Surprised while going through the Can Fin Homes website this morning...the number of branches have increased from 83 at end of March 2014 to 99 currently...16 branches added in 3 months timeframe...they are getting extremely aggressive...100th branch opening on July 5..
To put it into perspective, the number of branches were stagnant for a decade at ~40 till March 2011, and the Company added 11 branches in FY12, 17 in FY13 and 14 in whole of last year!
Overall the housing finance sector has excellent headwinds to provide attractive long term investment opportunitiesâthere could be multiple winners amongst the pack due to the reasons below â
- Huge opportunity size â India demographics, low mortgage penetration (8% of GDP, compared to 20% China, 17% Thailand), government focus on low cost/ affordable housing â structural growth story of mortgage remains strong, tax incentives, focus on RE as a key investment asset
- Economic improvement â should lead to housing market recovery (though the performance of these players do not indicate a slowdown J)
- Favourable Economics â High ROE, high NIMâs, Low NPAâs, low ticket size are key factors that enable efficient and profitable econmics
-
Leadership â All players small and regional. Companies are just scratching the surface in smaller Tier 2/3 towns...pan India potential- Low NPAâs â house as secure collateral, low ticket loans, tight credit appraisal process
-
Reducing interest rates â Interest rate cycle going forward should lead to better spreads, NIMâs and returns (NHB provides competitive rates of interest)- Competition - Limited competition from banks as focus of HFCâs is on Tier2/3 cities and in self-employed segment (ease of appraisal key due to focus of HFCâs)
However, the whole sector has been significantly re-rated in the market run up in the last 4 months, but does it offer potential to make long term investments?
Looking at the current business performance and valuations compared to peers, would be helpful to get some perspective on potential investment ideas -
|
Housing |
AUM (INR cr) |
CAR (%) |
NIM (%) |
Gross NPA (%) |
Net NPA (%) |
ROA (%) |
ROE (%) |
Mkt cap (INR cr) |
BV/ |
EPS |
P/B |
P/E |
|
HDFC |
1,97,100 |
17.9% |
4.0% |
0.7% |
2.7% |
20.5% |
1,58,104 |
241 |
51 |
4.2x |
19.9x |
|
|
LIC HF |
91,340 |
17.4% |
2.4% |
0.7% |
0.4% |
19% |
16,593 |
154 |
26 |
2.1x |
12.6x |
|
|
Dewan |
40,600 |
16.4% |
2.7% |
0.8% |
1.7% |
17.6% |
4,699 |
293 |
41 |
1.2x |
8.9x |
|
|
Indiabulls |
41,167 |
19.1% |
0.8% |
0.4% |
3.8% |
27% |
13,022 |
168 |
46 |
2.3x |
8.4x |
|
|
Gruh |
7,009 |
16.7% |
4.3% |
0.3% |
0% |
2.8% |
32% |
7,205 |
17 |
4.9 |
11.8x |
40.6x |
|
GIC HF |
5,312 |
14% |
2.7% |
1.86% |
0% |
1.8% |
17% |
950 |
120 |
18 |
1.5x |
9.7x |
|
Repco |
4,661 |
24.5% |
4.7% |
1.5% |
0.4% |
2.7% |
16.4% |
2,955 |
120 |
18 |
4.0x |
27.0x |
|
Can Fin |
5,848 |
13.8% |
2.7% |
0.2% |
0% |
1.5% |
17% |
865 |
220 |
37 |
1.9x |
11.4x |
|
Median |
2.2x |
12.0x |
Source : Company annual reports, filings, website
I am summarizing below some key observations on each company -
- Gruh is clearly the darling of the markets, given its parentage (HDFC), and its outperformance on each of the parameters - 30%+ ROE, high growth, high NIM..trades at >11x Book Value! Credit appraisal process, focus on self-employed, small ticket size of loans, focus on non-metro present immense opportunity to Gruh
- Repco has all the right ingredients to become the market leader similar to Gruh...highest NIM's of 4.7%, rapid growth of 30%+, comfortable CAR of 25%...ROE seems low due to high equity base due to listing...Market values it highest after Gruh with P/B of4x
- Indiabulls seems to have excellent metrics â 3rd largest HFC, high growth, 27% ROE, 3.8% ROA, Low NPAâbut market valuation doesnât value it even close to Repcoâmaybe its got to do something with the reputation of the promoters..
- Dewan Housing â Again like Indiabulls, has a large AUM (4th largest), fastest growing NII of 36% in last 4 years, decent metrics, but market discounts all of it...possibly due to promoter & management reputation
- LIC HF â has a 90,000 crore loan book with 10% market share, negligible NPAâs. Key is that it has over 50% fixed rate exposure on its loan book, which in a tightening interest rate environment had caused margin compression, leading to ROE erosion by 7% in past 3 years. Maybe it is the overhang of the scam of project finance to builders that the market is cautious about LIC HFâ.Current valuation is close to Can Fin Homes, and given its brand recall, size, reach and easing interest rate regime, could it potentially be a winner from here?
- GIC housing finance â size is close to Can Fin with similar metrics on NIM, ROE, ROA âbut significant difference in valuationâis there any room for growth?
- Can Fin Homes â has seen exponential growth since Mr C Illango took over as MD, branches have doubled, loan book has doubled, ROE improving, and the aggression is of a private companyâCompany was significantly undervalued due to PSU tag in Feb trading at 0.75x FY14 Book Valueâthere has been a significant re-rating post that, but is it sustainable?
I think the key monitorables for Can Fin Homes
- Any increase in NPAâs (could be driven by aggressive expansion)
- Equity dilution â CAR near 12% (so will need to raise funds potentially this year). At what valuation will the company raise funds?
- Interest rates â Should go down as inflation reducesânot immediate, but provides potential upside
- Property prices falling 40 â 50% - possible, but not very likely
- Improvement in ROE/ ROA going forward
In this scenario, how should we be looking at Can Fin Homes given the rapid rise from 170 in Feb 2014 to 415 currentlyâ Providing some simplistic projections below
|
FY14 |
FY15E |
FY16E |
|
|
Book value growth |
16% |
15% |
15% |
|
Book value per share |
220 |
253 |
290 |
|
Price to Book |
1.9x |
1.6x |
1.4x |
Using conservative assumptions of 15% growth in book value, does the stock look fairly valued from a 2 year perspective? What is the likelihood of a higher book value growth over the next 3 years given the aggressive strategy of the management?
What are the views with regard to other players? Does GIC HF or Dewan Housing offer opportunity to enter at current valuations? What about LIC, Repco HF and Gruh? What would be the right price to enter these?
Would be great to get views on what could be the strategy regarding Can Fin and the HF sector for the long term
Disclosure : Can Fin Homes is part of core holding since 170 levels