Housing Finance

24 Jun

We expect many M&A opportunities in our subsidiary businesses- HDFC

Update on the Indian Equity Market:

On Tuesday, NIFTY closed in the green at 10,471 (+1.5%). Top gainers in NIFTY50 were Bajaj Finance (+9.3%), Larsen & Toubro (+6.7%) and IndusInd Bank (+6.5%). The top losers were Reliance (-1.4%), Bharti Airtel (-0.6%) and VEDL (-0.1%). Top sectoral gainers were PSU BANKS (+3.4%), REALTY (+2.9%) and PVT BANKS (+2.7%) and there were no sectoral losers.

Excerpts of an interview with Mr. Keki Mistry, CEO, HDFC with Economic times dated 22nd June 2020:

  • Over the next one-and-a-half to two years, a number of opportunities will come up to make investments. They will look at good M&A transactions not just in the mortgage business but also in their subsidiaries – be it life insurance, general insurance, or AMC.
  • If such an opportunity does come up, then they do not want to start looking at whether they have adequate capital or not. That’s why at this point they want to take an in-principle approval from shareholders, which would take about five to six weeks roughly.
  • After they get the approval, they will be ready with some plan; whether they would do equity or do some other instrument which will convert into equity at a future date.
  • Today the plan is that out of that Rs 14,000 crore, some part will be pure equity and some part will be an instrument convertible into equity at a future date – could be two years later, three years late.
  • One must also remember that every rupee they invest into their subsidiaries reduces resources from a tier one point, and therefore, the need for capital at that point of time. It impacts their capital ratios.
  • When they invest, say, Rs 5,000 crore into a subsidiary, that sum gets deducted straight away from their net worth and capital for the purpose of calculating capital issued. So that is the only reason why they are looking at capital raising.
  • Whenever they believe the opportunity is right and it is a good time to go to the market that is the time they will reach out to the market. Their capital adequacy as of March 31, 2020, for tier one capital was 16.6% and total capital was 17.7%.
  • Housing loan is a lot more secure, than a car loan or a consumer loan or a personal loan. The reason being that is the advance has already been paid for a property, which always has a value.
  • This is obviously a much greater crisis than we had in the past, but what we had in 2008-2009 was also an economic crisis and to some extent in 2002, 1992, 1998 and at various other points of time.
  • In the short term, one might see non-performing loans inch up, but once normalcy comes back, non-performing loans will come back to normal levels. Something similar will happen this year also.
  • Recovery is on track, which has been a lot faster than what he would have expected it to be. The entire month of April was lockdown, offices were shut and there was very little business that they could do. They could do some disbursements, but that was for loans taken earlier.
  • What they have seen from the second half of May is that with every passing day, loan disbursement is getting better and better compared with what it was in the previous year. That trend has fortunately remained.
  • Business is picking up, disbursements are picking up. As there was little business for one-and-a-half months, they are still not close in their average.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of HDFC Ltd was ₹ 1,843/- as of 23-June-2020. It traded at 3.5x/ 3.2x the consensus book value of ₹ 529 /571 for FY21E/22E respectively.
  • The consensus price target of HDFC Ltd is ₹ 1,982/- which trades at 3.5x the FY22E book value of ₹ 571/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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27 May

Demand for home loans will rebound – HDFC

Update on the Indian Equity Market:

On Tuesday, Nifty ended marginally lower at 9,029. Among the sectors, Metal (+2.7%), Auto (+1.5%), and Realty (+1.2%) were the top gainers. IT (-1.9%), Pharma (-1.2%), and Media (-0.2%) were the only losers. JSW Steel (+5.9%), Eicher Motors (+5.7%), and Titan (+5.0%) led the gainers while Bharti Airtel (-5.9%), Bajaj Finserv (-5.1%), and TCS (-3.5%) ended in the red.

Excerpts from an interview with Mr. Keki Mistry, Vice Chairman & Chief Executive Officer, HDFC with BloombergQuint on 25th May 2020:

  • HDFC is offering a moratorium to all the customers. 79 percent of the borrowers have said they do not need it. A higher number of non-individual borrowers have opted for the moratorium compared to the individuals.
  • Since some developers are facing liquidity issues due to the lockdown, HDFC has to give them moratorium. The large developers are able to service their loans, with or without sales. Small and mid-sized developers have asked for the moratorium.
  • HDFC has not slowed down lending and is looking for fresh lending opportunities. In Mumbai and Madhya Pradesh, the offices are not open leading to slower disbursements. The offices which are currently open are working at 33 percent capacity and there will be a slowdown in disbursements during 1Q FY21. HDFC expects that 2Q FY21will be better than 1Q FY21 and consequently, 4Q FY21 will be back to 85 to 95 percent of normal levels.
  • Owning a home continues to be an important aspect of the lives of Indians. The lockdowns imposed in the aftermath of the virus outbreak has forced people to work from home, relying on internet connections and video conferencing apps. This trend could push people to buy larger homes or ones with a separate study room. Joint families could split into smaller units going forward meaning more people will be buying their own houses.
  • In the short term non-performing loans could rise but in the medium-to-long term, NPLs are expected to reduce. They have continued to tweak the credit underwriting model given the current situation.
  • In the affordable housing segment, the average loan size is Rs 17.7 lakh and most of the customers are salaried customers and not self-employed. The risk from job-losses or income cuts and its impact on NPLs is probably higher than in the pre-crisis period. There are co-borrowers to a mortgage, so if one person loses a job or faces a salary cut, they generally still do not default.
  • HDFC will be looking for opportunities to raise money. The liquidity level has been increased from around Rs 6,000 crores last year to around Rs 30,000 crores this year. HDFC has been recently sanctioned Rs 750 crores loan by the National Housing Bank recently.

Consensus Estimate: (Source: market screener website)

  • The closing price of HDFC was ₹ 1,506/- as of 26-May-2020. It traded at 2.8x/ 2.6x the consensus book value estimate of ₹ 531/ 574 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 2,406/- implies a PB multiple of 4.2x on FY22E BV of ₹ 574/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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07 May

Less than 15% customers applied for moratorium: Siddhartha Mohanty, LIC Housing

Update on Indian equity market:
Indian markets continued to remain volatile as the Nifty opened lower but managed to close 65 points higher at 9,270. The index traded in a wide range of 9,116-9,346 during market hours. Among the stocks, BAJFINANCE (5.5%), M&M (5.4%) and GAIL (3.9%) led the index higher while INFRATEL (-5.5%), ITC (-5.2%) and COALINDIA (-2.9%) were the laggards. Within the sector indices, FIN SERVICES (2.6%), PVT BANK (2.5%) and BANK (2.2%) were the highest gainers whereas FMCG (-1.9%) and PSU BANK (-0.9%) closed the day lower

Excerpts from an interview with Mr Siddhartha Mohanty, MD & CEO, LIC Housing aired on CNBC
TV18 on 5th May 2020
● He said that RBI has been very supportive as far as liquidity is concerned. The Apex bank has infused sufficient liquidity through TLRTO (Targeted Long Term Repo Operations). The company is in discussion with banks to get that fund at a cheaper rate. This will help the sector as a whole.
● The customer composition of the company is such that regular income group forms more than 76% of the total loan book. Very few people from this segment have applied for a moratorium period.
● The company has received less than 15% of the total clients application for moratorium. Many of them have asked for cancellation of moratorium when they understood that interest payment will have to be made during the moratorium period. It will not affect the cash flow of the company in a big way.
● Cost of Fund for the company is going down. It is difficult to predict the asset quality situation as the moratorium period is currently playing out. The company has launched a new product for those with CIBIL score greater than 800, offering home loans at 7.5%.
● Developer loans consist less than 7% of the total loan book. The book is currently under stress and some developers have asked for a moratorium. This period will help them to equip with the situation and develop some fund flow to repay the loans.
● He expects pick-up in affordable housing sales as the crisis settles down. The demand for luxurious houses will be under pressure for the next few quarters.
Consensus Estimate: (Source: market screener, investing websites) ● The closing price of LIC Housing was Rs 263/- as of 06-May-2020. It traded at 0.7x/ 0.6x the
consensus Book Value estimate of Rs 402/ 454 for FY21E/ FY22E respectively. ● The consensus target price of Rs 395/- implies a PB multiple of 0.9x on the FY22E BV estimate of Rs 454/-
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.

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16 Apr

No need for retrenching employees, call on pay cut will be taken soon: Keki Mistry, CEO of HDFC

Update on Indian equity market:

Indian markets opened on Wednesday higher but erased all the gains towards the end as Nifty closed 69 points lower at 9,196. Among the sectoral indices, six out of 11 indices closed in the red led by FIN SERVICES (-2.8%), BANK (-2.2) and PVT BANK (-2.1%) whereas FMCG (4.2%), REALTY (1.8%) and MEDIA (0.9%) were the highest gainers.  Within the index, KOTAKBANK (-5.7%), HEROMOTOCO (-4.7%) and BAJFINANCE (-4.4%) led the index lower while UPL (8.0%), HINDUNILVR (5.4%) and BRITANNIA (5.2%) closed the day higher.

Edited excerpts of an interview with Mr Keki Mistry, CEO, HDFC published on CNBC TV18 on 14th April 2020:

  • Sharing his views on the announcements made by PM Modi on 14th April, Mr Mistry said that there will be calibrated reopening of the economy. Certain industries which are very critical and necessary for the smooth functioning of the economy might be a part of this calibrated reopening starting from 20th
  • According to him, the critical thing at this point is to ensure that there is enough liquidity in the system.
  • He made a request to the Reserve Bank of India (RBI) to provide funding to the National Housing Bank (NHB), which is 100% owned by the government. Through the NHB, the RBI can provide the funding to Housing Finance Companies and something similar could be done for Non-Banking Financial Companies.
  • According to him, certain sectors of the economy like hospitality, hotels, airlines, real estate have been badly hurt by the crisis. They need some sort of a special stimulus.
  • Commenting on the cost-cutting measures, he said that the salary cost is not a major expense for the company as about 1.5% of the total expenditure for HDFC is spent on salaries.
  • The company currently has 3,500 employees and he believes that there will be no need to look at retrenching employees. Pay cuts are being studied on a day to day basis and the company will come out with something in the coming days.
  • He said that retrenchment and pay cuts could be a problem in certain sectors. However, in the financial sector, retrenchment may not be a major concern.

Consensus Estimate: (Source: market screener, investing websites)

  • The closing price of HDFC was Rs 1,594/- as of 15-April-2020. It traded at 3.2x/ 2.9x/ 2.7x the consensus Book Value estimate of Rs 506/ 544/ 598 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of Rs 2,594/- implies a PB multiple of 4.3x on the FY22E BV estimate of Rs 598/-
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11 Nov

Indiabulls Housing Finance: Maintains healthy cash balance on the balance sheet

Update on the Indian Equity Market:

On Friday, NIFTY closed ~104 points lower at 11,908 points. International rating agency Moody’s Investors Service downgraded India’s outlook to negative from stable on concerns that the country’s economic growth will remain materially lower than in the past. The negative sentiment led to a selloff in the stock market. Amongst the NIFTY 50 Stocks, YESBANK (+4.8%), INDUSINDBK (+2.9%), ICICIBANK (+2.4%) were the largest gainers; while INFRATEL (-4.9%), SUNPHARMA (-4.3%) and GAIL (-3.9%) were the top losers. The government’s announcement to set up an Alternative Investment Fund (AIF) in aid of the stalled housing projects kept the sentiment positive for the NIFTY REALTY index which closed higher by 1.7%. PRIVATE BANK was the only other sector in the NIFTY sector indices, to close in the green. NIFTY Pharma (-2.2%), PSU BANK (-1.9%), FMCG (-1.8%) were amongst the top losers for the day.

Indiabulls Housing Finance: Maintains healthy cash balance on the balance sheet

Key takeaways from the interview of Mr Gagan Banga, MD Indiabulls Housing Finance; dated 8th November 2019 on CNBC TV-18:

  • Indiabulls Housing Finance (IBHFL) maintains 20% of the balance sheet in cash; covering around the next 12 months liabilities. The cash balance is monitored on a daily basis. IBHFL continues to carry cash at similar levels as Sept-2019 less the amount of buyback done in October and early November 2019.
  • Mr Banga mentioned that in the last 13-14 months, the Housing Finance Companies (HFC) suffered because of the liquidity crisis. The market lost confidence in HFC. IBHFL’s suffering got exaggerated because of the various allegations and the attempt to merge with Lakshmi Vilas Bank.
  • IBHFL’s stakeholders are confident about the solvency with 20% of the balance sheet as cash and a capital adequacy ratio of 29%. Risky perception of the book is due to wholesale lending. However, for the last 10 years; IBHFL’s business has been in line with what the HFC charter permits.
  • In the event of various allegations, IBHFL has subjected itself to diligence. Multiple regulators and agencies have looked at the transactions in question and the overall book of IBHFL.
  • Talking about the governments’ announcement to set up an Alternative Investment Fund (AIF) to help complete the stalled housing projects, Mr Banga mentioned that it is a positive development in the right direction. It may take a couple of months for implementation with the setting up of the fund and the money to start flowing. The lenders and developers are content to see the government thinking of de-clogging the real estate sector.

Consensus Estimate (Source: market screener and investing.com website)

  • The closing price of IBHFL was ₹ 242/- as of 8-November-19. It traded at 0.6x / 0.5x / 0.5x the consensus Book Value for FY20E / 21E / 22E of ₹ 437 / 487 / 475 respectively.
  • Consensus target price of ₹ 467/- implies a Price to Book multiple of 1x on FY22E Book Value of ₹ 475/-.
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21 Sep

Government announcements for housing sector: Steps in the right direction

Dated: 18th September 2019

Update on the Indian Market:

Nifty closed in the red for the 2nd day on Tuesday. It ended 1.7% lower at 10,817 levels. Depreciating Rupee and rising tensions from the attack on Saudi Arabia oil supplies may be the reasons for this decline. Leading the decline were NIFTY Auto (-3.8%), NIFTY Realty (-3.7%) and NIFTY PSU Banks (-3.7%). None of the NIFTY sectoral indices closed positive. Hero Motocorp (-6.3%), Tata Motors (-4.9%), Tata steel (-4.9%) were the worst-performing stocks in NIFTY50 while GAIL (+1.9%), Titan (+0.9%) and HUL (+0.9%) were the top performers.

We offer research services on the Indian equity market and plan to offer investment advice shortly. For information on our services, please visit our website http://www.assetmultiplier.co.in/ 

Government announcements for housing sector: Steps in the right direction

Excerpts from an interview with Mr Keki Mistry, vice chairman and CEO of HDFC, printed in Mint dated 16th September 2019

·        The government announced setting up of Rs 10,000 cr fund for real estate projects requiring last-mile funding. Another Rs 10,000 cr is expected to come from the private sector.

·        The step is in the right direction and would help huge number of projects that are stuck due to the lack of last-minute funding.

·        Such a professionally managed fund would help the real estate issue to a large extent.

·        The fund is for projects in the middle income and affordable housing category that are 60% complete, are non-NPA and non-NCLT.

·        Today, if the project is NPA and requires the last 10% funding, nobody will be willing to put that 10% as the loan will be straightway classified as NPA from day one. That is why the fund eligibility might be for non-NPA projects. But on the other side, a project that is stuck is stuck because of lack of funds. If there is a lack of money, the builder may not have enough to repay loan instalments. So there is a chance that the project will become NPA. This needs to be looked at more carefully.

·        Non- NPA qualification is hard to understand. IF the builder is not able to complete a project, it is most likely already classified as NPA. There are many projects that have not yet slipped into NPAs and where last-mile funding would help.  

·        The fund could be operational in CY2019 itself, if not certainly in CY20.

·        Combining the government and private monies, a fund of Rs 20,000 cr if additionally leveraged 0.3 or 0.4 times, around Rs 26,000 cr will be available. This amount can take care of a huge number of projects.

·        Many projects will have a small last-mile funding requirement of Rs 50-60-80 cr. With Rs 20,000 cr plus leverage, many such projects can be helped.

·        Government has also proposed to relax External Commercial Borrowing (ECB) guidelines for affordable housing. This route could be a little cheaper than domestic borrowing. It could be a little cheaper than domestic borrowing. More importantly, it will open a new source of funding for some of the companies.

Consensus estimates (Source: Marketscreener website):

·        The share price on 05-09-2019 was Rs 1,996/- per share. It was trading at a P/B of 4.2x/3.8x its book value per share estimates of Rs 479/520 for FY20E/FY21E respectively. The consensus price target was Rs2355 implying P/B target of 4.9x/4.5x for FY20E/FY21E respectively.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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09 Sep

Excerpts of an interview with HDFC Chairman Mr Deepak Parekh published in Mint dated 4th September 2019

Dated: 6th September 2019

Update on Indian market: Nifty ended almost flat on Thursday (+0.03%). Within NIFTY stocks, top performers were Tata Motors (+8.1%), Coal India (+7.3%) and ONGC (+5.3%) and worst performers were HDFC (-2.8%), Indiabulls Housing (-2.3%) and ICICI Bank (-2.2%). Among the sectoral indices, best performers were Metal (+2.6%), Auto (+2.1%) and Media (+1.6%). Worst performing sectors were Realty (-1.8%), financial services (-1.2%) and Pvt Banks (-0.8%). RBI has mandated linking of housing and auto loan rates to the repo rate or other external benchmarks 1st October onward. Stock prices of HFCs (Housing Finance Companies) were down owing to the fear that HFCs will have to reduce their lending rates to remain competitive, effectively putting pressure on NIMs (Net Interest Margin). Auto stocks reacted positively to the same as lower borrowing costs to the customer can boost demand for vehicles.

Excerpts of an interview with HDFC Chairman Mr Deepak Parekh published in Mint dated 4th September 2019

·        In HDFC’s core business of housing finance, massive growth is seen in affordable housing. HDFC has launched a dozen projects in the last 3 months across Indian cities. Apartments that fit in the Pradhan Mantri Awas Yojana (PMAY) are selling fast. 70-80% is sold on the launch day.

·        Commercial real estate especially for IT back-office sector is also booming.

·        Real estate is in bad shape for homes that are larger and unaffordable.

·        The spiral down has continued after demonetization. The developers need help as without them there is no supply. There is a massive amount of unsold inventory and lack of fresh lending to the developers.

·        Regulators have to look at developers differently in terms of NPA recognition. Even if the developer is not able to build a phase due to demand shortage and is not able to repay the loan, he is sitting on the value in the form of land. When the demand picks up, the value will materialize.

·        50% of incomplete apartments need last-mile funding where 80%-90% work is complete. That should be done on an urgency basis. This will also boost confidence on the street. Currently, people prefer to buy a finished home rather than under-construction property as many people have booked under-construction flats and are still waiting. A solution could be a stressed asset fund initiated by National Housing Bank (NHB).

·        When IL&FS went down, it did not impact the Indian financial system. India has a strong financial base and a couple of players collapsing is not going to have a big impact.

·        Interest rate action helps in case of a slowdown but it is not the ultimate reason for the slowdown to go away. Self-confidence and confidence in buyers is required. India is a consumption-oriented economy and one or two-quarters slowdown is just part of the game. Even the auto industry has had phenomenal sales for many years and a slowdown for a few quarters will not have much impact.

·        The feeling is that slowdown will be short-lived. Good weather, upcoming festive season and easy availability of credit will cause spending.              

·        Consumption as a % of GDP is very low in India, less than half of China. So that has to grow. Even if there is a global slowdown, it is not so in India.

·        Ease of doing business in India has to improve. Large funds of billions of dollars have not yet invested long-term money in India. India specific funds have come in but global funds, sovereign wealth funds have just started looking at India. Still, massive amounts of investments can be expected from Australia, Canada and Japan. The sovereign wealth funds are underinvested in India but are looking at viable companies, good promoters and good track record.

Consensus estimates (Source: Marketscreener website):

·        The share price on 05-09-2019 was Rs 2,044/- per share. It was trading at a P/B of 4.2x/3.9x its book value per share estimates of Rs 479/521 for FY20E/FY21E respectively.

·        The consensus price target is at Rs 2,361/- implying P/B of 4.5x for FY21E BVPS of Rs 521.

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08 Aug

Indiabulls Housing Finance 1QFY20 result update: Asset quality deteriorates sequentially.

Dated: 7th August 2019

  • Loan assets declined 10% YoY to Rs 1,131 bn. The decline is primarily due to efforts taken for reduction in the Commercial Real Estate (CRE) book.
  • NII at Rs 14,750 mn was 13% lower YoY. Pre-provisioning operating profits at 12,536 mn were 15% lower YoY.
  • Provisions were at Rs 1,476 mn compared to Rs 649 mn and Rs 1,645 mn in 1QFY19 and 4QFY19 respectively.
  • PAT at Rs 8,020 mn was lower by 24% YoY.
  • Asset Quality worsened sequentially from GNPAs and NNPAs of 0.88% and 0.69% respectively in 4QFY19 to 1.47% and 1.10% respectively in 1QFY20.

Management Commentary:

  • IBHFL reduced exposure to CRE loans amounting to Rs 60 bn in 1QFY20. Efforts to reduce CRE exposure is in anticipation of the proposed merger with Lakshmi Vilas Bank (LVB).
  • Management has guided to quarterly disbursements of Rs 100 bn from 2QFY20. Guidance for loan book growth for FY20E is in mid-teens.
  • Management expects spreads to remain stable in 300-325 bps range.
  • IBHFL recovered Rs 7 bn from Palais Royale in 1QFY20 against earlier guidance of Rs 2 bn. Against the recovery, Rs 4.5 bn was used to make additional voluntary provisions. Under ECL norms, companies cannot make floating provisions. Hence IBHFL has proactively classified certain accounts as Stage 3 (including Zee group, CCD group) and provided against them.

Consensus estimates (Source: Marketscreener website):

  • IBHFL closing price (as on 07-08-2019) was Rs 446/- per share. It was trading at a P/B of 1.1x/ 0.9x its book value per share estimates of Rs 417/ 493 for FY20E/ FY21E respectively. Consensus target price over next 12 months is Rs 910/- implying P/B of 1.85x for FY21E BV of Rs 493
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