Housing Finance as a Theme has been on Fire, this is no secret that we at Stallion Asset are bullish on NBFC Space. Vijay Kedia, in his latest Tweet stated that Housing Finance’ sector could be the next market leader. In His Interview on Budget day on ET Now he said that he is long on LIC housing and wants to enter CanFin Home as well.The First person to buy the Housing Finance theme was Basant Maheshwari, (Big Fan of him) way back in 2014. Our understanding from his Interviews is that he is long on PNB Housing and Can Fin Homes. Rakesh Jhunjhunwala, the big Bull is backing
Lets Understand the Housing Finance Space in the next 3 mins.
Housing Finance is an easy business to understand, the company borrows at a Rate, lends at a higher rate, the difference is the gross profit. There are two main cost 1) Operating Cost and 2) Credit Cost (NPA)
Modi Government has been pushing for reforms in Housing finance space with interest subsidy of 4% for loans upto 9 Lakh and 3% on loans upto 12 Lakh. They have also given infrastructure status to affordable housing projects.
Housing Finance has clear tailwind and has an expected growth rate of 20-22% till FY 2020. In Particular the governments push towards affordable housing, reduction in interest rates and rising income level are expected to contribute towards increased housing demand.
Banks or NBFC?
If Money is an commodity, the one with the lowest cost of money should ideally win. Out of the total housing mortgages of 16.6 Lakh Crores in 2016, Housing Finance companies were 6.2 Lakh cr. or 37.5% of market Size. The Share is expected to increase further to 39% by 2020 as per Crisil. The competition is high in High ticket size Loans where banks are big players, whereas NBFC dominate the low ticket size space in the mortgage business. Historically banks have been inefficient on the collection side and have had higher NPA.
In Fiscal Year 2017, the estimated gross NPA level for HFCs in the housing loan sector is estimated at 0.50-0.7% while it is slightly higher for banks, at 1.60% clearing showing that NBFC’s have managed their portfolio a lot better than banks.
Which NBFC Should i choose?
We have identified 7 Factors that affect the Valuations of Housing Finance companies.
We are now doing peer comparison of housing finance company for Various Factors.
#FACTOR 1 – Growth in AUM – Higher the expected growth in AUM, higher the valuation. PNB housing is the fastest growing HFC, Basant Maheshwari loves growth and hence he has invested there.
#FACTOR 2 – Gross NPA – Higher the NPA, Lower the Valuation. NPA is affected with asset quality of companies. It is perceived by the market that salaried class doesn’t default as their income is very stable and where self-employed individuals may get affected due to business volatility. CanFin homes has superb asset quality with Gross NPA of just 0.24% and has given 84% loans to Salaried class.
#FACTOR 3 – NET INTEREST MARGIN – In a commodity business, the one with the highest margin wins, in the housing finance business, money is a commodity. Higher the Net Interest margin, Higher the Valuation.
Net Interest Margin is a factor of cost of borrowing and price of lending. Indiabulls has the highest NIM’s due to its corporate lending loan book and Loan Against Property. Repco and Gruh have higher NIM because of their presence in lowest income group where competition is lowest from banks. LIC housing finance is the lowest cost borrower, but gives out loans only to salaried class where competition is high.
#FACTOR 4 – Average Ticket Size
Gruh is the lowest with an average ticket size of only 7 Lakhs as its rural focused whereas PNB has the highest average ticket size due to its Urban Focus. Higher the Average ticket size, higher the competition from banks. NBFC cannot compete with banks on the pricing front as banks have low cost of capital. DHFL has an edge in the low income housing finance as it has immense amount of experience of dealing with the needy.
#FACTOR 5 – Return on Equity – Higher the ROE, Higher the valuation of a housing finance company. Gruh Finance backed by HDFC has the highest ROE of 31.5%, followed by Indiabulls who has high exposure in Corporate loan book.
Valuation – Housing Finance companies also have perceived character of the Promoter Premium or Discount in their valuation. The Price to Book Ranges from 1.5x Book to 12.3x Book. PE Ratio ranges from 10 to 46. DHFL has the lowest P/B and PE whereas Gruh has the Highest.
Stallion Asset Take -There is no doubt that Housing Finance is in a multiyear bull market, There is strong Sector tailwind, 2-3x GDP Growth, NBFC as a class has been a leader in this bull market and we continue to believe that the story is far from over. How will we come to know that NBFC bull market is over? When Reliance capital goes up 100-200% in 2-3 month period, that would be the end of the NBFC bull. In every bull market the horse leads from the start, but in the last phase of the bull market the pigs run the fastest. When the pigs start running, we will be cautious on the sector.
Conclusion – The big boys are backing it with Rakesh Jhunjhunwala in DHFL, Vijay Kedia in Canfin Homes and LIC Housing, Basant Maheshwari in Can Fin Homes and PNB Housing, Motilal Oswal has Invested 600 Crores in Aspire (affordable Housing Finance).
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Disclosure– Amit Jeswani and Family have Vested Interest in Housing Finance Companies. This is not a recommendation and use this for Education Purpose Only. Stallion Asset is a SEBI Registered Equity Advisory Company (INH000002582). The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision.