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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.Vijay Kedia Tweet Housing FinanceThe 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

DHFL.

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.

 

 

HFC to Bank

 

 

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.

valuation Housing FinanceWe 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.

Loan Growth Housing Finance

#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 volatilityCanFin homes has superb asset quality with Gross NPA of just 0.24% and has given 84% loans to Salaried class.

Gross NPA

#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.

NIM Housing Finance

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 

Average Ticket Size Housing Finance

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.

ROE Housing Finance

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.

valuation Housing Finance

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).

Incase your looking for the full Excel of housing finance data, feel Free to Mail us at info@stallionasset.com and we will provide you for free.

CLICK HERE TO DOWNLOAD THE COMPLETE IMAGES OF HOUSING FINANCE COMPARISION

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.

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Rakesh Jhunjhunwala, the badshah of Dalal Street needs no Introduction and was seen on dalal street buying his Mentor Radhakrishna Damani’s Favorite stock TV18 Broadcast Limited. Rakesh Jhunjhunwala now owns 3.2% of the company whereas Damani owns 2.44%.

Tv18 Broadcast Enjoys Strong Parentage of Mukesh Ambani Owned Reliance Industry. The Following blog will explain you why exactly are these 3 legends backing this company.

 

About the Business TV18 Broadcast is India’s most diverse and leading Media and Entertainment conglomerates with interest in television, internet, films and entertainment.

 

Dont Forget to Read the Valuation Paragraph of TV18 for amazing ClarityTv18

TV18 Owns very popular Channels like CNBC, Colors, MTV, Sonic, Etc.

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The Company pays Royalty for Using CNBC brand of about 30 Crores a Year whereas it has a joint venture for Colors and other MTV with Viacom18. Tv18 entered the Regional Market by buying out ETV for 2053 Crores.

Financials – 

Tv 18 3

The company has been recovering in the last few years as investment in Colors starts to yield returns. Company has focused on very high Quality Content in colors in its Popular Shows Big Boss, Nagin Jalak Diklaja etc which has made colors the number 1 GEC channel in Q3 FY2017.

 

Investment Rational –

Subscription Revenues Set to Surge: The 2 Primary Revenue Generator are Advertisement & Subscription. Subscription Revenues are given by DTH players, however with the onset of digitalization especially in Tier III & IV cities , subscription revenues are all set to improve.

 

Advertising Fees Early Signs of Picking up: : TV18 was under tremendous pressure as advertising revenue had plummeted due to the economic slowdown and 12 minute ad cap regulation. Going ahead, advertising revenue is expected to pick up as economy improves. 

 

Grabbing Regional Channel Space : Do you know Sun TV has an operating margin of 70%? Sun Tv has been maintaining this margin level in the toughest of All times. Tv18 entered the growing regional space by acquiring 100% stake in ETV news, 50% stake in ETV GEC via Viacom JV and 24% stake in ETV Telugu spending a whopping 2052 Cr. However, the acquisition gives the TV18 a foothold into fast growing regional space. ETV acquisition has also led to better bargaining power with Multi system operators , DTH players and advertising companies and has enhanced its presence in Media & Entertainment Space. TV 18 has a significant presence in hindi speaking belt via ETV. It also has strong presence in Maharashtra, Karnataka, Rajasthan & Gujarat. Digitization and improved content to increase viewership share of regional channels from 27% in FY2012 to 43% in FY2020E

Sector Tailwinds – The size of India’s television industry was estimated at Rs 542 billion in 2015, which is expected to grow at a CAGR of 15% to touch  Rs 1,098 billion in 2020.

 

Strengthening & Transition of Colors Brand: GEC has undergone consolidation with STAR, ZEE and Colors exchanging top 3 places in the last few years. In Q3FY17 Colors continued its strong performance and was the #1 channel among its comparable peers.Colors has gained higher market share in urban area as per BARC ratings while still increasing its presence in rural areas.

Valuation – 

Tv183

Lets understand the Listed Space to Understand the Valuation of TV18.

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Zee Entertainment is clearly the Market Leader of the Pack with 1000 crores of profit and 47,600 Crores of Market Cap. Sun Tv a regional Player has PAT margins of 35.5% clearly having competitive advantage in South regional entertainment Market. TV18 has lagged behind in PAT due to a lot of investments in Colors to make it number 1 channel in GEC.

Tv18 6

Tv18 7

Typically Industry Opearting Margins are between 25-70%. TV18 has operating margin of 9.8% only but it has presence in both Regional play in ETV and GEC like colors. The margins of Tv18 have been poor because of continuous investments in new Channels. A diversified Market leader like TV18 can easily Fetch a PE multiple of  20-25x. The question that is what will be the earnings then if margins expands to 25-30%.

We conservatively expect that Operating Margins can expand to 25% in 3 years, Sales growth of 12% and PE multiple of 25. Using this approach, we believe that the company will be valued at at-least 16,000 Crores against about 6300 Today. Please note Zee Entertainment trades at 50+ PE and Colors is now better than Zee in viewership rating.

Conclusion

Tv18 is available at High margin of Safety, the bet is on the Business model rather than on the Financial. We are confident that the company will turnaround in coming years, but even if it doesn’t the odds of someone losing money is low. Media is a very high fixed cost business. The gestation period is extremely high. It will be extremely difficult for newer channels to be launched & start competing against the big guys for gaining viewership and market share. TV18 has demonstrated a successful business model over the years and across the segments; the company’s channels are among the top leaders in their particular segments. ETV channels via its subsidiary are near break-even and will start performing in coming years. Colors has become profitable but we believe margins can improve substantially in coming years. With Rakesh Jhunjhunwala and RadhaKrishna Damani Betting big in this stock, this looks to be a good pick.

Please note – From FY2017  Viacom18, Indiacast and IBN Lokmat have now been accounted following “Equity method”, as proportionate consolidation method is not allowed as per New Ind AS. We have made this report based on 2016 and prior annual report as quarterly data wasn’t sufficient.

 

Disclosure – Amit Jeswani and His family has no Positions in this Stock. Stallion Asset is a SEBI Registered Equity Advisory company. 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.

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