Excellent post Naman,
To me the biggest surprise is that Indiabulls HF has the highest RoA.
[ Comment too short ]
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That was one comprehensive post on the HFC sector.The greatest tailwind remains: low penetration & a possible lowering in interest ratesâŚprobably in the second half of Fy15.What we should bear in mind,is the fact that markets are now betting on an economic revival.Your estimates for CFH are extremely conservative & shouldnât be used to make a final decision on the stock.In the scenario of a better economy,the Books will grow much faster than the 30% CFH has been clocking.A lower interest rate environment would lead to better NIMs & certainly,the EPS growth would accelerate.That would make CFH look attractive again.
Repco is richly valued & would continue to do soâŚit is a sort of âsafeâ bet for bigger investors.Returns may not be spectacular.Same applies for Gruh too(even though the stock price keeps surprising) LIC HF is interesting,but it is already well covered & well known in the big investor community.So,I feel,its fairly valued now(as all positives seem to have been discounted at CMP) DHFL & IHF continue to be outliers & trade quiet cheapâŚthe doubts about promoter may remain or may go away in a jiffy(probably,in case of a change of management) However,these stocks have also been re-rated over the past few months,owing to overall bullish sentiment.So,for a lower risk appetite investor,CFH still looks the best buy on corrections.The PSU tag,as you said,wonât be haunting the stock anymore & continued aggression,coupled with comtrolled asset quality,can very well,lead to further re-rating.
Caveat: Markets will always pay a higher price for Quality & seeing the cases of Eicher,HDFC,Gruh,HUL,Page,Astral,etc.,there seems to be no limit to these âhigher pricesâ 
Having bought at 170 levels,you should ride this one out & just continue to hold.
Disc.: Invested.My views should be taken with a pinch of salt. 
Excellent work naman.
I think the size of LIC definitely warrants re rating. Its a far bigger entity than the likes of gruh, repco, canfin and the rest. It can easily quote valuatons of close to 3 times book. Even on PE basis (though thats not too applicable to financial companies) its at around 12-13 times PE. That too for its size seems attractive. Technically I have put up the chart wherein it has broken out above multiple resistances provided by previous tops nearer to 300 odd levels. (Same thing happened to canfin when it took out the resistance zone of 180-190 convincingly). I expect it to head much higher after some consolidation above previous resistance zones.
GIC also seems attractive. Its journey seems to have begun and could be more upsides. Plus it has higher div payout track record. There again previous top of 164 posted few years back has been taken out and stock is consolidating above it and I feel getting ready for its move.
Canfin on valuation parameters looks good. At what price it raises funds needs to be seen.
Gruh and Repco remain the darlings of the sector.
The 200 new cities proposed by govt could provide a good tailwind for the whole sector.
Overall it housing finance sector seems a good place to be in.
disc: have been bullish on gruh ,repco and canfin since long. New buys include LIC and GIC.
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Very comprehensive compilation of data, which presents a good snapshot at one place.
Comparison of debt to equity would give a clearer picture on how much room the company has to borrow more (typical D/E is around 10) and fund future growth. Repoc would score high on this. Also D/E influences ROE, so maybe some of the lower ROE company may have lower D/E, and hence should not be ignored on ROE basis alone.
Second is % of loans to retail individuals. HDFC has a relatively larger (~25%) loans to developers. Gruh is around 10%. Repco is nil. I think Canfin is close to nil too. Not sure of the others. Developer loans would give an immediate increase in AUM, but are more prone to defaults, although this scenario may reduce considering the expected economic revival. Developer loans are at typically higher interest rates than retail.
Ofcourse, there are other factors such as % of loans to self employed vs salaried, average loan size, % of loan against property, however these are ancillary and the effect is adequately captured by the NIM.
Market cap to AUM ratio presents interesting points - Gruh is more than 1, HDFC 0.8, Repco 0.6 and reduces to 0.15-0.2 for the others.
Repco is best placed for growth and is cheap on market cap basis considering size of opportunity. Canfin is the next attractive. With improving market sentiments, if they are able to raise money at around 2.5x book, then it will be very attractive indeed, with the caveats of maintaining the quality of their book.
Disc - invested in Gruh, repco and canfin.
I think the best strategy to invest long on Housing NBFC is to create basket with high conviction H NBFC getting higher weightage.
Say one decides to allocate 25% fund for H NBFC secor in his portfolio for extended period then, something similar can help
| Co | Conv Rank | Weightage |
|---|---|---|
| Canfin | 1 | 12.5 |
| Gic | 2 | 6.5 |
| Repco | 3 | 4 |
| Indiabulls / LIC | 4 | 2 |
Disc : invested on canfin for long
hi value-pickrs
i had invested in canfin home from 100-150 rs . and it was high conviction bet with 35% allocation . but now feel that although they are very aggressive and still we can easily see 20-25% growth for next 3-5 years . but the double deep ( earning growth + rerating) has taken place . so trimmed my exposure by 15% now i am having 22% of portfolio in canfin .
and the new allocation is YES Bank . why?
-
Stock is at 10-11 pe current year that is too low for private bank
-
it can easily grow at 20% for next 8-10 years as overall credit market is growing at 15-18% .
3)no need for capital for next 4-5 years
- has nims of 3 and it should go to 3.3 in next 3 years
5)casa of 22% will go to 25-26% and will rise by 200 -300 bps for next 3-4 years as have put up solid local sales team for this purpose
6)the pe should expand to 15-16 times as it has least NPAs.
so canfin still is good but feel that yes bank is ripe for double dip as canfin was earlier.
there are lot ofuncertainties regarding capitaladequacyratiogetting close to 12% this year.psu tag will keep pe at most at 10-12 range and regardingreappointmentof Mr. Ilango .
so i have hedged my bet by shifting portion of canfin to yes bank.
views are invited.
From : Kunal Shah
Thank you for the excellent suggestions. I think all of you (Sagar, Hitesh, Vinay & Kunal) are suggesting that we can allocate money across multiple HFC's as there will be multiple winners from here given the opportunity size, under penetration, current size of players, government support, easing interest rates, economic and RE recovery and the excellent economics of the Housing finance business. Of course there could be dampeners such as falling property prices, regulatory change (such as microfinance or gold loan), and we need to keep these in mind.
Before coming to capital allocation (using Donald/ Valuepickr framework - undervaluation vs conviction), I am providing additional information on each of these companies as suggested by Vinay to help us better understand these companies.
I have added information on Debt to equity, % of individual home loans, cost to income %, average individual loan size and market cap to AUM.
| Housing NBFC's |
AUM (INR cr) | CAR (%) | NIM (%) | Gross NPA (%) | Net NPA (%) | ROA (%) | ROE (%) | D:E | % of individual Home loans | Avg loan size (lakh) | Cost to income (%) | Mkt cap (INR cr) | BV/ share |
EPS | P/B | P/E | Mcap to AUM |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| HDFC | 1,97,100 | 17.9% | 4.0% | 0.7% | 2.7% | 20.5% | 6.6x | 71% | 22.1 | 7.9% | 1,58,104 | 241 | 51 | 4.2x | 19.9x | 0.8x | |
| LIC HF | 91,340 | 17.4% | 0.7% | 0.4% | 1.4% | 18% | 9.4x | 17 | 18% | 16,593 | 154 | 26 | 2.1x | 12.6x | 0.2x | ||
| Dewan | 40,600 | 16.4% | 2.7% | 0.8% | 1.7% | 17.6% | 97% | 10.7 | 26% | 4,699 | 293 | 41 | 1.2x | 8.9x | 0.1x | ||
| Indiabulls | 41,167 | 19.1% | 0.8% | 0.4% | 3.8% | 27% | 6.2x | 24 | 17% | 13,022 | 168 | 46 | 2.3x | 8.4x | 0.3x | ||
| Gruh | 7,009 | 16.7% | 4.3% | 0.3% | 0% | 2.8% | 32% | 10.6x | 93% | 5.8 | 19% | 7,205 | 17 | 4.9 | 11.8x | 40.6x | 1.0x |
| GIC HF | 5,312 | 14% | 2.7% | 1.9% | 0% | 1.8% | 17% | 6.7x | 950 | 120 | 18 | 1.5x | 9.7x | 0.2x | |||
| Repco | 4,661 | 24.5% | 4.7% | 1.5% | 0.4% | 2.7% | 16.4% | 4.6x | 81% | 11 | 18.4% | 2,955 | 120 | 18 | 4.0x | 27.0x | 0.6x |
| Can Fin | 5,848 | 13.8% | 2.7% | 0.2% | 0% | 1.5% | 17% | 11.7x | 92% | 16 | 865 | 220 | 37 | 1.9x | 11.4x | 0.1x | |
| Median | 2.2x | 12.0x |
Few more interesting observations emerge â
1. HF companies have a long way to go in controlling costs, where average cost to income ratios are currently more than 18%, compared to HDFC which is 7.8%. Incidentally, HDFC Cost to Income ratios were 30% in 1990, and 13.8% in 2000.
2. ROE for Repco, GIC are ~16 â 17% due to the lower debt equity ratios. As the leverage increases, the ROE will increase significantly
3. Mcap to AUM shows clearly the difference between valuations of market leaders (Gruh, Repco and HDFC) compared to others. The market darlings trade at 0.6x - 1x AUM, whereas others are between 0.15x â 0.2x.
4. % of loans to individuals â this is where Gruh, Can Fin score over others, where there loan book is highly skewed towards individuals. Repco has a 17% exposure to Loan Against Property (LAP)
5. Any one knows what is the real issue with Dewan Housing Finance? The stock is still available very very cheap and Rakesh Jhunjhunwala bought a 2% stake into the business in Oct 2013. There are some noises of promoter integrity and stock manipulation. Does anyone know the exact issue with Dewan Housing?
I am going to try and summarize the key findings on LIC Housing Finance and GIC as they dont seem to feature in the Valuepickr threads.
Given Hitesh's keen interest and knowledge of HFC's, would love to get his inputs on the capital allocation across companies on similar lines as presented below (from Capital Allocation thread).
|
Undervalued |
Conviction |
Max Weights |
Allocation |
Portfolio |
|
|
High |
vs |
High |
40% |
Highest allocation |
long-term |
|
High |
vs |
Medium |
20% |
Normal allocation |
short-term (long-term as conviction builds) |
|
Medium |
vs |
High |
20% |
Normal allocation |
long-term |
|
Medium |
vs |
Medium |
5% |
Nibbling allocation |
short-term (long-term as conviction builds) |
|
Screaming |
vs |
Highest |
Call addl. funds |
Can override guidelines |
long-term |
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Thanks Naman for the efforts and digging out information. I recently read about GRUH and Repco. I feel that Repco is aggressive in branch expansion. GRUH in other hand is more conservative in expansion. They don't hesitate to close branches (two years back, they closed 2). This makes make me feel GRUH will still grow 20%+ for a long time. In TN, they have huge scope to expand. Repco in the other hand have presence in AP and Telengana which may be risky in the short term with talks about farm loan waiver, etc. Repco's ROE is set to improve as recently they've done equity dilution and once they start tapping NCDs, CDs route for funding. Their GNPA is coming down.
I think LIC HF is little undervalued for the numbers it clocks (17% growth vs 20% of GRUH) and compared wrt other HFCs. LIC HF has good brand recall, has recruited young graduates recently and doing branding building via ads and through home exhibitions/melas, etc. I feel LIC HF ROE will improve in coming quarters.
I also request Hitesh, other investors in HFCs to share their thoughts, capital allocation. I'm sharing my thought assuming I've to allocate 100% capital in HFCs.
| HFC |
Undervalued? |
Conviction |
PF Weight |
|---|---|---|---|
| GRUH |
No (maybe muted returns for next year or so but good bet for long term buy & hold) |
Highest | 35% (willing to increase to 40%+ on deep correction) |
| Repco | Medium | High | 25% |
| LIC HF |
Medium (scope for PE re rating) |
Medium | 20% |
| HDFC | Medium (subsidiaries holds value) |
Medium | 10% |
| Others | (Not read about Can fin/Dewan/GIC yet) |
-- | 5-10% |
I feel HFCs are good sector to own for long term. We've to find companies with good management and business models to buy and hold. With the Govt's vision for affortable housing for all, GRUH and Repco will stand to gain the most.
Disc: I own LIC HF and HDFC.
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Have been an investor in CanFin since 125 levels and had kept adding till 250 levels (wanted to add more at around 315 levels but missed it).
A friend of mine working as a partner for one of the leading domestic IB and broking firm which covers CanFin, had met a large institutional investor of CanFin recently.
He came back very positive from that meeting with a take away that HF as a sector has very good times ahead of it and the institutional investor is very bullish on CanFin.
**Discl:**Invested in CanFin (20%) and Repco (8%) and very bulish.
May add LIC HF as well in near future as I totally concur with Hiteshâs views on LIC HF.
thanks guys for the inputs on various HFCs.
Personally I am quite overweight on HFC sector on my portfolio mainly because I see very few variables affecting their business.
One of them is the threat of NPA. Unless there is a big downturn in economy or a large crash in prices of real estate, I dont see NPAs rising too much.
Second is cost of funds. Thats where the companies like Gruh score over others as they have higher ratings from ratings agencies and would enjoy access to cheaper funds. Repco would have an edge bcos of very high CAR due to recent equity dilution.
Coming to how much these companies are slated to grow, I think Repco and Canfin are slated to grow the fastest among all of them. (I dont track IBHL and Dewan and hence dont know about them).
Coming to how much one can allocate to individual company, it would be largely subjective but I guess it makes sense to allocate based on business quality⌠higher allocation to slightly higher BQ companies namely gruh and repco (amply reflected by their NIMs and then making up with the other choice of companies.
Personally I have heavy allocation to the sector due to a combination of long term and opportunistic (techno-funda) bets. I own canfin, repco, lic and gic.
Valuation wise I think repco can keep getting closer to gruh although some difference will always remain. Interesting bet remains LIC HF due to its size. Size usually commands higher valuations As mentioned before LIC HF is second to hdfc and likely to attract some more re rating provided the bull run in HFCs continues. GIC has historically had higher div payout ratio which might aid in its valautions.
I list here interesting comparison of profit growth.
| HFC | Profit Growth YoY | Profit Growth 3yr Avg | % Change from Avg |
|---|---|---|---|
| hdfc | 19.7 | 20.53 | -4.0 % |
| lic hf | 28.73 | 15.66 | 83.5 % |
| dewan | 17.07 | 32.13 | -46.9 % |
| indiabulls hf | 51.3 | 279.76 | -81.7 % |
| gruh | 21.31 | 24.64 | -13.5 % |
| gic hf | 14.72 | 8.53 | 72.6 % |
| repco | 37.61 | 22.09 | 70.3 % |
| can fin | 39.92 | 11.39 | 250.5 % |
Canfin, lic, gic, repco are fastest moving (listed from higher to lower)
Kunal Patel
The RBI via a notification has accorded affordable housing (defined as loan up to 50 lacs in metro cities for houses of values upto 65 lac and 40 lac in non metro cities) priority sector status.
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/BLP15072014F.pdf
This should provide some funding comfort to the HFCs and thus enable companies in the sector to pursue growth more profitably.
Market reaction to the notification would be interesting to watch tomorrow. How much of this is priced in and in which company needs to be seen.
From the RBI circular appendix.
Housing Loans Eligible under Priority Sector Lending
(i) Loans to individuals up to Rs.25 lakh in metropolitan centres with population above ten lakh and Rs.15 lakh in other centres for purchase/construction of a dwelling unit per family excluding loans sanctioned to bankâs own employees.
(ii) Loans for repairs to the damaged dwelling units of families up to Rs.2 lakh in rural and semi- urban areas and up to Rs.5 lakh in urban and metropolitan areas.
(iii) Bank loans to any governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to a ceiling of Rs.10 lakh per dwelling unit.
(iv) The loans sanctioned by banks for housing projects exclusively for the purpose of construction of houses only to economically weaker sections and low income groups, the total cost of which do not exceed Rs.10 lakh per dwelling unit. For the purpose of identifying the economically weaker sections and low income groups, the family income limit of Rs.1,20,000 per annum, irrespective of the location, is prescribed.
(v) Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance, for on-lending for the purpose of purchase/construction/reconstruction of individual dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to an aggregate loan limit of Rs.10 lakh per borrower, provided the all inclusive interest rate charged to the ultimate borrower is not exceeding lowest lending rate of the lending bank for housing loans plus two percent per annum.
The eligibility under priority sector loans to HFCs is restricted to five percent of the individual bankâs total priority sector lending, on an ongoing basis. The maturity of bank loans should be co-terminus with average maturity of loans extended by HFCs. Banks should maintain necessary borrower-wise details of the underlying portfolio.
I think the loan amounts have been revised upwards.Under the new definition of affordable housing, loans of up to Rs 50 lakh in metros for houses valuing up to Rs 65 lakh and those of up to Rs 40 lakh for houses valuing up to Rs 50 lakh in all other cities are now part of affordable housing.
My understanding is that these new measures will benefit the banks at the cost of NBFCs as the NBFCs are already exempt from CRR/SLR. However if the banks continue to lend under priority-sector lending through NBFCs, then it will continue to benefit the NBFCs, though Iâd imagine the banks would try to push to lend directly for better margins. One of the biggest beneficiary should be HDFC.
bankâs bankâs
Hi,
There are two things here. Priority sector lending is not same as âaffordable housingâ. PSL target have to be met by banks like earlier, but for calculation of PSL target the lending they do under Infra+affordable housing will not be included.
For affordable housing the definition is quite broad at 50 lacs. HDFC average loan is 22 lacs, Canfin 18 lacs, LIC HF 15 lacs. But will these NBFCs benefit? I doubt. In the name of loans to affordable housing, if RBI will allow Banks to lend to these HFCs then cost of funds for HFCs could come down a bit. But all the above HFCs are already getting bank loans at near BPLR rates of banks, hence there may not be much benefit. This is because banks canât lend below BPLR and will not bring down BPLR just because of this new development (reduction in BPLR will affect their entire floating rate loan book).
Banks will now find home loans very very attractive business as their margins will be high. They will give priority to this. But this wonât mean a price war which will affect HFCs as again the interest rates offered to customers will be near the BPLR. Since home loans are offered at very low rates there is not much scope for reduction. Hence banks will be more aggressive in terms of pushing their distribution mechanism to sell the more lucrative home loans, but pricing will be similar to that of HFCs. Is this a threat to HFCs? Yes to a large extend for HFCs operating in salaried segment (HDFC, LIC, Canfin, GIC). Banks have huge branch network, if they are determined, they can leverage this. SBIâs home finance business is as big as HDFCâs but branch network of SBI is humongous.
For HDFC it is double whammy as 30% of loan book consists of loans to builders/commercial purpose. This segment had the highest yields for HDFC. Now banks can cut rates and lend to these customers at lower interest rates as the gap b/w BPLR and interest rates for this segment is still high.
On the positive side for HFCs - the home finance opportunity is huge. Mortgage contributes 8% of Indiaâs GDP compared to 14% in China, 19% in Thailand, 24% in South Africa, 34% in Malaysia, 47% in Germany and 67% in USA. Almost 20 million houses are required in urban India alone. Players like Canfin and LIC have huge room for growth from their low base. Banks are seen to be more keen to lend to non-retail segment when the economic growth picks up.
And for Gruh and Repco Banks are anyway no competition. Banks just canât lend and collect like them.
Cheers
Vinod
hi vinod,
I have been invested in canfin all this time,however i was thinking of diversifying in the home loan space by investing in repco and dewan housing.do you see any problem in dewan housing as the market assigns lower valuation to it,although the return ratios are lower than the competitors.All the others including canfin have run up and do you consider it wise to invest now with these valuations in this space.
biju john
Vinod - Thank you so much for your valuable insights. couple of qsts or rather affirmation of understanding:
1). Under priority sector lending, banks still have a target of 40% lending, which includes priority housing sector. So even if the funds raised for affordable housing + infra does not need will not have to meet priority sector lending, banks still have to meet those priority lending targets for other funds. In order to meet the priority sector lending, banks will continue to lend through HFCs, so HFCs should continue to access cheap loans by banks to meet their required targets. So HFCs (especially Gruh, Repco and CanFin) should continue the growth as their ticket sizes are normally that falls under priority sector lending?
2). Even though the bonds raised for affordable housing doesnât need to meet CRR/SLR as well as priority lending targets, wouldnât the bonds yields depend on the credit ratings of these banks which would mean HDFC should continue to raise funds at a competitive rates. Also the admin rates for HDFC is much lower than other banks, so it enjoys much better margins. Banks will need to become competitive on cost front as well to compete with the likes of HDFC.
Hi Biju, if market has worries about promoter it will be difficult to ascertain when that will change. Repco looks good. Trading at around 3.4 times forward P/B.
Frankly I am unable to pick one from Repco, LIC and Canfin. LIC and Canfin are trading at same valuations of around 1.7 times forward P/B. LIC has around 30% of loan book due for repricing in FY16 which will increase its margins. None will grow like Canfin in next 3 years - atleast 40-45% growth in disbursements. But Repco has no competition from banks and has good amount of equity capital at its disposal. Housing finance sector has a good tail wind going. It may not matter, you may consider all three too
Punit, yes the PSL funda remains same, but Banks have cap on how much they can lend to HFCs under this.
Bonds with 7 year duration is one part. But the attractiveness is when you lend for home loans you need not consider that in the SLR-CRR calculations. So overall it becomes cheaper than current system. We need to hear the bankers speak on this for more clarity.
Hi Biju, if market has worries about promoter it will be difficult to ascertain when that will change. Repco looks good. Trading at around 3.4 times forward P/B.
Frankly I am unable to pick one from Repco, LIC and Canfin. LIC and Canfin are trading at same valuations of around 1.7 times forward P/B. LIC has around 30% of loan book due for repricing in FY16 which will increase its margins. None will grow like Canfin in next 3 years - atleast 40-45% growth in disbursements. But Repco has no competition from banks and has good amount of equity capital at its disposal. Housing finance sector has a good tail wind going. It may not matter, you may consider all three too
Punit, yes the PSL funda remains same, but Banks have cap on how much they can lend to HFCs under this.
Bonds with 7 year duration is one part. But the attractiveness is when you lend for home loans you need not consider that in the SLR-CRR calculations. So overall it becomes cheaper than current system. We need to hear the bankers speak on this for more clarity.