Feeling the Heat

Shares of housing finance companies have fallen sharply this year. It may be the right time to pick a bargain.
Sarbajeet K Sen & Rahul Oberoi        Print Edition: November 2013
Feeling the Heat
Photo: Rachit Goswami/www.indiatodayimages.com

Housing finance companies, or HFCs, seem to be under stress. After giving huge returns in 2012, their stocks have been under pressure this year. Stocks of Dewan Housing Finance, LIC Housing Finance, GIC Housing Finance and Canfin Homes have fallen 43.5%, 37%, 31% and 21%, respectively, this year till September 30. The market leader, HDFC, is down 8%.

This is surprising as most HFCs had increased profits at a decent pace in 2012-13, a trend that continued well into the first quarter of 2013-14. So, while the Dewan Housing Finance stock fell 43.5% from Rs 184 to Rs 104 this year, the lender's net profit rose 47.45% in 2012-13 from Rs 306.37 crore to Rs 451.86 crore. The rise in the first quarter of this financial year was a much sharper 54.5%. Similarly, the LIC Housing Finance stock fell 36.8% this year, in spite of a 12% rise in net profit in 2012-13 (from Rs 914 crore to Rs 1,023 crore) and 36% in the first quarter of 2013-14. In case of GIC Housing Finance, the 44% growth in net profit in 2012-13 and 10% in the first quarter of 2013-14 have not helped the stock, which has fallen 30.9% this year.

Experts say economic slowdown, especially in the real estate sector, has gotten to these companies more than anything else.

V K Vijayakumar, investment strategist, Geojit BNP Paribas Financial Services, says business this year may not be as good as in 2012-13. "The profitability will be lower in 2013-14 compared to 2012-13. The HFC stocks rose in 2012 because of two reasons. One, the overall market was buoyant, with the Nifty rising 27.7%. Two, the real estate sector did very well. In 2013, these two factors have turned negative. Rising cost of funds and falling loan offtake have impacted the industry this year," he says.


Experts who track HFCs say the stocks fell due to slowdown in real estate, high cost of funds as a result of rising interest rates, tight liquidity and competition from banks, which have access to low-cost current account and savings account, or CASA, deposits. HFCs have to raise funds at a much higher cost than most banks.

HFCs are non-banking finance companies regulated by the National Housing Bank.

Naveen Fernandes, fund manager, Centrum Broking, lists three reasons why HFCs have been feeling the heat. "High interest rates, economic slowdown and competition from banks are giving HFCs a tough time. Also, most HFCs are mid-caps, and the BSE Midcap index has itself fallen 21% this year," he says.

Fernandes also highlights the advantage that banks have over HFCs. "Competition from banks, which have access to cheaper CASA funds and a closer relationship with borrowers, is tough. Client acquisition and risk profiling are also costlier for HFCs than for banks," he says.

Dinesh Shukla, banking analyst, Sharekhan, agrees. "Given the tight liquidity and upward pressure on interest rates, the cost of funds has gone up for HFCs, impacting their spreads. Also, due to falling demand for corporate credit, banks are shifting focus to housing loans, which is increasing competition and lowering margins of HFCs," he says.
Is there a likelihood of a further fall in HFC stocks? Are they good investments in the current market? Vijayakumar of Geojit is not bullish on HFC stocks in the short term, though he feels that the chances of a further correction are limited. "The real estate sector is not likely to revive this year. The huge inventory pile-up will be a drag on the companies and, therefore, the industry will have to go through some more pain. We feel the stocks have factored in this. Hence, there may be no further fall. But the upside potential is also limited."

Sharekhan's Shukla also says the downside is limited. "A stock like LIC Housing is trading at close to book value (12-month forward) while HDFC is at four times 12-month forward book value. DHFL is trading at a 50% discount to its book value. These are attractive valuations considering that housing loans have the least default rates. Also, HFCs' return on equity is 16-18%. In addition, they are now getting a lot of business from the non-metro regions, where the situation is better. Therefore, we do not see any significant contraction in valuations, except for HDFC, which is trading at a premium."

Fernandes of Centrum says they are not positive on HFC stocks for the short term, though some may be good long-term bets. He says Canfin Homes, HDFC and LIC Housing Finance can be good bets for the long term. However, investors can wait for a further 10-15% price fall, he says.

Sharekhan's Shukla says LIC Housing Finance and Canfin Homes can be good long-term picks. "At current valuations, LIC Housing Finance looks reasonable from the long-term perspective. Also, a smaller HFC like Canfin Homes, which is witnessing strong growth and is trading at a 30-40% discount to its 12-month forward book value, can be a good option."

Vijayakumar of Geojit BNP Paribas is bullish on market leaders HDFC and LIC Housing Finance. "Long-term investors can buy HDFC and LIC Housing. HDFC is a blue-chip stock and one of the best in the Indian market. This stock will certainly bounce back once the industry revives. Also, HDFC is one company that has been least affected by the slowdown. LIC Housing is attractively valued, going by historical valuations," he says.

However, he says people must be careful while investing since the sector is passing through a difficult phase. "They should buy quality stocks and that too for the long term. Investors must watch for changes in interest rates."

Fernandes says investors must check the quality of the management and the HFC's credit rating and past record before deciding to invest in it.

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