Calculate your SIP ReturnsExplore

What is the Investment Argument for Housing Finance Companies

27 January 20235 mins read by Angel One
What is the Investment Argument for Housing Finance Companies
ShareShare on 1Share on 2Share on 3Share on 4Share on 5

Take any housing finance company in India and they have been clear outperformers in the equity market. Be it the larger housing finance companies like HDFC, LIC Housing Finance and Indiabulls Housing Finance or smaller companies like GIC Housing, CanFin Housing and Dewan Housing; they have all outperformed the overall market by a fairly big margin. A mix of rising consumer demand and the government’s proactive approach to housing have gone a long way in making these housing finance stocks attractive. However, there are some key concerns that investors in housing finance stocks need to be cautious about…

Why investors need to be cautious about buying housing finance stocks…

There are some genuine concerns that the valuations of housing finance stocks may have run ahead of their fundamentals. Here is why…

  • Although HFCs have seen their average return on equity (ROE) bounce from the lows of 2015, the ROE is still way below the highs touched in 2011. At that point, the ROE of the HFCs was at around 27%, which is now down to about 21%. That largely may have taken away the sheen from many HFCs.
  • During the same period, the Return on assets (ROA) of these HFCs has also been on a downtrend. The ROA, which had stabilized at around 2.8% back in 2011 has consistently come down to a level of 1.8% currently. That essentially means that the expansion of revenues and profits has not kept pace with the rapid expansion in the asset base of these housing finance companies.
  • Price / Book Value is a popular metrics used for financials. In the Indian context, the HFCs are quoting at over 5 times book value. That is nearly twice the P/BV that private banks in India command, even if we forget the PSU banks for the time being. At the P/BV, it is a valuation that is going to be hard to sustain unless the earnings are able to show a geometric growth going ahead.
  • Credit costs of the HFC segment (as a share of AUM) has seen a doubling over the last few years and that is likely to put pressure on the spreads and the margins of the HFCs. The pressure on the margins is already visible in the falling ROE and the ROA. If the Fed rates move up further, we could see Indian bond yields also go up higher which will result in higher credit costs for HFCs. Margins are likely to stay under pressure for these HFCs.
  • The big risks could come from falling real estate prices. In fact, the demonetization undertaken in November 2016 did result in a dampening of real estate prices across India. Normally, falling real estate prices results in negative equity. (Negative equity is caused when the value of the property goes below the net liability off the borrower). That is normally a case that could lead to default, which be a key concern for HFCs in the next few quarters.

But, there is still a solid case for HFCs as an investment story…

While most of the points raised above are perfectly valid from a financial point of view, there is also a fairly compelling investment story that favours housing finance companies. Here is why…

  • At a macro level, per capital house ownership in India is still one of the lowest. Even if you compare with other nations in the West or even in South East Asia, India lags behind other nations in per capita house ownership. The government’s ambitious Housing-for-All project by 2022 is likely create a huge demand for housing. When there is an explosion in demand companies have been known to sustain rich valuations for a fairly long period of time.
  • Low cost housing is likely to be the next big story for the Indian investment scenario. It is currently at an inflexion point like what telecom was in early 2000s or banking was in the early 1990s. Low cost housing could be something of a similar magnitude. According to preliminary estimates, the low-cost housing opportunity in India is estimated to be worth $1.2 trillion. One can imagine the multiplier effect that it will have on demand for housing and for housing finance.
  • Rural and semi-urban housing is a major opportunity that has not been tapped. With rising rural incomes and the government investing heavily in enhancing rural demand, we could see big demand coming from the rural and semi-urban areas. If these emerging demand segments have to be met, then the appetite for housing finance will be substantially larger than what HFCs are able to provide today.
  • What we could see in the next few years is the proliferation in the number of HFCs in India, which is a natural progression in any industry. Many of these companies may be available at reasonable valuations compared to their established peers. Therefore, for investors there will be two key opportunities that will essentially open up. Firstly, there will be quality new HFCs available at reasonable valuations and that is where stock selection will come in handy.
  • At the second level, there will be the established HFCs, which include the marquee names available today, that will give intermittent opportunities when they correct during times of volatility. Even if these HFCs just keep pace with the rate of growth of the industry, the established stocks will be able to sustain premium valuations for many more years to come.

The crux of the matter is that the HFCs may show some minor cracks today but the opportunity ahead is humongous. From a 10-year perspective it is hard to be wrong if you are positive on the sector.


Enjoy Zero Brokerage on Equity Delivery
Enjoy Zero Brokerage on Equity Delivery

Get the link to download the App

Send App Link

Enjoy Zero Brokerage on
Equity Delivery