Last Week we met the Management of PNB Housing and spend the entire day with the whole top management. We got amazing insights about the housing finance Industry & the road Ahead. These are the 5 main takeaways from the meet.
1) Opportunity Size – The Run up in Housing Finance Companies has been very strong and we wanted to understand the opportunity as every company is coming out with exciting target’s, for example newly launched Piramal is targeting 15,000 Crores AUM by FY 2020, Reliance Home has guided to Increase AUM by 57% CAGR from 13000 Crores now to 50,000 Crores by 2020, Kapil Wadhawan of DHFL guided in an Interview last week to more than double AUM from 90,000 Crores to 2,00,000 Crores in 3 years, & Finally Indiabulls Housing finance has guided for 30% CAGR AUM Growth. This is more important as these guidance are coming at a point when the supply to new housing is very weak & most builders are struggling with weak sales.
Sanjaya Gupta, the CEO of PNB Housing and a man who is one of the most passionate 54 year old man i have seen has spent his entire life in the mortgage Industry, told me that there is no doubt that supply is weak in the new retail housing this year due to factors like RERA & Demonetization but a lot of builders have started to line up projects next year, and FY2018 will be the inflection point for affordable housing in India. He also added that he will sweat his assets and ensure that they have reasonable growth. The whole Industry is looking towards affordable housing and the same point was repeated by Khushru Jijina on Wednesday on the launch of Piramal Housing finance that FY2018 will be a super Kicker for Housing Finance Companies as affordable housing really starts. We at Stallion Asset always verify the information and we spoke to a few builders in affordable housing & their reply was every top builder in major cities are definitely foraying and betting big on it. The model of Purvankara of having a separate low cost housing subsidiary has been well taken by the market & that’s the model they will work on.
2) Growth – We all know Housing Finance Industry in India has been growing at 18% historically, though the banks have been growing at just 15% and losing market share to Housing finance companies who are growing at 21%, but what about growth ahead. The Question was that if we break up the growth for last 15 Years there was a 10% Growth in Prices of Real Estate & 8% volume Growth, but now that there is no growth in Real Estate Prices, will the Industry be able to grow at 18%? The Answer was affordability for housing has improved as prices have been stagnant for last 5 years and with falling interest rates and subsidies on housing loan, they remain super bullish.
The most Important point i picked up during the Conversation was that only 20% of new registrations for house that happen are new houses (Seller is the builder), and the rest 80% are Consumer to Consumer transfer (Resale).
3) Competition- Since Competition has increased from New HFC’s as well as banks getting aggressive on retail lending, our next concern was will the Spreads sustain? There is pressure on the Salaried Class for spread as government banks are getting aggressive there but self employed remain 50% of Retail book for PNB Housing where competition is limited.
4) Loss Given Default & Credit Risk – We asked that there is a common phenomena and the one that we at Stallion Asset also believe that Profits for an NBFC are Front Ended, Whereas Losses are Back ended. Sanjaya Gupta Clarified that it all depends on the Credit Quality, and we at Stallion Asset learned from our visit that PNB Housing definitely has the best System in Place for credit Checks. When i asked Jayesh Jain, CFO of PNB Housing about the Loss given default, he told me its about 4% of NPA i.e. if the loan book is 10,000 Crores, assuming NPA is 1% of that i.e. about 100 Crores, in that case only 4 crores is real bad debt, the rest is recovered from selling mortgage.
5) Conclusion – The Growth in Housing Finance going forward is going to be a volume game. Raamdeo Agarwal of Motilal Oswal who himself runs a Housing finance company (Aspire) gave PNB Housing a thumps up, calling a 1 Lakh Crore ki Kahani. Valuation of most HFC’s are pricing in a pick up in affordable housing, the housing finance story is now depended on affordable housing story, but remember only 20% of housing sold in India is via builders and the rest 80% is by Consumer to Consumer. The conclusion of the meet was that if Affordable housing really picks up the HFC’s would grow at 30%, and if it doesn’t they will grow at 15%.
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