Housing Finance Companies - winds of change

Hi,

Since the formation of new government on May 16, all the sectors have touched 52 week highs (between May and October). Interestingly none of the sectors are at all time high as we speak on October 19.

Clearly the Banking Index stands out, as it has corrected the least from its 52 week high. However the index does not capture the Non-banking Finance companies, especially the housing finance companies. Please find below a similar chart for the housing finance companies.

Noticeably most of the housing finance companies have under-performed the broad banking index. They have even under-performed the mid cap index (which has fallen by only 8% from the peak). The key reason being that the RBI had recently allowed banks to raise bonds for affordable housing loans, whereby the banks are not mandated to maintain reserves for such loans. This meant the cost of funding for banks would come down. More importantly, this has brought the banks on a level-playing field with the Housing Finance Companies (since the housing finance companies never maintained the reserves).

However the investors were time & again reminded by the Housing finance companies that had other advantages over banks as well:

[1] Tangible advantages (branch network in the hinterland) and 

[2] Intangible advantages (relationship with customers, knowledge about the credit profile of these unorganized' customers). 

While the sector leader - HDFC, has always proven its might when it comes to asset quality, it will be interesting to test the claims of the other housing finance companies. My assessment is that the higher yields (generated by these Housing Finance companies because of their reach) is offset partially by the higher defaults/ credit costs (which puts to test their "understanding of clients credit-risk profile").

Lets just dig a bit into the numbers to understand what this means. Please find below a table which highlights the Yields, Gross NPAs for these companies.

Gruh Finance clearly stands out of the lot; in-spite of higher yields, the company has superior asset quality. It implies that Gruh has not just lent to the sub-prime customers; but it has gone the extra mile into the hinterland of India and chosen unique customers, who do not have bank accounts but are credit-worthy. This is the sustainable advantage that no bank will be able to challenge. 

It is also worth mentioning that, when the banks will slash their lending rates for housing finance, Gruh will be able to withstand since it has access to low cost of capital because of its track record and superior parentage.

Most importantly, unlike its Peers, Gruh does-not dilute its shareholders; it generates cash that can easily meet its growth requirement. This makes Gruh more like an FMCG company. To me, Gruh Finance is a FMCG company with the power of Leverage. Thus, like other FMCG companies, it is time that Gruh Finance starts fetching PE multiples in the range of 35x rather than 25x.

Gruh stock has recently corrected and provide an attractive opportunity to buy. Please note that CanFin Homes at 1.5x PB and 20% RoE, is another stock to analyze in spite of the run up.

I rest my case,

Cheers,

Ankit

P.S: Please note that the last para about Gruh being compared to FMCG, is ideated from the blog of Mr. PrabhakarKudva. Even though I do not know him in person, I would urge all to give due credits to the blogger, since I have just taken inspiration from a great investor and just taken the next step (by analyzing the onslaught from banks on Housing Finance Companies)