7 March 2017

Housing Finance Companies: Still good to buy?

In the last 2-3 years, the housing finance companies have performed very well and have given investors stellar returns. The returns have been backed by both actual performance and valuation expansion.

The above stellar numbers are expected to continue till FY 2021. The Housing Finance Industry is expected to grow at 19% per annum for the next 3 years and housing finance companies are expected to grab a larger share of this growth. Banks are the largest players in the HF industry but they focus on in urban areas and big ticket loans. HFC's are growing at this pace thanks to the push for housing loans from tier II and tier III cities. The average ticket sizes of these companies are as given:

The share of HFC's has grown from 32% in FY 11 to 38% in FY 16 and it is expected to touch 39% by 2020.

Housing Finance Companies Analysis:

- With the number of earning professionals increasing, more and more home loans are going to be disbursed in India
- As mentioned in the above page, Housing Finance sector is expected to witness a 20% annual growth rate for the next 2-3 years, earnings of HFC companies are bound to go up at a similar pace
- The LMI segment is expected to see > 20% growth as the push for increasing the earnings of lower and middle income segments gains traction by favourable government policies
- Most HFC companies cater to rural and semi-urban areas and banks don’t focus much on this segment; banks prefer to focus on personal loans which yield them close to 15% p.a and corporate loans which yield close to 12% p.a thus leaving room for HFCs
- The industry has humungous potential going forward in terms of the shift in demographics of India (Shift from rural to Tier II and III, more nuclear families, etc.) and the low penetration rate compared to other major economies

Here is comparison table showing different metrics for different companies in this sector:

Click to expand

As things stand, the Housing Finance Companies have run up a lot but the industry is still growing and is expected to do well. There are few HFC's which are still trading at attractive valuations. Our clients are invested in DHFL at an average price of Rs 210 and we continue to remain selectively bullish on the medium term to long term prospects of few housing finance companies.

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