quality platform.
N.L.Dalmia Institute Of Management Studies And Research 20
MANAGEMENT
Board of Directors
Mr. Analjit Singh
Chairman,
Max India Limited
Mr. Anuroop (Tony) Singh
Vice Chairman,
Max New York Life Insurance
Mr. Rajesh Sud
CEO & Managing Director,
Max New York Life Insurance
Mr. Rajit Mehta
Executive Director & Chief Operating Officer,
Max New York Life Insurance
Mr. John Harrison
Director,
Max New York Life Insurance
Mr. Richard Mucci
Director,
Max New York Life Insurance
Dr. Omkar Goswami
Director,
Max New York Life Insurance
Mr. Rajesh Khanna
Director,
Max New York Life Insurance
N.L.Dalmia Institute Of Management Studies And Research 21
Management Team
Rajesh Sud
Managing Director and CEO,
Rajit Mehta
Chief Operating Officer
Anil Mehta
Senior Director - New Markets SBU
Sunil Kakar
Senior Director& Chief Financial Officer
Ajay Seth
Senior Director- Legal & Compliance
Debashis Sarkar
Senior Director & Chief Marketing Officer
John Poole
(Appointed actuary)
N.L.Dalmia Institute Of Management Studies And Research 22
ORGANISATION FLOW CHART
N.L.Dalmia Institute Of Management Studies And Research
MANAGING DIRECTOR
VICE PRESIDENT
ASSISTANT VICE PRESIDENT
REGIONAL MANAGER
MULTI PARTNER MULTIPLE LOCATION
PARTNER IN CHARGE
PARTNER
ASSOCIATE PARTNER
ASSOCIATE SALES MANAGER/SALES MANAGER
ASSOCIATEAGENCYPARTNER
ADVISOR
23
PRODUCTS
Max New York Life Insurance Company Ltd has divided its products into two main
categories INDIVIDUAL plans and CORPORATE plans.
Individual products are mainly categorised into Protection plans, children plans,
Investment plans, Retirement plans, Health plans, Savings plans, Emerging Market
plans and Strategic Management plans which meet the different requirements of an
individual. Each of the above categories has different types of products which provide
customers with an option to select a product that suits there needs.
Corporate plans consist of GROUP plans which have a variety of products to meet
the different requirements of an organisation.
INDIVIDUAL PRODUCTS
1) Protection plans
There are two types of protection plans.
Five Yr Renewable and Convertible™ Plan (Non - Par)
This plan not only provides you with a low cost insurance cover during its tenure
of five years, it also helps you plan in advance for various future needs and your
family's financial security, should anything unfortunate happen to you.
An important feature of this policy is that it allows the insured to convert the policy to
a regular policy during the tenure of the policy.
Level Term Policy (Non - Par/Non - Con)
This plan covers your life at a very low cost and reduces the consequent
hardship your family may have to bear in the unfortunate event of your death. In case
of the unfortunate death of the policy holder during the term of the plan, an amount
equal to the sum assured is paid to the nominee.
N.L.Dalmia Institute Of Management Studies And Research 24
2) Children plans
Children's Endowment to 18 (Par) Plan and Children's Endowment to 24 (Par)
Plan.
Both these plans provide customers with an option to buy a permanent life
insurance policy without medical underwriting (irrespective of his/her health at that
time). This policies are especially designed to enable parents to provide for higher
education of there child and take care of the child’s future needs in case of spiralling
costs.
SMART Steps™ Plan, SMART Steps ™ Plus, and SMART Steps ™ Single
Premium Plan
These plans will help parents to plan for there child's future in a SMART way and
takes there worries away. This plan offers the required financial protection for there
loved ones if they are not alive and provides an unmatched investment opportunity by
way of well managed investment funds. This policy also entitles the customer to
make partial withdrawals for various unplanned expenses in the future.
3) Investment plans
The Investment Plans offered by Max New York Life provide the dual benefit of
protection and market-linked returns with the flexibility to choose the premium and
determine the market exposure. There are a variety of products which can meet the
needs of different types of customers. These products are,
a) Life Maker™ Premium Investment Plan
b) Life Maker™ Platinum Plan
c) Life Maker™ Gold Plan
d) SMART Assure Plan
e) Max New York Life SMART Xpress Plan
The plans provide a customer with an opportunity where he can direct his investments
in the customized unit linked funds such as equities, money market instruments,
investment grade corporate bonds, and government securities. These funds offer a
wide range of returns basis market returns. The customer can also choose to invest his
premiums in one or more of these funds, based on his risk taking ability.
N.L.Dalmia Institute Of Management Studies And Research 25
4) Retirement plans
Easy Life™ Retirement (Par) Plan
Max New York Life's Easy Life™ Retirement Plan Regular Premium/Single
Premium (Participating) Policy is designed to help you save money for your
retirement. It also provides you with an opportunity to take home a regular retirement
income (i.e. pension).
SMART Invest™ Pension Plan
Max New York Life's SMART Invest™ Pension Plan is a comprehensive unit linked
pension plan to meet your post retirement financial needs, ensuring you complete
peace of mind. One-third of the corpus can be commuted at vesting age the amount
commuted are eligible for tax exemption u/s 10A
5) Health plans
LifeLine MediCash™ Plan & LifeLine MediCash™ Plus Plan
These health Insurance plans from MNYL provide support to the individual by
giving him hospital cash benefit, whenever he is hospitalized. Through this plan he
can get a fixed benefit towards hospitalization, ICU and recuperation (post
hospitalization). The second (plus) plan In addition provides the surgical expenses of
a fixed Lump-sum for more than 400 listed surgeries that he may undergo.
LifeLine Wellness™ Plan
Max New York Life's LifeLine-Wellness™ is a health plan, which provides an
individual with a 360-degree benefit in terms of long tenure of coverage, coverage for
10 critical illnesses, and permissible tax benefit under an Income Tax Act.
LifeLine Wellness™ Plus Plan
Max New York Life's LifeLine-Wellness™ Plus health plan provides a
wonderful benefit system in terms of long tenure of coverage, coverage for 38 critical
illnesses and tax benefit.
LifeLine-Safety Net™ Plan
Max New York Life Insurance Company offers this term cum health insurance -
LifeLine-Safety Net™ , the new age insurance covering death, disability, disease and
accident under one single plan.
N.L.Dalmia Institute Of Management Studies And Research 26
6) Savings plans
Max New York Life’s saving plans provide an all round financial protection, and
include a life cover that will protect an individual till the last day. These savings plans
are designed to provide the customer the dual benefits of protection along with the
potentially higher returns.
These plans are,
Whole Life Participating plan
The Whole Life Plan provides an insurance cover that is guaranteed for life. The
policy also builds cash value, which you can use to fund any unforeseen needs.
20 year Endowment (Par) plan
On its maturity at the end of 20 years, this Policy not only gives you a
guaranteed sum but also any bonus it accumulates.
Life Gain™ Plus 20 (Par) & Life Gain™ Plus 25 (Par)
These plans provides an individual with an insurance cover that is guaranteed for
20 years and 25 years down the line respectively
Life Pay™ Money Back, Life Gain™ Endowment, Life Partner Plus
The above three plans also provide a wide range of options for a customer to
choose from.
7) Emerging market plans
Easy term policy
Easy Term Policy is designed to provide the insured with an insurance cover
during the tenor of the policy till age 60. This policy also offers a special claim
concession where if the life insured dies within 6 months of the last unpaid premium,
the claim will still be honoured.
N.L.Dalmia Institute Of Management Studies And Research 27
8) Strategic products plan
These plans are divided into three types Bancassurance, Partnership
Distribution and Max Amsure.
Bancassurance
Capital builder plan
It provides fixed life coverage, simple fund options and plan terms. This plan
also gives an edge to you to choose any one of the investment plans amongst Govt.
Securities, Corporate Bonds (Investment Grade), Money Market Instruments/Cash or
Equities.
Partnership distribution
Max Mangal
Max Mangal™ Endowment (Participating) Policy is a unique plan with limited
premium paying term by which you can reduce your financial burden and enjoy
increasing life cover for the entire term.
Max Vriksha
The Max Vriksha™ Money Back (Participating) Policy is an exceptional plan that
provides you regular lump sum payments at fixed intervals to cater to your periodic
needs and keeps the balance for your long-term savings needs.
Capital Builder & Max New York Life Unit Builder plans
Max New York Life Unit Builder is an insurance plan that offers guaranteed
returns in an uncertain environment.
It offers you the twin advantage of a risk cover and market returns to suit your needs
and risk profile..
MAX AMSURE
Future Builder
N.L.Dalmia Institute Of Management Studies And Research 28
Max Amsure Future Builder Policy enables you to provide for specific needs of your
child such as wedding of your child and also builds cash value, which you can use for
any unforeseen events by taking a loan
Bonus Builder
Max Amsure Bonus Builder Policy provides an insurance cover that is guaranteed
for your entire life. This policy will always help you in fulfilling unforeseen, urgent
needs through its various riders
Business Builder
Max Amsure Business Builder Policy provides an insurance cover during the
tenure of the policy with a maturity benefit: with either 20 year term or 120% of
premiums paid.
N.L.Dalmia Institute Of Management Studies And Research 29
CORPORATE PRODUCTS
Group Plans
Group Credit Life
Max New York Life offers Group Credit Life plan, which provides life cover for a
group of employees who are borrowers from the same employer, (or some credit
institution, bank, finance provider etc.) by paying a lump sum towards repayment of
loan amount on the death of employee.
Group Gratuity cum Term Assurance
Max New York Life's Group Gratuity cum Term Assurance plan is especially
designed to enable you to fund your gratuity obligation in an organized and
convenient manner while enjoying tax benefits at the same time.
Unit Linked Group Gratuity Plan
The Unit Linked Group Gratuity Plan facilitates steady funding and the opportunity
of increased returns on investment.
Max Super Life
A single master policy for all employees, Max Super Life is the mainstay of our
employee benefit platform. This easy and convenient policy is valid for one year and
can be renewed annually.
Group Term Life
This easy and convenient policy is valid for one year and can be renewed annually.
In case of death of an employee, due to natural or accidental reasons, the entire sum
assured amount is paid to the employer.
N.L.Dalmia Institute Of Management Studies And Research 30
WORLD ECONOMY OUTLOOK
In little over a year, the mid-2007 sub-prime mortgage debacle in the United States of
America has developed into a global financial crisis and started to move the global
economy into a recession. Aggressive monetary policy action in the United States and
massive liquidity injections by the central banks of the major developed countries
were unable to avert this crisis. Several major financial institutions in the United
States and Europe have failed, and stock market and commodities market have
collapsed and become highly volatile. Since early October, policymakers in the
developed and developing countries have come up with a number of more credible
and internationally concerted emergency plans. The measures have reshaped the
previously deregulated financial landscape; massive public funding was made
available to recapitalize banks, with the Government taking full or partial ownership
of failed financial institutions and providing blanket guarantees on bank deposits and
other financial assets in order to restore confidence in financial markets and stave off
complete systematic failure. These measures have really worked in favor of economy
and all major world markets have started recovering showing good signals.
GROWTH RATE:
Growth in world gross product (WGP) is expected to slow to 1.0 per cent in 2009, a
sharp deceleration from the rate of 2.5 per cent estimated for 2008 and well below the
more robust pace in previous years. While most developed economies are expected to
be in a deep recession, a vast majority of developing countries is experiencing a sharp
reversal in the robust growth registered in the period of 2002-2007, indicating a
significant setback in the progress made in poverty reduction for many developing
countries over the past few years. The prospects for the Least Developed Countries
(LDCs), which did so well on average over the past years, are also deteriorating
rapidly. Income per capita for the world as whole is expected to decline in 2009.
N.L.Dalmia Institute Of Management Studies And Research 31
Below is a chart displaying GDP growth of Emerging, Advanced and World
Economies.
It clearly shows that Emerging and developing economies have outperformed
advanced economies over a period of a decade (2000-2010).
N.L.Dalmia Institute Of Management Studies And Research 32
ANALYSIS OF FINANCIAL HOUSING
COMPANIES
INDIAN HOUSING SECTOR
The Indian housing finance industry has grown by leaps and bounds in past few
years. The robust growth experienced by the industry in the last few years has been
triggered by a number of factors. Earlier the cost of the house used to be in multiple
of nearly twenty times the annual income of the buyers, whereas today that multiple
is less than 4.5 times. This multiple has come down mainly because income levels
have gone up, while the tax rates have fallen. So with less tax and more income there
is more money left with people to spend. Also interest rates, which earlier used to be
between 16-
18% in past - that has halved. Further property prices have significantly declined or
remained stable over the last 7 to 8 years. Moreover the Government has been
providing tax incentives to people to buy house with the interest on housing loans
now tax deductible upto1.50 lacs per annum.
The industry growth is also being driven by other factors like evolution of the nuclear
family system, an increasing per capita income, the gradual disintegration of the joint
family system, a desire for independent home ownership and an increasing preference
to finance the acquisition than pay for it cash down. The sector has emerged as one of
the outstanding successes over the last decade, second perhaps only to the country's
software industry. It is growing at an estimated annual rate of 28 to 30%.
Prospects of the housing finance industry look encouraging mainly due to the fact that
the gap in demand and supply has not been corrected adequately. As per the current
estimates, India faces a shortage of about 40 million dwelling units and this backlog
is growing. To plug this gap, an estimated Rs 200000 crore will be required and with
only 25% of this requirement expected to come from the formal sector, a growing
role for the housing finance sector can be visualized.
N.L.Dalmia Institute Of Management Studies And Research 33
Realistic property prices, low interest rates, tax incentives and innovative products
offered by housing finance companies augurs very well for the growth of the housing
sector. Moreover securitisation and foreclosure norms will pave the way for the
creation of an active secondary mortgage market, enhance the liquidity into the sector
at low cost and speed up the loan recovery mechanism thereby increasing the pool of
lendable resources.
However, the industry has become over crowded, with players of all sizes. The entry
of banks into the sector has further intensified competition. Increasing competition
has forced various small sized housing finance companies, which faces squeeze on
margins to reconsider their strategy, thereby providing an opportunity for inorganic
growth for other developing housing finance companies.
Major players in the financial housing sector
Housing Development Finance Corporation Limited
L I C Housing Finance Limited
Dewan Housing Finance Corporation Limited
G I C Housing Finance Limited
International Housing Finance Corporation Limited
Gruh Finance Limited
S B I Home Finance Limited
Sahara Housingfina Corporation Limited
Mehta Housing Finance Limited
Usha Housing Development Company Limited
N.L.Dalmia Institute Of Management Studies And Research 34
The current scenario of the housing sector
India continues to be amongst the fastest growing nations in the world, backed by
among other things, increased job opportunities, higher disposable incomes, a
growing middle-income group and tax saving opportunities, which continue to be
available on interest and principal re-payments on housing loans. The growing
affluence of the middle class has acted as a great impetus for big housing projects
taking off in tier I and tier II cities.
The Indian housing finance sector has been insulated from the subprime crisis in the
US owing to various factors like availability of plain vanilla financial products in the
market, limited exposure of Indian financial system to highly leveraged structured
products, timely measures by the authorities to control asset bubbles etc.
Further, the Indian housing market is facing an acute demand-supply mismatch with
the housing shortage expected to rise to 26.53 million units by 2012 from the current
shortage of 24.7 million units. It is also estimated that most of this shortage pertains
to the economically weaker sections and low-income groups.
Home loans to Gross Domestic product (GDP) Ratio in India is 7.25% as against 80%
in developed countries like United States and United Kingdom, according to
Assocham. This indicates a huge growth potential for the housing sector and in turn
presents a fantastic growth opportunity for the housing finance industry.
Mortgages as percent of GDP for various countries around the world
N.L.Dalmia Institute Of Management Studies And Research 35
Demand Drivers for the Housing Industry
1) Population
2) Urbanisation
3) Nuclearisation
4) Affordability
Population:
Population growth has a direct bearing on the requirement for housing units. Further, in the
current scenario, population growth is actually occurring in the younger age brackets. This is
estimated to translate into a large increase in working population, thereby translating into
greater demand for housing.
India is not just the second largest country in the world; it also has the youngest population –
a unique combination. Of the country's population 60% is 29 or below in age; compare this
with corresponding numbers of 47% for China, 42% in the US and 33% in Japan. So even as
the populations of these countries will age faster, India's will remain vigorously income
earning. In fact, the geriatric population - also classified as financially unproductive – across
these countries will be the lowest in India
Estimated Growth in Population from 2001-12
N.L.Dalmia Institute Of Management Studies And Research 36
.
Besides, the Indian middle-class is expected to grow from around 57 mn in 2001-02 to
around 92 mn by 2005-06 and 153 mn by 2009-10 (Source: NCAER). Households with
earnings greater than Rs.10 lakh are expected to grow from 0.8 mn in 2002 to 3.8 mn in 2010
(Source: NCAER), which will immediately translate into robust and sustained demand for
quality housing.
Urbanisation:
The share of urban population has increased steadily to around 27% of total. In the
past two decades, urban population has grown at 2.77%, a little higher than the
overall population growth of 2.3%. Going forward, the pace of urbanisation is
expected to accelerate. This is expected to translate into urban population growth of
2.27% till the year 2011 as compared with overall population growth of 1.5%. This
difference in growth rates implies that the gap between the urban and rural population
will narrow.
Expected movement in urban and rural population:
Nuclearisation:
N.L.Dalmia Institute Of Management Studies And Research 37
Urbanisation has twin impact on housing demand. On the one hand, it reduces the
area per household, and on the other, there is an increasing need for more nuclear
families, leading to the formation of more number of households. The fact that urban
house prices are higher also leads to buying smaller areas in comparable income
categories.
N.L.Dalmia Institute Of Management Studies And Research 38
Affordability:
Impact of Rising Income on the housing industry:
India is witnessing a steady movement of households into higher income categories.
Urban households with incomes above Rs 500,000 are further expected to grow by
12% in the next 5 years on an increased base thus implying that the shift is more
pronounced in the high-income categories. Rural households, in the same income
class, are expected to grow by 7%. The growth rate, though comparatively lower than
the past 5-year average, reflects an adjustment of a higher base in incomes.
Growth rate in incomes – Urban and Rural – 2007-2012:
Impact of interest rate increase on loan amounts:
EMI remaining constant, the loan amount is inversely proportional to the interest rate
and directly proportional to the tenure. Rising interest rates increase the monthly EMI
for the individual. For new houses, the rising interest rate reduces the maximum
amount an individual can borrow, thereby reducing the ability to go for higher value
or bigger houses. In a falling interest regime, the EMI would typically fall, leading to
a higher eligibility for loans while in a rising interest scenario the situation is reverse.
Impact of interest rate increase on loan amounts:
N.L.Dalmia Institute Of Management Studies And Research 39
The threat for stand-alone housing finance companies comes from commercial banks, which
have an established vast network and access to funds at a comparatively cheaper cost,
continuing to be active players in this segment. However, there is ample scope for expansion,
based on novel marketing initiatives, professional expertise and customer friendly approach.
N.L.Dalmia Institute Of Management Studies And Research 40
COMPANY VALUATION
LIC Housing Finance Ltd
Company Profile
LIC Housing Finance Ltd. is one of the largest Housing Finance companies in India.
Incorporated on 1989, LIC Housing Finance (LICHFL) was promoted by Life
Insurance Corporation of India with equity participation from UTI, ICICI and IFCI.
The main objective of the Company is providing long term finance to individuals for
purchase, construction, repair and renovation of new and existing houses. The
Company also provides finance on existing property for both business and personal
needs and gives loans to professionals for purchase, construction of Clinics, Nursing
Homes, Diagnostic Centres, Office Space etc. The mission of the company is to
provide secured housing finance at affordable cost, maximizing shareholders value
with higher customer sensitivity
Management
Chairman Mr T.S.Vijayan
Managing Director Mr D.K.Mehrotra
.
Stock Details
Stock exchange code Reuters code Bloomberg code
BSE Code: 500253
NSE Code:LICHSGFIN
BSE–LICH.BO BSE-LICHF@IN
N.L.Dalmia Institute Of Management Studies And Research 41
(As on 31-Dec-2008)
Price Chart of LIC Housing Finance for the last 10 years from
FY99-09
price fluctuations of LIC Housing Finance
0
50
100
150
200
250
300
350
400
450
April 1999
Octo
ber
1999
April 2000
Octo
ber
2000
April 2001
Octo
ber
2001
April 2002
Octo
ber
2002
April 2003
Octo
ber
2003
April 2004
Octo
ber
2004
April 2005
Octo
ber
2005
April 2006
Octo
ber
2006
April 2007
Octo
ber
2007
April 2008
Octo
ber
2008
Months
Ru
pees
Investment Argument
Favourable Factors
1) Good performance even during the slow down
N.L.Dalmia Institute Of Management Studies And Research
Shareholding pattern %
Promoters 40.84
MFs/Banks/Fis 14.32
Foreign 27.06
Non-Promoter 5.13
Total Public 12.64
Total 100.00
42
Since the beginning of the current financial year, the financial sector has been facing
the brunt of rising interest rates and slow disbursements. In these extremely
challenging environment, LICHF has been able to weather the storm and has
delivered a healthy performance in areas of business growth and profitability and has
made significant improvement in the asset quality.
The company's interest income grew by more than 30% year-on-year for the nine
months ended December '08. The company’s disbursements, both sanctions and
approvals, have been growing at above 25% during this period, which is in line with
its performance last year. The disbursements are expected to improve with the cost
of funds coming down. The company is looking to disburse Rs 9,500 crore by the
end of the current financial year as against Rs 7,071 crore in the previous financial
year.
2) Improving Asset Quality
NBFCs typically face delinquency risks, which surface during times of a slowdown,
when borrowers are not able to make the interest payments on their loans.
LICHF’s gross non-performing assets (GNPAs) stood at 1.69% as of end-December
'08, compared to 2.77% a year ago, whereas net non-performing assets (NPAs) stood
at 0.73% of its net advances as of end-December '08, compared to 1.61% a year ago.
This shows that the company's quality of loan book has improved tremendously in
the past one year and it has been efficient in managing delinquency risks.
The management attributes the reduction in NPA to active loan management and
adequate provisions in the past.
With adoption of better and stricter risk management process and concerted efforts
on NPA recoveries, the company is aiming to achieve a GNPA level of 1.50%, as
compared with 1.70% last year.
3) Healthy growth in loan book
LICHF has been steadily growing its loan book with loan sanctions and disbursal
growing at a compounded annual growth rate (CAGR) of 30% and 20% respectively
in the last three financial years. For the nine months ended December 2008 the
Company sanctioned Rs 7360 crore and disbursed Rs 5623 crore, an increase of 29%
and 26% respectively.
N.L.Dalmia Institute Of Management Studies And Research 43
The primary focus of LICHF has been on retail client though it has tie-up with
corporate clients. Given the cost of funds coming down and interest rate easing
further, LICHF expects to grow its loan book at a CAGR of 21% over a period
of FY2008-10 (E)
4) Reliance on floating rate structure
LIC Housing is increasingly relying on floating rate borrowing and lending which
helps to protect margins in volatile interest rate scenario. Currently the company
maintains its loan book with 93% of the outstanding individual loans offered at
floating rate. The higher exposure to the floating rate loans has enabled LICHF to
maintain its Net interest margin (NIM) by periodically passing on the effect of
changes in its own borrowing cost to customers. The focus on protecting margins
by adopting this business strategy will ensure stable growth in profitability in the
future.
The cost of funds has been increasing continuously, but yields have also gone up.
NIM improved to 3.23% in the last quarter, as against 2.87% in the third quarter a
year ago.
With inflation coming down, it appears that the cost of funds and interest rate will
come down further. The reduction in rates is also expected to boost the demand for
home loans.
5) Strong parentage
Life Insurance Corporation (LIC), which owns 40.8% of LICHFL, is a well-known
brand (leader in the Life Insurance Sector in India) and has high safety perception.
The company uses the agency network of the parent and so can potentially leverage
on a huge customer base. LIC of India helps the company to raise funds in times of
liquidity crunch by participating in its bond offerings. Also due to its parentage, the
LICHF enjoys equally good brand recall. Further the public sector nature of the
parent has helped LICHFL to follow a conservative approach in terms of loan
disbursements helping to mitigate downside risks.
6) Attractive dividend yield
N.L.Dalmia Institute Of Management Studies And Research 44
LIC Housing has been consistently increasing the rate of dividend since the last four
financial years. Over the last four years, dividend paid increased from 50% in the
financial year ended 2005 to 100% (Rs 10 per share) in the financial year ended 2008.
Even if we assume that status quo is maintained, yield works to be more than 5%.
7) Floating a new financial services arm
With a view to strengthening its distribution, LICHFL is all set to launch its financial
services subsidiary, LIC Housing Finance Financial Services, in this quarter. To
start with, the company's product suite would include home loans, insurance products
and mutual funds and going forward it would add other third-party products. This will
help the company to improve its disbursement of loans and other financial
products.
8) New Initiatives
LICHF has developed its reverse mortgage product and is expected to launch the
same in the near future. LICHF Care Homes Ltd’s business of developing the land
and running “Assisted Living Community Centre” is also expected to provide a
further boost to the bottom line. The floating of venture capital fund will benefit
LICHF to raise fee income in future.
9) Strong industry growth
LIC Housing Finance has been one of the fastest growing NBFCs over the last five
years mainly due to the strong economic growth seen in India and the rising level of
disposable incomes, which has fuelled the demand for housing loans.
Currently, the Indian housing market is facing an acute demand-supply mismatch
with most of the shortage coming from economically weaker sections and low-
income groups. In order to capture a share of this huge opportunity, the company
has stepped up its promotional activities, which has improved its share in housing
loans from 5% to 7%.
Key Concerns
1) Extension of special schemes may hurt margins
N.L.Dalmia Institute Of Management Studies And Research 45
LICHFL has offered special schemes offering home loan rates at 8.75% for loans
upto 3mn. Extension of such schemes coupled with further rate cuts will impact
margins negatively.
2) Competition from Banks
Banks are dominant players in the housing finance segment having ~60% market
share. LICHFL may loose market share in case banks become more aggressive in the
home loan segment.
N.L.Dalmia Institute Of Management Studies And Research 46
HDFC
Company Profile
Background
HDFC was incorporated in 1977 with the primary objective of meeting a social need -
that of promoting home ownership by providing long-term finance to households for
their housing needs. HDFC was promoted with an initial share capital of Rs. 100
million.
Business Objectives
The primary objective of HDFC is to enhance residential housing stock in the country
through the provision of housing finance in a systematic and professional manner,
and to promote home ownership. Another objective is to increase the flow of
resources to the housing sector by integrating the housing finance sector with the
overall domestic financial markets.
Organisational Goals
HDFC's main goals are to a) develop close relationships with individual households,
b) maintain its position as the premier housing finance institution in the country, c)
transform ideas into viable and creative solutions, d) provide consistently high returns
to shareholders, and e) to grow through diversification by leveraging off the existing
client base.
Management
Executive Chairman Mr Deepak.s. Parekh
Vice-Chairman & Managing Director Mr K.M.Mistry
.
Stock Details
Stock Exchange Codes: Reuters Code: Bloomberg Code:
BSE Code: 500010
NSE Code: HDFC EQ
BSE–HDFC.BO
NSE-HDFC.NS
BSE-HDFC
NSE-NHDFC
N.L.Dalmia Institute Of Management Studies And Research 47
Share information as on June 30, 2009:
Paid-up Share Capital Rs. 2,845,603,540.00 comprising of 284,560,354 equity
shares of Rs. 10 each
No. of Shareholders 121,819
Market CapitalisationBSE -> Rs. 66,740.79 crores
NSE -> Rs. 66,722.29 crores
Shareholding pattern as on March 31, 2009
FIIs & FDIs 75%
Individuals 11%
FIs/Banks/Insurance Cos 8%
Mutual Funds 4%
Companies 2%
Total 100%
Fluctuation in share price of HDFC for the past 10 years
0
500
1000
1500
2000
2500
3000
3500
Apr
-99
Oct
-99
Apr
-00
Oct
-00
Apr
-01
Oct
-01
Apr
-02
Oct
-02
Apr
-03
Oct
-03
Apr
-04
Oct
-04
Apr
-05
Oct
-05
Apr
-06
Oct
-06
Apr
-07
Oct
-07
Apr
-08
Oct
-08
Months
Ru
pee
s
Notes:
1) The Equity shares of the Corporation with Face Value of Rs. 100/- each were
sub-divided to Equity shares with Face Value of Rs. 10/- each with effect
from August 25, 1999.
2) The Corporation issued Bonus Shares on 1:1 basis to the shareholders whose
names appeared in the Register of Members as on December 16, 2002.
N.L.Dalmia Institute Of Management Studies And Research 48
Investment Argument
Favourable Factors
1) Market Leader
HDFC is the undisputed market leader in the housing finance industry with a very
strong presence all across the country and in different market segments.
2) Home Loan Strength
Low average loan to value ratio and income to installment ratios
Post dated cheques obtained from most customers or deduction at source
arrangements with employers
Steady level of prepayments
Quality underwriting with experience of over 30 years
3) Corporate strengths
Strong brand – customer base of 3.3 million
Stable and experienced management – average tenor of senior management in
HDFC over 15 years
High service standards
Low cost income ratio: 8.8%.
4) Strong Performance even in a tough environment
HDFC has maintained a high asset quality even in a tough operating environment. In
fact, its asset quality as of March 2009 has shown an improvement over its last year's
performance. Net NPAs formed 0.56% of net advances as on March 2009 compared
to 0.68% during March 2008-end.
N.L.Dalmia Institute Of Management Studies And Research 49
5) Strong Performance over the Years
Financial Performance of HDFC over the past 10 years
ROE and EPS for the past 5 years
Key Concerns
1) Growth in sanctions not translating into growth
Despite a high growth in sanctions, HDFC's loan book grew by just 16% in the March
2009 quarter. This is a far cry from the 31% growth in the June 2008 quarter. High
growth in sanctions is not translating into high growth in HDFC's loan book.
N.L.Dalmia Institute Of Management Studies And Research 50
2) Competition from Banks
Banks are dominant players in the housing finance segment having 60% market
share. HDFC may loose market share in case banks become more aggressive in the
home loan segment.
3) Competition from other housing companies
HDFC’s interest expense grew by 52% in the March 2009 quarter, while its interest
income grew by only 36%. On the other hand companies like LICHF have shown a
better performance by not letting interest expense grow at a significantly higher rate
compared to interest income even in times of tight liquidity as in December 2008.
LICHF’s interest income grew at 30% and 39% in the March 2009 quarter and Dec
2008 quarter respectively and its interest expense jumped by 34% and 40% in the
same period. It is important for finance companies to maintain this balance, or else
higher growth in interest expense can eat into profits.
N.L.Dalmia Institute Of Management Studies And Research 51
DEWAN HOUSING FINANCE
Company Profile:
Dewan Housing Finance Limited (DHFL) is a private sector HFC. It was established
on 11th April 1984 by Mr. R.K.Wadhawan with an unusual objective of providing
housing finance to lower and middle income Indians. It was only the second housing
finance company set in India. Mr. Kapil Wadhawan is the current Vice-Chairman and
Managing Director of the company.
Vision
Transform lives of Indian households by enabling
access to home ownership
Mission
Be easily accessible to every Indian who desires to
own a home.
Understand our customer’s inner needs and speak
their language.
Go to any length to make sure our customers don’t
feel intimidated
.
In the 25 years of its operations, DHFL has focused on providing housing loans to
middle and low income customers in tier-II and tier-III cities (its average loan size
was Rs425,000 in FY09 as compared with Rs1.3m for LIC Housing Finance). The
company operates on the hub-and-spoke model and has nearly 300 points of presence
(PoPs) for business generation, most of which are its own service centres and some
are through tie-ups. It plans to scale up its own PoPs from 213 to 350 and its tied-up
PoPs from 85 to 200. DHFL is positioning itself to take the next leap in its niche
business.
DHFL has a strong presence in West and South India, and has a captive distribution
network covering 188 locations. In North India, it is expanding through its tie-up with
Punjab and Sind Bank (45 PoPs), and in East India, through its tie-up with United
Bank of India (40 PoPs). It also operates through its subsidiary, DVFL’s 25 PoPs.
N.L.Dalmia Institute Of Management Studies And Research 52
DHFL has access to the large customer base of HDIL and Spinach, which it can use
to grow its loan book.
The company is planning to increase its location coverage with Punjab and Sind Bank
(PSB) to 200 and with United Bank of India (UBI) to 500 in the next 2-3 years. PSB
and UBI have the option of taking 50% of the loans originated by DHFL on their
books.
Management
Chairman Mr Rakesh Kumar Wadhawan
Vice-Chairman & Managing Director Mr Kapil Wadhawan
Chief Executive Officer Mr Anil Sachidanand
Stock Details
BSE code NSE code BLOOMBERG code
511072 DEWANHOUS DEWH IN
EQUITY CAPITAL
(Rs MN)
FACE VALUE
(Rs)
Eq. SHARES O/S
(Mn)
MARKET CAPITAL
(Rs cr)
742.9 10 74.3 3373.8
Shareholding pattern
Promoters 55.9%
Domestic institutions 23.1%
Foreign 20.3%
Others 7%
Total 100%
N.L.Dalmia Institute Of Management Studies And Research 53
N.L.Dalmia Institute Of Management Studies And Research 54
PRICE CHART FOR THE PAST TEN YEARS Fy-99-09
PRICE CHART
0.00
50.00
100.00
150.00
200.00
250.00
Apr
-99
Apr
-00
Apr
-01
Apr
-02
Apr
-03
Apr
-04
Apr
-05
Apr
-06
Apr
-07
Apr
-08
MONTHS
RU
PE
ES
Series1
Investment Argument
Favourable factors
1) Superior growth rate
DHFL has been the fastest growing housing finance company in the last five years –
its loan book and disbursements have registered a CAGR of 39% and 37%,
respectively (significantly above peers) over FY04-09.
In FY09, loans grew at a healthy 40% on (1) 34% growth in disbursements, and (2)
lower repayments during the year. Repayment ratio declined to 14% in FY09 from
27% in FY08 due to lower sell-downs of loans.
Strong 40% growth in FY09 is commendable in an adverse business environment;
LICHF grew 26% and HDFC grew 16%.
2) Superior margins that can be sustained
DHFL’s core competence of lending to low and middle income customers gives it
better pricing power and superior margins (3%). The company enjoys higher yield on
loans (13.1%) than its peers. This is despite high yielding builder financing
contributing just 2% of its book as compared to 9% for LIC HF and 12% for HDFC.
N.L.Dalmia Institute Of Management Studies And Research 55
However, cost of funds is higher for DHFL due to its lower credit rating (AA+ from
CARE and AA from FITCH), and higher dependence (73%) on banks and FIs. Over a
longer period of time, expected liability restructuring will help to keep margins higher
at 3%+. The management intends to reduce dependence on banks and FIs to 60% and
increase the share of multilateral agencies and NCDs to 33% from 10% currently.
3) Commendable performance on asset quality front
DHFL’s gross NPA ratio improved from 1.6% in FY08 to 1.5% in FY09 and net
NPA ratio improved from 1.1% in FY08 to 1% in FY09. In absolute terms, gross
NPAs increased 28% to Rs856m. Despite exposure to higher risk low income
customers, DHFL’s gross NPAs have remained <1.8% over FY03-09. However,
provision coverage ratio has remained low at 20-30%, as DHFL follows the
provisioning policy as prescribed by NHB and does not make provisions higher than
required by the regulators.
4) To drive earnings by fee income and cost efficiency
DHFL is focusing on growing fee income through three key avenues – insurance
distribution (has tied up with SBI Life and ICICI Lombard), project marketing, and
providing technical services to developers. It is targeting to earn fees to cover its
operating expenses fully.
Last two years’ fee income CAGR is 66% and it accounted for ~25% of operating
expenses in FY09. There is considerable scope for improvement in DHFL’s cost-to-
income ratio of
~35% (compared with ~20% for LIC Housing Finance). Higher fee income and
volume growth would help in bringing down its cost-to-income ratio.
Key Concerns:
1) The business model of tapping lower/middle income group may add extra credit
risk as asset quality may slip in tight market situations.
2) Increasing competition in the untapped markets including Tier II and Tier III
segment may put margins under strain in the future.
N.L.Dalmia Institute Of Management Studies And Research 56
3) The cost effective policies may be strained if the firm interest rate scenario
continuing/stretching for a long period of time. This may put pressure on the margins
of DHFL.
4) The profitability of DFHL may be impacted in case of a slowdown in the mortgage
finance industry or slow down in the real-estate segment.
N.L.Dalmia Institute Of Management Studies And Research 57
COMPARITIVE ANALYSIS
LOANS GROWTH CAGR FY05-09
TREND IN YIELD ON LOANS %
N.L.Dalmia Institute Of Management Studies And Research 58
TREND IN HOUSING LOAN SPREADS
COMPARISON OF KEY RATIOS
Ratios HDFC LICHF DHFL
PE ratio (07/07/09) 29.46 9.45 7.79
EPS (Rs) (Mar, 09) 80.24 62.59 15.16
Sales (Rs crore)
(Mar,09)
3145.77 790.48 204.51
Net Profit Margin
(Mar, 09)
20.71 18.37 15.77
Face Value (Rs) 10 10 10
Last dividend (%) 300 (04/05/09) 130 (23/04/09) 25 (11/05/09)
Return on avg
equity
17.37 23.79 21
N.L.Dalmia Institute Of Management Studies And Research 59
Conclusion:
Prospects of the housing finance industry look encouraging in the long run as there
is a very big demand for houses due to fast population growth, rapid urbanisation and
emergence of the nuclear family system. Moreover housing finance companies are
coming up with innovative products suitable for different types of customers. The
reductions in interest rates as well as the rising income levels have made housing
loans accessible to a large number of people. Also, a very strong regulatory
environment in India will protect the housing sector from a sub prime crisis like
situation that occurred in the US. Hence, in the long run housing companies are
definitely a very good investment.
But, the investor has to consider that most of these growth opportunities are already
factored into the price of many of these housing companies like HDFC. Further the
comparison of the three companies shows that DHFL has shown a better
performance than HDFC and LICHF over the past five years. DHFL has more
exposure to the tier1 and tier2 cities from where the future growth is expected, so it is
at an advantage as compared to the other two companies. However the default risk
from these markets cannot be properly evaluated.
Finally, one has to remember that housing loans are a disbursal with relatively long
tenure (10-15 years), hence they expose the lending entities to interest rate and re-
pricing risks also the fungibility from fixed to floating rate schemes can further trims
there margins. Hence inspection of the company’s performance by the investor at
regular intervals is very essential.
N.L.Dalmia Institute Of Management Studies And Research 60
BIBLIOGRAPHY
WEBSITES
www.irdaindia.org
www.wikipedia.org/wiki/Insurance
www.maxnewyorklife.com
www.nasscom.in
www.dhfl.com
www.lichousing.com
www.hdfc.com
www.nhb.org.in
www.moneycontrol.com
www.moneycontrol.com
www.bseindia.com
www.nseindia.com
www.nasscom.in
Books
Financial Services and Markets-Dr S.Guruswamy
NEWSPAPERS
Times of India
Economic Times
N.L.Dalmia Institute Of Management Studies And Research 61