Yes, the growth in book value is the relevant metric. However, it cannot exceed the ROE unless there is consistent equity dilution as is the case with financial institutions.
HFC’s have had a great run in the past due to a benign interest rate scenario coupled with rising home prices in an unregulated real estate sector which was quick to increase inventory.
The position has now reversed. We now have a rising interest rate scenario, pricing pressure on developers, tough real estate regulations and developers who are now more concerned with collections rather than volume.
Under these circumstances, margins for housing finance cos are going to be curtailed and they will also find it difficult to raise finance. Exacerbating this situation is the entry of many other players in this space.
I think 60% of the borrowing mix of DHFL is from banks. Clearly, Interest rates are going to put further pressure here.
Under these circumstances, the typical ROE of a HFC going forward should be much lesser than what has been in the past. 13% - 15% should be a good guess going forward.
The long term government bond yield is a risk free investment and an investment in the equity of an HFC i should assume carries with it significantly more risk and it stands to reason that a greater margin of safety should be demanded if one is certain about the long term earnings potential of the said HFC.
Net Net in my view and given the changed market scenario, the average ROE of HFCs will contract to 15% going forward and maybe DHFLs will contract even further to settle at 13% or so.
1.5 times book value should be a fair valuation for DHFL in my view and ofc you would also want a deep MOS on that given that the sector may not be as attractive going forward like it was in the past.
Your point about tax benefits is well taken.