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N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH MIRA ROAD (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.
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
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 indepth 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 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.
INDEX
Sr. No
1 2
TOPIC
Objective Life Insurance
Introduction Types Of Life Insurances Benefits Of Life Insurance History Of Life Insurance Companies in India
Page No
7
8 11 13 15 18
4 5
33 35
Company Valuation
LIC Housing Finance Ltd Housing Development Finance Corporation Ltd Dewan Housing Finance Corporation Ltd
40 45 50 55 57 58
7 8 9
Comparative Analysis
Conclusion Bibliography
OBJECTIVE
N.L.Dalmia Institute Of Management Studies And Research
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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.
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.
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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.
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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.
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process. This investigation and resulting evaluation of the risk is termed underwriting.
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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
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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 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.
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. b) 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.
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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 Familys 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 minors or parents life.
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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. 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 theres a Business Transfer, life insurance can provide ready cash to finance a transaction between business owners who are ready to buy the deceased owners share from his or her estate after death. g) If theres 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.
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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)
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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 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.
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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.
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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.
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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
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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)
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MANAGING DIRECTOR
VICE PRESIDENT
REGIONAL MANAGER
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PARTNER
MANAGING DIRECTOR
VICE PRESIDENT
REGIONAL MANAGER
PARTNER IN CHARGE
PARTNER
ASSOCIATE PARTNER
ADVISOR
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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.
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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 childs 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
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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.
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
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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.
6) Savings plans
Max New York Lifes 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.
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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.
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
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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 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.
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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.
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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 37 N.L.Dalmia Institute Of Management Studies And
Research
average over the past years, are also deteriorating rapidly. Income per capita for the world as whole is expected to decline in 2009. 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).
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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. 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.
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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
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. 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:
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Nuclearisation:
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.
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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:
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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.
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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 Managing Director . Stock Details Stock exchange code BSE Code: 500253 NSE Code:LICHSGFIN Shareholding pattern Promoters MFs/Banks/Fis Foreign Non-Promoter Total Public TotalN.L.Dalmia % 40.84 14.32 27.06 5.13 12.64
Price Chart of LIC Housing Finance for the last 10 years from FY99-09 (As on 31-Dec-2008)
Mr T.S.Vijayan Mr D.K.Mehrotra
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Months
Investment Argument
Favourable Factors
1) Good performance even during the slow down 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 companys 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.
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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. LICHFs gross non-performing assets (GNPAs) stood at 1.69% as of endDecember '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. 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
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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 wellknown 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 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
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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 thirdparty 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 Ltds 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 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
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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.
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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 Vice-Chairman & Managing Director . Stock Details Stock Exchange Codes: BSE Code: 500010 NSE Code: HDFC EQ Reuters Code: BSEHDFC.BO NSE-HDFC.NS Bloomberg Code: BSE-HDFC NSE-NHDFC Mr Deepak.s. Parekh Mr K.M.Mistry
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Share information as on June 30, 2009: Paid-up Share Capital No. of Shareholders Market Capitalisation Rs. 2,845,603,540.00 comprising of 284,560,354 equity shares of Rs. 10 each 121,819 BSE -> Rs. 66,740.79 crores
NSE -> Rs. 66,722.29 crores Shareholding pattern as on March 31, 2009 75% 11% 8% 4% 2% 100%
FIIs & FDIs Individuals FIs/Banks/Insurance Cos Mutual Funds Companies Total
Months
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.
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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.
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5) Strong Performance over the Years Financial Performance of HDFC over the past 10 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.
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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 HDFCs 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. LICHFs 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.
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Vision
Be easily accessible to every Indian who Understand our customers inner needs and Go to any length to make sure our
customers dont 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,
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through its tie-up with United Bank of India (40 PoPs). It also operates through its subsidiary, DVFLs 25 PoPs. 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 Vice-Chairman & Managing Director Chief Executive Officer Stock Details
BSE code 511072 NSE code DEWANHOUS BLOOMBERG code DEWH IN
Shareholding pattern
Promoters Domestic institutions Foreign Others Total 55.9% 23.1% 20.3% 7% 100%
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PRICE CHART
250.00 200.00 RUPEES 150.00 Series1 100.00 50.00 0.00 Apr-99 Apr-00 Apr-01 Apr-03 Apr-05 Apr-02 Apr-04 Apr-06 Apr-07 Apr-08
MONTHS
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financing contributing just 2% of its book as compared to 9% for LIC HF and 12% for HDFC. 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 DHFLs 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, DHFLs 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 DHFLs 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.
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2) Increasing competition in the untapped markets including Tier II and Tier III segment may put margins under strain in the future. 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.
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COMPARITIVE ANALYSIS
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HDFC
29.46 80.24 3145.77 20.71 10 300 (04/05/09) 17.37
LICHF
9.45 62.59 790.48 18.37 10 130 (23/04/09) 23.79
DHFL
7.79 15.16 204.51 15.77 10 25 (11/05/09) 21
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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 companys performance by the investor at regular intervals is very essential.
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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
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