For Indians, investing in physical assets such as residential properties takes precedence over financial assets when it comes to avenues for household savings. As per Ministry of Statistics and Programme Implementation (MoSPI) data, 53 per cent of India’s gross household savings are in physical assets, followed by financial savings at 46 per cent and precious metals at 1 per cent. The government’s push towards affordable housing through schemes such as PM Awas Yojana and tax sops linked to buying/ investing in a house property, too, make a case for the sector.

The size of India’s housing finance industry is pegged at an AUM (assets under management) ₹33 lakh crore as of FY24, having grown at a good 13 per cent CAGR from FY19. It is projected to reach ₹50 lakh crore by FY27, at a growth rate of 15 per cent compounded. The housing finance market for low- and middle-income groups, which constitutes about two-thirds of the overall market, is also pegged to grow at a similar rate by FY27. Strong growth prospects, along with the fact that housing loans are secured and that the sector is a highly regulated one, sweeten the deal for investors in housing finance stocks.

How is the sector faring right now on various parameters?

Robust loan growth

In general, growth in AUM has been robust for all housing finance companies (HFCs) analysed here, except for LIC Housing Finance (LIC HFL), whose growth has been below the 13 per cent industry growth mentioned earlier. Disbursals, too, have seen robust growth. The average year-on-year (y-o-y) growth in AUM (between FY20 and FY24) of players analysed is a healthy 24.7 per cent. Similarly, the average y-o-y growth in disbursals is 20.7 per cent. Disbursals growth was indeed weak during the Covid years (FY20 and FY21), but has picked up strongly post those years, due to factors such as pent-up demand and resumption of construction activities. However, in the case of LIC HFL, disbursals have been weak in FY23 and FY24, thus explaining the poor show. 

Good asset quality

Asset quality has remained largely stable over FY19-24, except for Covid-led shocks. Delinquencies measured by the gross NPA ratio or the gross stage-3 ratio, peaked for most players in FY22, following the pandemic. But they have normalised since then for all HFCs analysed, except Can Fin Homes, Aavas Financiers and Aptus Value.

It may be par for the course in case of Aavas Financiers and Aptus Value, because of their borrower mix being tilted towards non-salaried borrowers (60 per cent and 77 per cent respectively), making it more risky. For example, for Aadhar HFL in FY21-23, NPAs in the non-salaried portfolio were twice as those in the salaried portfolio.

This apart, credit costs (provisions or impairment losses as a percentage of average advances), which rose during the Covid years, have normalised for all HFCs analysed. As provisions also include those on standard assets (accounts that have not become NPAs yet), credit cost, in a way, can be viewed as a leading indicator of upcoming stress. Since it has remained benign post the Covid years, it may be said that there may not be sizeable risks on the asset-quality front for HFCs in the foreseeable future.

This can further be substantiated with the fact that the proportion of stage-2 accounts (30-89 days past due) is cooling down since the pandemic years for most HFCs. For instance, between FY21 and H1 FY25, stage-2 accounts of LIC have gone down from 6.2 per cent to 3.9 per cent, those of Aavas Financiers from 2.9 per cent to 1.6 per cent, Aadhar HFL from 6.3 per cent to 3.7 per cent and India Shelter from 3.2 per cent to 2.8 per cent.

Well diversified

Additionally, what investors can note is that apart from the diversification offered by the borrower’s occupation, HFCs are also diversified product-wise. Products other than home loans include LAP (loan against property given to business owners in general), developer finance (loan to real estate builders), LRD (lease rental discounting loan advanced against the security of future rental cash flows) and small business loans. Such products also help in diversification of credit risk, while also bringing in incremental yields depending on the risk profile.

As per regulations applicable for HFCs, they need to maintain at least 60 per cent of total assets in financial assets relating to the business of providing housing finance (home loans). This is called the principal business criterion (PBC). Any diversification can happen only within the scope of this criterion.

As can be seen from the infographic, Bajaj HFL, Aavas Financiers, Aptus Value and India Shelter are the most diversified away from home loans. For Aadhar HFL, though into just home loans and LAPs, the proportion of LAPs in the mix have gone up significantly from 16 per cent in FY19 to 25.5 per cent in H1 FY25. Aavas Financiers forayed into small business loans only in FY23 starting with an exposure of 10.4 per cent of the portfolio.

Funding mix

It is to be understood that the loans advanced by an HFC (its assets) are on a floating interest rate basis. HFCs are largely funded by bank term loans and bonds. While term loans are on a floating rate basis, bonds are on a fixed rate basis. With interest rates expected to trend downward in the near term, over dependence on bonds in the funding mix can cause mismatches. However, HFCs employ derivative strategies to hedge such mismatches, which again can be susceptible to risk of inefficacy.

Of the HFCs analysed, Aptus Value, India Shelter, LIC HFL and Can Fin Homes have reduced the most exposure to bonds from the funding mix as of FY19. The exposure to bonds has fallen 34 percentage points (pts) for Aptus Value, 23 pts for India Shelter, 21 pts for LIC HFL and 18 pts for Can Fin Homes.

However, a comparison of the funding mix between FY24 and H1 FY25 reveals that exposure to bonds has gone up 8 pts for Bajaj HFL, 6 pts for Aptus Value and 5 pts for Aadhar HFL.

How are HFC stocks faring?

While there are structural drivers, the performance of stocks in the sector has been a mixed bag with some such as LIC HFL, Aavas Financiers and Can Fin Homes trading well below their all-time highs. Some of the recent IPOs such as Aptus Value, India Shelter and Aadhar HFL for instance, despite making good gains post-listing, have failed to hold on to the gains. Bajaj HFL too, has corrected from its highs, but that can be attributed more to the stock’s valuation multiple coming back to normal levels as against the premium valuation earlier. As can be seen in the infographic, the valuation multiples (price to book value) of all HFCs have cooled now from the multiples at their respective all-time high prices.

Earnings have been quite healthy, as can be inferred from the compounded growth rate of NII (net interest income) and PAT (profit after tax) in the infographic. RoA (return on assets) also has improved through the years.

As far as valuations go, Bajaj HFL trades at an expensive valuation for its superior asset quality. LIC HFL provides valuation comfort, but has the highest GNPA ratio (albeit improving). Since LIC HFL, Bajaj HFL and Can Fin Homes largely lend to the prime and salaried borrowers, they face competition from mainstream banks.

In contrast, the other four HFCs largely cater to the underserved non-salaried and low-to-middle income group borrowers and so there can be a higher growth potential. Asset quality also is in control. Investors can keep a keen eye on these stocks.

Published on December 21, 2024