Valuation of affordable housing finance firms looks stretched

Valuation of up to six times FY18 estimated book value for housing finance companies, which are focused on affordable housing, such as Repco Home Finance, CanFin Homes, Gruh Finance, PNB Housing Finance, Indiabulls Housing and Dewan Housing looks stretched, thanks to the 32-94 per cent year-to-date rise in their stock prices.

Larger housing players such as HDFC and LIC Housing Finance gained only 30-34 per cent in the same period and trade in the range of three to six times price to FY18 estimated book value. Financing by these players straddles luxury housing to affordable housing.

According to an analyst, HDFC and LIC’s average loan ticket size is between ₹22-24 lakh compared to the affordable housing loan amount of up to ₹15 lakh (as defined by Ind-Ra).

Ambit recently flagged off concerns such as premium valuations of the stocks, declining growth, increasing competition, pressure on net interest margins and rise in provisioning cost given the rising share of riskier assets. Even Spark Capital said the market is ignoring demand and supply side issues.

“On the supply side, GST, RERA, significant stock of unsold inventory and relatively unattractive economics of affordable housing projects threaten to play spoilsport. On the demand side, the IT and NRI segments which account for 40 per cent of demand are facing a slowdown even as overall job confidence has deteriorated sharply,” it said.

However, nobody has given a ‘sell’ rating yet on most of the above-mentioned affordable housing finance companies. In fact, Ambit remains ‘negative’ on HDFC and LIC Housing Finance but has not rated others. Spark also reiterated its ‘sell’ call only on HDFC, LIC and Repco.

The assessment of the brokerages is that the affordable housing sector offers tremendous opportunity for growth over the long term. The Narendra Modi government aims to build 50 million new low-cost houses over the next five years. Pradhan Mantri Awas Yojana Rural has already scaled up, constructing 2.5 million houses during FY17. Analysts see this getting ramped up to four million a year by FY24.

India Ratings and Research sees the affordable housing industry quadrupling and achieving a loan book size of ₹6 lakh crore in the next five years, which translates into a compounded annual growth rate of 37 per cent. CLSA expects close to 6 crore new houses to be built at a total spend of ₹83 lakh crore ($1.3 trillion) during FY18-24. It recommends ‘buy’ on HDFC and Indiabulls Housing Finance. Phillip Capital initiated ‘buy’ recommendation on DHFL and Indiabulls while it upgraded Repco to ‘buy’ from ‘neutral’. Besides the industry opportunity, benign interest rates (down 100 basis points in the last two years) also will act as a catalyst for financiers as well as end-users, going ahead.

Many market experts see interest rate cuts at least in August on benign inflation outlook and stable domestic macro-economic factors. On the demand side, CLSA expects slow property sales to reverse from the second half of this fiscal with the affordable housing (unit price less than ₹50 lakh) segment turning the corner.

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