CFH is the top holding in my portfolio and I wanted to take a stock of current situation. Following are notes from my research (Compiled from Q4FY17 Con Call, Investor Presentation and Annual Report) -
Annual Report -
FY17 Investor presentation -
Everybody is talking about tailwinds in housing sector and HFCs. I wanted to spend some time understanding what exactly are these tailwinds. Following is what I have found -
CLSS under PMAY
The government is offering various Credit Linked Subsidy Schemes (CLSS) under Pradhan Mantri Awas Yojana (PMAY). The income eligibility under these schemes is 18L per annum and I suppose very large part of Indian households are eligible. There are three categories in the scheme - EWS & LIG (Economically Weaker Section & Low Income Group, Income upto 6L), MIG - I (Middle Income Group - I, Income between 6-12L) and MIG - II (Income between 12-18L). For EWG & LIG, subsidy is provided at 6.5% for first 6L loan. For MIG-I and MIG-II, the subsidy rate are 4% for first 9L loan and 3% for 12L loan. There are rules about carpet area as well. With these subsidies, the effective pre-tax incentive interest rate comes to about 7%. If you add tax incentive, the rates are even lower. There has never been more favourable times to get home loans than current time. This shall lead to increase in demand in affordable housing segment.
Following link and snapshots provide more details -
EWS & LIG
MIG-I & MIG-II
- GoI estimates that there is shortage of 60mn affordable homes - 20mn in urban areas and 40mn in rural areas. These estimates by themselves do not mean much I suppose.
Affordable Housing segment has been granted infrastructure status. This entails some tax breaks etc. I suppose. One thing CFH AR mentions is - one can raise ECB upto $750Mn under automatic route.
- RERA is expected to make the real estate sector transparent. Smart Cities and Housing for All by 2022 are also said to be adding to the supply creation.
Cost of Funds
- Cost of funds from various sources for CFH is described in table below -
After PMAY, it is not clear to me how NHB refinance rates would be.
- The division of funds in current year is provided below -
- Again from CFH AR, RBI has reduced risk weights on bank lending to AAA rated HFCs to 20% from 100% enabling banks to lower the cost of funding to HFCs.
- IRDA has exempted investments in AAA rated HFCs from sectoral caps thereby enabling insurance companies to freely invest in HFC debt instruments.
- The company has raised ordinary resolution to increase the borrowing limit from 16,000Cr to 20,000Cr. They have raised this limit in every AGM since last 3 years at least.
- The company also has raised resolution to raise NCDs worth 6000Cr on private placement basis. The rate of interest offered on these NCDs remains a key moniterable.
The details of past NCDs are provided below -
- The cost of funds via CP route is getting cheaper but CP funds are short term funds.
- The company had 170 offices in FY17 - 124 branches, 36 satellite offices and 10 Affordable Housing Loan Centres (AHLC). The company plans to open 22 offices - 12 branches and 10 satellite offices in FY18. It also plans to open 20 more AHLCs.
- On concern that, non-salaried (self employed) loan book growing faster than salaried, management said if India is developing this way, then we can not ignore non-salaried class. Also if risk of underwriting is lower to non-salaried person is lower than that to salaried person, management would gladly take that. The RoI offered to self employed class is 25 basis points more.
The average yield on housing loans is close to 10% and that on non-housing loans is close to 12%. So far, if existing customer wanted lower rate, he would have to ask for it and it can be availed upon payment of conversion fee. CFH has started new policy of interest rate reset every year for existing loans.
- The company used services of 685 Direct Selling Agents (DSAs) in FY17 and that formed 54% of the sanctions.
- The geographical breakup of revenue is - South India - 75%, North India - 25%. Amongst south Indian states - Karnataka contributes 33%, Telangana, Andhra Pradesh and Tamil Nadu contribute 17% each and Kerala contributes 2.5%. (The figures don't add up!).
- As per CAPITAL MARKET may 22 issue, the number of HFCs increased from 55 in FY14 to 70 in FY16. Around 80 licenses are pending with NHB.
- The deposits only contribute 150Cr to the company's funds. Its about time, company expanded this low cost fund base by some good advertising/marketing campaign.
- 54% of sanctions via DSAs is actually a lot. About time, company started advertising campaign for its loan products and shore up in-house direct sales team.
Disc - CFH forms 20%+ of my portfolio at average price of 873 and hence my views are biased. This is not a buy or sell recommendation. Investors are kindly advised to do their own due diligence before investing.