HDFC's Q3 biz update confirms recovery; re-rating in HFCs likely: Analysts

Larger HFCs, with strong balance sheets, are expected to gain market share from weaker players, say analysts
Mortgage lender HDFC’s December quarter (Q3FY21) business update brought the spotlight back on housing finance corporations (HFCs) in Tuesday’s trading session. Shares of HDFC advanced 3.08 per cent to hit a new high of Rs 2,658.5 on the BSE after the HFC reported a healthy 26 per cent year on year (YoY) pick-up in individual loan disbursement during the quarter (Q3FY21).

Others in the pack followed suit as shares of Aavas Financiers surged 5.3 per cent, LIC Housing Finance gained 2.3 per cent, GIC Housing Finance (1.6 per cent), and Can Fin Homes (1.4 per cent). In comparison, the benchmark S&P BSE Sensex settled 0.5 per cent higher at 48,438 levels.

"Contrary to the earlier expectations, such growth in housing loans indicates that the real estate market witnessed a strong turnaround during the festival season. In the first two-quarters of FY21, loan disbursements were muted, but it recovered to the normal levels in the Q3. Due to the size and strength of the company, HDFC’s performance is the clear indicator of the industry’s health, therefore, we are expecting a similar performance from other HFCs," says Vinit Bolinjkar, head of research at Ventura Securities.

Housing sales have picked up in recent months as the economy slowly limps back to normalcy. Global brokerage Jefferies’ proprietary housing affordability index is at the lowest (hence the best) level in the past two decades, and the numbers coincide with the bottom of the previous property cycle in 2003/04. 

"The affordability has been attractive for some time and the only missing part has been buyer sentiment, which is now falling in place. The unsold inventory is down 20 per cent from peak and we project that as sales accelerate, inventory would start hitting price-gaining levels by end-2021," Mahesh Nandurkar, equity analyst at Jefferies wrote in a January 3 co-authored note with Abhinav Sinha.

Over the past three months, shares of HFCs have largely outperformed the benchmarks. DHFL, HDFC, Reliance Home Finance, Indiabulls Housing Finance, Repco Home Finance, LIC Housing Finance, SRG Housing Finance, and GIC Housing Finance have outrun the benchmark S&P BSE Sensex by rallying up to 130.5 per cent, ACE Equity data show. In comparison, the benchmark Sensex gained 25.44 per cent during the period. Only two HFCs -- India Home Loan and Akme Star Housing Finance -- delivered negative returns during the period under review.

Key drivers

According to analysts, the central government’s steps to boost liquidity - making real estate loans eligible under the 'stressed category' for credit guarantee, and allowing a one-time restructuring of developer loans – proved to be significant in nudging the sector forward. 

India, Nandurkar and Sinha of Jefferies say, is seeing negative real rates for the first time in six years. Also, a decline in home-loan rates as well as bond yields/bank deposit rates has meant that the negative carry of rental yield has shrunk to multi-year lows. 

That apart, the post-Covid volume recovery has happened with only 5-10 per cent price-cuts, which demonstrates improved affordability and customers' belief that prices are attractive. Since 2013, property prices have grown at 1-2 per cent CAGR, significantly below inflation (5 per cent CAGR), and are also trailing growth in income levels (8 per cent per capita). 

Q3 to be better-than-expected

According to Gaurav Garg, head of research at CapitalVia Global Reserach, HFCs are likely to report better numbers for the recently concluded quarter. Loan collection efficiencies are expected to increase due to the closure of loan moratorium while the build up in provision is likely to benefit these companies against uncertainties. 

"With this kind of strong disbursement trend, we are expecting low to mid-teen asset under management (AUM) growth in individual housing loans for Q3FY21. Though the sharp cut in housing loan yields due to lower interest rates could impact net interest margins (NIMs), but better disbursement volumes would offset the impact and deliver strong absolute income and profits in Q3FY21,"says Bolinjkar of Ventura Securities.

Investment strategy

Jyoti Roy, DVP- Equity Strategist at Angel Broking Angel Broking expects the larger HFCs, with strong balance sheets, to gain market share from weaker players, flagging concerns that the recovery may not be the same across all HFC companies. "That said, high frequency indicators like PMI are pointing to continued improvement in the underlying economic conditions. Therefore, we expect the recovery to continue in the HFC sector from here on," he says.

Roy remains positive on LIC Housing Finance as the management expects to clock double digit growth in FY21. Brokerage Sharekhan, too, has a ‘buy’ call on the stock with a target price of Rs 440.

Vinit Bolinjkar of Ventura Securities, meanwhile, expects the sector to see a re-rating going forward as many financial institutions have adopted digital channels to sell and disburse loans which has reduced the cost of processing and improved profitability. "Therefore, a strong recovery along with better margins could re-rate stocks in HFC sector and could be a good buy at the current price," he says.

Garg of CapitalVia, however, expects the sector to consolidate for a while before giving a fresh breakout. "One may expect reasonable concessions and stimulus from the Budget but expectations must not be placed high because of already loosened economic policy. Investors may buy stocks in this segment with a mid to long term view," he suggests.

Quantum Securities picks GIC Housing (Buy with TP of Rs 144) while ICICI Securities likes Aavas Financiers (Buy with TP of Rs 1,650).

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