HFC's - the other side

Hi all

Small/midcaps have had an amazing run up…And we all probably have multiple multi-baggers in our portfolio’s…We all feel super smart looking at our yearly returns. Recently I attended an investing seminar and I noticed that almost every person I spoketo owned stocks in the housing finance sector. It was like returns here are a given, no matter at what price people bought their HFC stock. We all know that Rj owns DHFL, multiple marquee investors hold Gruh and Repco, Mohnish Pabrai owns GIC housing finance, Vijay Kedia owns LIC housing finance, and the retail microcap investors probably own canfin…How can we all feel so good about these stocks and get good prices at the same time?? Who is the seller on the other side and why is he selling?? Time to think about why would we all be getting this free ride on a cheery consensus and probably think about the ‘risks’ in these companies, given that everybody can see only a bright future…One risk I can think of;

Every other NBFC/Bank that can get into this space already has or is planning to launch this division. They are struggling to see growth in other areas while there is sever under penetration here. High growth has also attracted new players and the real moat of these business models could soon be tested…I foresee undercutting as a means to get business, since margins enjoyed currently are quite high.

What are the thoughts on other members here?? Any merit in thisargument/way of thinking?? cause finally it is known that the pattern followed is smart retail investors to institutions to finally dumb retail investors.

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Akshay - You raise good points and it is always important to have curiosity around trades that seems over-crowded. However history has suggested that there have been various occasions when Mr.market has given no-brainer opportunities and most investors did not pick it up except a select few. Just because some of the respected investors are investing in the same sector/company doesn’t make it favourable or unfavourable.

In case of HFC, i think we need to look at the big picture:

1). Size of the sector - which we all know is huge and only growing, on any metrics that you may select. This means the cake is big enough for multiple players.

2). If one bets on economy revival and bets on any sectors such as infra, cement, auto, engineering etc one is indirectly betting on increase in per capita income and consumption power as it increases the velocity of money. Given the demographic structure, owning house is the primary desire. So these two factors combined means only an uptick in housing sector.

3). You are right that increasing competition MIGHT result in decrease in margins or unsustainable growth, but this is where management, company’s disciple and business model comes into play. There are many examples of good companies such as Apple, Wells Fargo, Toyota, HDFC, Page, Asian Paints etc that has not only been able to keep the growth and margins, but in fact grow it in a very competitive environment.

Which companies you put your money on depends on your own outlook, understanding and perception of the sector and individual companies. Investors dont need to get carried away or be fearful just because everyone else is jumping into the trade. The only downside I can see with it is that the valuations are getting richer and it may not be a “no-brainer” investment anymore at least in the short-term.

Personally, I think instead of looking at sellers and buyers (I mean, there have to be sellers and buyers for a transaction to take place), the valid question to ask is whether there’s a bubble or not in HFCs. I suspect that’s what you wanted to ask?

Some signs of bubble are: Irrational prices going up further, newer unknown companies coming up with IPOs at exuberant prices, everyone being bullish on the sector, lack of fundamentals among most companies in the sector.

I personally think that is not the case here with HFCs, but of course, it’s just one person’s opinion.


My view is the valuations of most good companies are stretched. But the lure of quick gains is irresistible to everyone. So the prices keep going up and up. As to why there are people selling, they must have made a good gain, and want to cash out and get into something else. This is just a view, dont have data to support it.

For every buy transaction to take place there would be a seller. The pressure of buying vs selling results in price increase or decrease. One way to look at it might be that Gruh is trading at ~50 P/E because sellers are demanding that kind of price to let go of the stock. Markets would be more worried about success of HFCs if the valuations were cheap. So, the question is whether Gruh could be expensive for a significant number of people at P/E of ~50 to make them sell the stock?

By the way, it looks like a good buyto meeven at these levels. May be I am one of those sitting ducks waiting to be killed if something extremely negative happens to HFCs unexpectedly.


I am not making a case of HFC’s being in a bubble territory but rather being expensive, which could probably lead to muted returns in the future…The under penetration should ensure good growth, but as investors we need to be skeptical of anything that could slow down growth, especially when all the growth may be priced in…Whether its a good buy or not is on the individual to decide, I am merely commenting on the sentiments (as i see it), which at times can be a lead indicator…I think comparing companies like Page and Apple etc might not give an accurate picture…They sell products which customers want only from them…While I don’t think the customer in HFC’s care whether they get a loan from a company X or Y…They are more concerned with getting the best deal in town, irrespective of the lender…Given the high growth, this is an open invitation to competition…While I’m invested in a HFC myself, I am just trying to be skeptical, given the valuations and consensus

looks like other investors in HFCs like me have bombarded you a lot! Don’t feel bad about it. A questioning mind is a prerequisite to margin of safety.

hfc comparision for quick study & comparision