Markets have been very optimistic about housing finance companies due to Pradhan Mantri Awaas Yojana.
Almost all housing finance stocks are factoring in exponential growth in loan book.
We disagree with the market’s expectations due to
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very low benefit from subsidy i.e. just Rs. 2.6 Lac in absolute,
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non-availability of affordable homes,
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poor income proof & credit record to lend,
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no new demand just demand coming in earlier,
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select beneficial companies already factor in all the upside, etc.
Housing Finance has been in existence for long and we have always been very positive about housing finance as a secular business. In past, we had recommended buying 1-2 housing finance companies too.
Currently, the market has become more optimistic about housing finance companies due to Pradahan Mantri Awaas Yojana reform. Such schemes aren’t new and have been in functioning for long in different names. They haven’t been successful due to poor execution in terms of low credit history, no authentic income proof, lack of affordable houses, etc. Even if we assume no slippages in execution by NDA govt., it would not materially add to loan book growth for Housing Finance Companies.
NDA govt has tinkered with increasing interest rate subsidy to 6.5% for loans upto Rs. 6 Lac, 4% for loans upto Rs. 9 Lac and 3% for Rs. 12 Lac. This is further capped at Rs. 2.6 Lac in absolute terms over period of 20 years. Hence, this leads to better pricing for sub Rs. 6 Lac loans, but not much discount for above Rs. 6 Lac loans. This leads to incremental benefit only for Gruh Finance, Repco Finance and other rural facing NBFCs.
However, this scheme may bring accelerated demand rather than linear demand which we were expecting over 10 years. So there are no new borrowers in the system but same number of borrowers buying early. For example, loan book may grow at 20% for 5 years and fall to 10-12% for next 5 years rather than our assumption of 15% CAGR over 10 Years. For this to happen, the availability of affordable houses is sacrosanct. Till now, many developers didn’t venture into affordable housing due to higher construction costs. But since, higher demand in record time due to PMAY would lead to better internal rate of return.
We believe the large quality companies like HDFC, ICICI Home Finance and LIC housing wouldn’t benefit as much from affordable housing segment. Ticket size is small and underwriting practices are conservative. Due to no income proof and below average job profile, these companies wouldn’t lend to such borrowers. We do not favour like Indiabulls Housing Finance and DHFL due to risky loan book of Loan Against Property. ICICI and SBI Housing Finance arms are not listed separately hence can’t comment.
Among smaller peers, we believe Gruh, Repco, Can Fin, Gold Loan NBFCs, Micro-Finance and PNB Housing could benefit. However, these companies’ valuations already factor more than estimated growth in loan book which anyways limits the upside. Within the above mentioned companies we like Gruh and CanFin homes due to conservative underwriting practices. Rest are aggressive and risky.
We have often seen that there is always Euphoria around some reform getting passed. As usual when it doesn’t materialize in time, people get tired waiting. We believe similar thing to happen in this space. Growth is not going to come in hurry due to multiple reasons. Stock prices have already factored in large growth which would lead to limited upside. This would fade away people’s interests in housing finance companies.
We believe there are no exponential returns to be made in this sector and investors should stay away from this sector. Downside is real and could be brutal over 2 years. We prefer sectors which have quality businesses and factoring in reasonable growth at decent valuation multiples.
Every subscriber might be interested in different housing finance co. Since it’s a sector update, uploading the same note in all the relevant companies.
