Housing Finance

Major housing demand is coming from first-time buyers – HDFC

Update on Indian Equity Market:

On Tuesday, NIFTY ended at 17,749 (-0.6%) as it closed near its high at 17,533. Among the sectoral indices, OIL & GAS (+1.3%), PSU BANK (+1.24), and METAL (+0.6%) ended higher, whereas REALTY (-3%), IT (-2.2%), and MEDIA (-1.7%) ended lower. Among the stocks POWERGRID (+4.4%), COALINDIA (+4.2%), and NTPC (+3.74%) led the gainers while BHARTIARTL (-3.7%), TECHM (-3.5%), and BAJFINANCE (-3.3%) led the losers.

Excerpts of an interview with Mr. Keki Mistry, Vice-Chairman and Managing Director of HDFC Ltd (HDFC) with CNBC TV18 on 27th September 2021:

  • Between 2017-2020, demand for housing was largely coming from Tier 2, Tier3 towns or outskirts of big cities but not that much in the center of big cities like Mumbai and Bengaluru.
  • In the last year, people in Mumbai, Delhi, and Bengaluru are buying houses because housing has become very affordable compared to what it has been in the last 20 years.
  • From 2017-20, prices in the center of big cities have remained the same or may have marginally come down. This was complemented by rising income levels of individuals. An average income level of 6-7% a year if compounded on a 3-year basis, gives an approximate increase of 25% against a 0% (virtual) increase in property prices.
  • So, the cost of a house as a multiple of the annual income of a typical customer has become a lot lesser.
  • Mistry believes that structural demand for housing will always remain strong since it is a very under-penetrated market. The factor that points towards a sustained growth of housing in the Indian market apart from increased affordability is a Mortgage-GDP ratio of less than 11%. This ratio ranges between 40-60% in Western countries.
  • Unlike people in the West, Indians prefer buying houses in their late 30s. From a demographic standpoint, two-thirds of India’s population falls in the under-35 age category which will eventually need to buy houses in the next 1-10 years. The average of a first-time buyer in Mumbai is between 37-39 years.
  • The pressure that this sector faced, particularly in big cities like Mumbai, has been quashed because bigger developers took over incomplete projects of smaller developers. But this process takes time because approvals from various authorities need to be obtained.
  • Demand in the industry is muted. Only the reputed developers are seeing traction because customers prefer buying an under-construction property from reputed developers rather than buying the same from a less reputed developer. That is because the risk of a project not getting completed is very little in the case of the former.
  • Collection numbers, from a retail standpoint, are back to pre-covid levels but, the distress that people encountered from April to June might not have gone away completely.
  • These problems are temporary as far as individual NPAs are concerned. He does not believe that the housing finance sector will see any severe loan losses because the security cover is huge and the average loan amount is a small component of the value of the property at origination.
  • The loan to value ratio (loan as a percent of the value of the property) for most lenders is less than 70% which means from day one the individual has a 30% equity in the property upfront.
  • Since all loans are paid equally in monthly installments, this ratio will keep declining every passing month as the installments get paid. Therefore, an individual’s equity in the property keeps rising, and the losses on a housing portfolio of any lender, as long as there is prudent lending, would be almost non-existent to very negligible.

Asset Multiplier Comments

  • The demand from homebuyers is picking up due to subdued interest rates and the government’s push towards the affordable housing segment.
  • Due to a higher focus on individual loans vs non-individual, and a greater share of lending to salaried individuals, HDFC’s loan portfolio did not suffer any major setbacks in terms of asset quality. Moreover, HDFC has a provision buffer in place which is higher than the regulatory requirement.
  • Due to increased demand and low interest rates, rising competition among housing finance companies could exert pressure on interest rates.

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

  • The closing price of HDFC was ₹ 2,802 /- as of 27-Sept-2021. It traded at 5x/4x/4x the consensus BVPS estimate of ₹ 651/703/769 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,016/- implies a P/BV multiple of 4x on FY24E BVPS of ₹ 769/-

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.”

 

 

Provisions for slippages will affect short term outlook – LIC Housing Finance

Update on Indian Equity Market:

On Thursday, markets ended lower with Nifty losing 76 points to close at 15,691. ULTRACEMCO (+1.7%), TCS (+1.6%), and INFY (+1.4%) were the top gainers on the index while ADANIPORTS (-9.0%), INDUSINDBK (-3.0%), and HINDALCO (-3.0%) were the top losers for the day. Among the sectoral indices,  METAL (-2.3%),  REALTY (-1.7%), and PSU BANK (-1.4%) were the top losers, while IT (+0.6%) and FMCG (+0.1%) were the only gainers.

Excerpts of an interview with Mr Y Vishwanath Gawd, MD and CEO of LIC Housing Finance on CNBCTV18 dated 16th June 2021 :

  • Retail stress was the leading cause of slippages in non-performing assets (NPA). Substantial new provisions were needed to be made due to the Supreme Court Order last year, which compelled the company to make provisions in 4QFY21.
  • Project Finance and Developer Loans form just 7% of the loan book, so not much issue of NPAs there as the company has made adequate provisions for the loan book.
  • The One-time restructuring facility was provided last year by the government. Around 1.5-2% of the portfolio was restructured using the same facility, this year the company expects a similar restructuring process to be followed, the only concern will be an expectation of a longer repayment structure.
  • The disbursements grew over 97% YoY however the same was not reflected in the order book growth due to faster and larger repayments, consumers shifting their loans to other companies for better terms and restructuring offers during the pandemic.
  • Substantial reduction in the cost of funds has seen the margins improve to around 2.3-2.4% but the company expects margins to stabilise at these levels due to bottoming out of lending rates.
  • As far as the capital infusion is concerned, the company promoter LIC is investing through preferential allotment of 45.4 mn of equity shares which will further shore up leverage and provided much-needed cash impetus. 
  • The focus in FY22 will be to increase market penetration and further improve all the ratios to deliver better value and post incremental growth in the loan book portfolio.

Asset Multiplier Comments:

  • LIC Housing Finance has seen its NPA Provisions bottoming out due to the Supreme Court order. A substantial loan book growth, and improving margins will be the cause of higher growth rates going ahead.
  • As the stress from the Covid-19 pandemic subsides, the affordable housing industry will gather pace which promises better days for the company.

Consensus Estimates (Source: market screener website): 

  • The closing price of LIC Housing Finance was ₹480/- as of 17-June-2021.  It traded at 1.03x/ 0.92x the BVPS estimate of ₹ 462/ ₹ 518  for FY22E/23E respectively.
  • The consensus price target is ₹ 507/- which trades at 0.95x the BVPS estimate for FY23E of ₹ 518/-

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.”

Capital raise on cards to fund aggressive growth plans – Can Fin Homes

Update on the Indian Equity Market:

On Thursday, Nifty closed 1.5% lower at 14,325. Within NIFTY50, TATASTEEL (+2.9%), DRREDDY (+0.8%), and ICICIBANK (+0.6%) were top gainers, while IOC (-4.0%),MARUTI (-3.9%), and COALINDIA(-3.4%) were the top losing stocks. Among the sectoral indices, METAL (+0.02%) was the only gainer whileMEDIA (-3.1%), AUTO (-2.8%), and PSU BANK (-2.6%) ended with the most losses.

Capital raise on cards to fund aggressive growth plans – Can Fin Homes

Excerpts of an interview with Mr. Girish Kousgi, MD& CEO, Can Fin Homes (CANFINHOME), published on Economic times dated on 24th March 2021:

  • CANFINHOME witnessed a decline in loan book in the last couple quarters. This was due to repayments being higher than incremental disbursements. But December 2020 onward, the business is seeing a comeback.
  • CANFINHOME’s disbursements have been strong since December 2020. December 2020 disbursements were equal to disbursements in October 2020 and November 2020 put together. February 2021 saw disbursements at an all-time high and March 2021 is expected to be even better.
  • The demand for affordable housing revived couple months ago, while the non-affordable housing demand is back to 90% levels.
  • Several financial institutions have been focusing on mortgage segment. CANFINHOME has changed its pricing strategy to retain customers and attract good customers.CANFINHOME has moderated its pricing to be at par with best banks in India. This will contribute to CANFINHOME’s expectation of 17-18% loan book growth in next few quarters.
  • CANFINHOME’s aggressive pricing strategy will put a pressure on its margins. Mr Kousgi said the management will look for opportunities to improve yields where possible.
  • CANFINHOME has a capital adequacy of 24% and leverage at 7.3x. While the capital adequacy is comfortable, Mr Kousgi says capital raise is shortly on the cards to fund aggressive growth plans for next 3-5 years.
  • Kousgi does not anticipate any additional covid-19 related provision requirement.

 Asset Multiplier Comments:

  • Demand for housing has seen a revival in last few months due to attractive prices, lower interest rates, lower stamp duties, and other benefits.
  • In the covid-19 era, banks refrained from lending to the more risky segments such as unsecured consumer loans, SMEs, and vehicle finance.Several banks have ramped up their lending in the home loans space due to lack of other lending options. This has led to increased competition in the mortgage lending space.

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

  • The closing price of CANFINHOMEwas ₹ 575 as of 25-March-2021. It traded at 3.0x/ 2.5x/ 2.1x the consensus BVPS estimate of ₹ 192/233/271 for FY21E/ FY22E/ FY23E respectively.
  • The consensus target price of ₹ 593/- implies a PB multiple of 2.2x on FY23E BVPS of ₹271/-.

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.”

 

Demand for Housing loans is strong – HDFC

Update on the Indian Equity Market:

On Thursday, Nifty closed in the red at 15,081. Among the sectoral indices, Media (+1.6%), and Realty (+0.1%) closed higher. Metals (-2.0%), Financial Services (-1.8%), and Financial Services 25/50 (-1.6%) closed in the red. Ultratech Cement (+3.9%), Adani Ports (+3.0%), and Shree Cement (+2.9%) closed on a positive note. JSW Steel (-2.9%), HDFC (-2.6%), and Hindalco (-2.6%) were among the top losers.

Excerpts from an interview of Mr. Keki Mistry, Vice Chairman  & CEO of HDFC with CNBC-TV18 dated 03rd March 2021:

  • Interest rates may bottom out by March-end and there is not much downside expected from current levels.
  • The demand for housing loans is extremely strong. In Q3FY21, individual loan disbursements were ~26% higher YoY for HDFC.
  • 3rd quarter of last year (2019) was not impacted by covid, which indicates that the growth was not on a lower base.
  • HDFC manages COF (Cost of funds) carefully which helps to manage spread in higher/lower interest rate scenarios. The incremental cost of borrowings is coming down, which led to rate cut by some players. HDFC will also take an ALM meeting to take a decision on this front.
  • He said that on a 9-month basis individual loans constituted 76% of total loans and 24% is non-individual loans.
  • In non-individual loans, 11% is construction finance and the rest is lease rental discounting. 80% of the growth came from individual loans and the rest from non-individual loans in 9MFY21.
  • There is a pickup in demand in every segment.
  • Speaking on projects, he said the builders are able to finish projects. Some projects are stuck and they are taking a bit more time to come around.
  • The company is not looking to raise capital.
  • The company is looking to list HDFC ERGO and HDFC Credila, however, it is still in the planning stage.

 

Asset Multiplier comments:

  • Cheaper home loan rates have helped people to buy homes. The Home loan rates are already at a 15 year low. This has acted as a trigger for rising home loans.
  • RBI has lowered its repo by 115 bps since March 2020, the bank has also passed these benefits by offering lower interest rates.
  • Many players like SBI, Kotak Mahindra Bank have announced a reduction in home loan interest rates.
  • Lower interest rates and lower stamp duty in some regions might act as a demand driver for residential real estate in India.

 

Consensus Estimate: (Source: Market screener and Investing.com website)

  • The closing price of HDFC was ₹ 2,585 as of 04-March-2021.  It traded at 4.4x/4.0x/3.6 the consensus Book value per share estimate of ₹ 582/633/699 for FY21E/FY22E/FY23E respectively.
  • The consensus average target price is ₹ 2,921/- which implies a PB multiple of 4.1x on FY23E BVPS of 699/-.

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.”

Greater demand in real estate – LIC Housing Finance

Update on the Indian Equity Market:
On Monday Nifty closed 0.8% higher at 14,133. Among the sectoral indices, IT (+2.7%), Metal (+5.1%), and Auto (+1.6%) closed higher. Pvt Bank (-0.1%) and Bank (-0.04%) were the only sectoral indices that closed lower. Tata Steel (+8.4%), Hindalco (+6.9%), and Eicher Motors (+4.3%) closed on a positive note. Hero Motors (-1.6%), Kotak Bank (-1.2%), and Bajaj Finance (-1.2%) were among the top losers.

Excerpts from an interview of Mr. Siddhartha Mohanty, MD & CEO, LIC Housing Finance with CNBC-TV18 dated 1st January 2020:
● The real estate sector faced issues because of lower liquidity and demand.
● Mr. Mohanty said these issues are addressed and now the demand is normal.
● The consumption demand has gone up and there is a pickup in new real estate registration.
● Not only the metros but even tier-2, tier-3 cities are showing high growth.
● He said the company will close in a high double-digit year on year growth by the end of FY21.
● Speaking about bad loans, he said the moratorium ended in August and now people who had opted for the moratorium have also started paying.
● He said there is an improvement in big accounts.
● Speaking on spreads and margins, he said the company is raising debt at a very competitive rate.

Consensus Estimate: (Source: market screener and investing.com websites)
● The closing price of LIC Housing Finance was ₹ 382 as of 04-January-2020. It traded at 8x/ 7x/ 5x the consensus Earnings per share estimate of ₹ 49.8/57.8/71.1 for FY21E/ FY22E/ FY23E respectively.
● The consensus average target price for LIC Housing Finance is ₹ 363/- which implies a PE multiple of 5x on FY23E EPS of 71.1/-.
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.”

Optimistic on future of the real estate, service sector to take longer to recover – HDFC

Update on the Indian Equity Market:
On Wednesday, Nifty ended 1.0% higher at 13,529 with banks outperforming. The top gainers for Nifty 50 were GAIL (+8.3%), Sun Pharma (+5.7%), and IndusInd Bank (+4.9%) while the losing stocks for the day were Nestle (-2.6%), Kotak Bank (-1.5%), and Titan (-1.3%). The top gaining sectors were Media (+3.8%), Pvt bank (+1.7%), and Bank (+1.5%). The losing sectors were PSU Bank (-1.0%), Metal (-0.5%), and Auto (-0.1%).

Edited excerpts of an interview with Mr Deepak Parekh, Chairman, HDFC dated 09th December 2020 from CNBC TV 18:

Mr Parekh is optimistic about the future of the real estate sector, especially the small homes. However, he believes the service sector is going to take long before it recovers.
The pain, the struggle and difficulty have been in close contact service sectors like restaurants, hotels, transport, civil aviation and these industries still have a long way to recover.

Mr Parekh said October 2020 was a record month for auto as companies saw all-time high numbers of sales.
On inflation, he said that the latest monetary policy has been mature and accurate although the inflation is higher than the comfort zone of the Reserve Bank of India (RBI). RBI has decided not to make any changes and leave the surplus liquidity into the system. He is confident RBI will not destabilize any large non-banking finance company (NBFC) or housing finance company (HFC) even if they don’t want to convert into a bank.

Speaking about NBFCs, Mr Parekh said that there needs to be a change in the RBI Act for corporates to enter the banking system. He does not see it happening immediately. It’s a 2-3 year process. However, in the end, RBI will be more conservative and cautious in their usual style and manner and will differ giving licences to corporate houses.
On the GDP front, Mr Parekh said that 2Q has surprised everyone; although the gross domestic product (GDP) showed a negative growth rate for 2Q, one should look at it as an aberration.

One never expected that September and October would see such fantastic new inflows of application in e-bills, tolls or housing sector compared to previous September-October, which was pre-pandemic.

Consensus Estimate: (Source: market screener website):

The closing price of HDFC was ₹ 2,308/- as of 09-December-2020. It traded at 4.0x/ 3.7x/3.4x the consensus Book value per share estimate of ₹ 569/615/674 for FY21E/ FY22E/ FY23E respectively.
The average consensus target price of ₹ 2,106/- implies a PB multiple of 3x on the FY23E book value of ₹ 674/-.

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.”

Expect double-digit growth in 3QFY21E– LIC Housing Finance

Update on the Indian Equity Market:

On Wednesday, Nifty closed with 0.7% gains at 11,739. Within NIFTY50, TITAN (+4.5%), BAJAJ-AUTO (+3.6%), and HEROMOTOCO (+2.9%) were the top gainers, while BAJFINANCE (-4.1%), BPCL (-2.8%), and HINDALCO (-2.7%) were the top losing stocks. Among the sectoral indices, AUTO (+1.4%), IT (+0.6%), and PVT BANK (+0.6%) were the top gainers while MEDIA (-2.5%), REALTY (-1.9%), and METAL (-1.5%) were the top losing sectors.

Expect double-digit growth in 3QFY21E– LIC Housing Finance

Excerpts of an interview with Mr. Siddhartha Mohanty, MD & CEO, LIC Housing Finance (LICHSGFIN), that aired on CNBCTV18 on 6th October 2020:
● Post the highly impacted months of April and May, LICHSGFIN experienced good growth in disbursements June onward. This growth has been particularly in the affordable segments. However, off late, Mr. Mohanty has also observed some uptick in demand in above mid-segment, as well as premium segment disbursements picked up since June.
● LICHSGFIN has almost reached pre-COVID levels in terms of disbursements owing to good traction in the month of September.
● Despite the inauspicious periods of ‘shraadh’ and ‘adhik maas’ in September, the 2QFY21 has been very good.
● Management expects the positive trend to continue and expect double-digit growth in 3QFY21E. Several factors are into play to motivate home buyers to purchase now. Government has given several incentives including the extension of PMAY CLSS scheme till March 2021, and reduction in stamp duty to 2% up to December 2020 by Maharashtra government. Apart from that, some developers are also giving concessions to attract customers.
● LICHSGFIN has also introduced innovative products to attract customers such as 6 EMI waivers for borrowers who are undertaking immediate purchase/ moving of the house.
● For LICHSGFIN, developer loan book is less than 7% of the total book. Considering sales velocity, within the developer segment, LICHSGFIN focuses more on affordable housing. Even now, LICHSGFIN has been lending to developers but on a very limited basis.
● LICHSGFIN has also seen better than expected collections. A substantial portion of borrowers who were under moratorium have also started paying in September.
● Despite increased competition in home loans, LICHSGFIN has managed to sustain its market share and maintain stable margins.
Consensus Estimate (Source: market screener and investing.com websites)
● The closing price of LICHSGFIN was ₹ 283/- as of 07-October-2020. It traded at 0.7x/ 0.7x/ 0.6x the consensus Book Value per Share estimate of ₹ 386/428/472 for FY21E/ FY22E/ FY23E respectively.
● The consensus target price of ₹ 331/- implies a PB multiple of 0.7x on FY23E BVPS of ₹ 472/-.

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.”

Will not need to dip into capital for provisioning –Indiabulls Housing

Update on the Indian Equity Market:

On Wednesday, Nifty closed with0.7% gains at 11,605. Within NIFTY50, DRREDDY (+4.4%), M&M (+4.0%), and HINDALCO (+3.9%) were the top gainers, while INDUSINDBK (-2.0%), NTPC (-1.6%), and INFRATEL (-1.1%) were the top losers. Among the sectoral indices, REALTY(+2.3%), PHARMA (+2.1%), and AUTO (+1.5%) gained the most. MEDIA (-1.6%) andPSU BANK (-0.5%)ended with losses.

Will not need to dip into capital for provisioning –Indiabulls Housing

Excerpts of an interview with Mr. Gagan Banga, Vice Chairman and MD, Indiabulls Housing Finance (IBULHSGFIN), aired on CNBC-TV18dated 15th September 2020:
• Indiabulls Housing has raised Rs 6,830 mn via QIP and Rs 5,220 mn through stake sale in OakNorth bank to build capital buffer. This will be used as growth capital. With this capital raise, the capital adequacy has gone up to 31%.
• Higher capital buffer will also help as a positive affirmation for credit rating agencies. Indiabulls Housing has been on a downward rating trajectory from AAA to AA. Management wants to get it back atleast to AA+ levels.
• Management has plans to increase capital further by about Rs 10,000 mn and increase capital adequacy up to 32%.
• In 1QFY21, AUM was flattish and similar trend persists for 2QFY21. Management expects growth from 2HFY21.
• Indiabulls Housing continues its strategy of reducing the real estate developer book. The gross developer book has reduced by Rs 180 bn in the last 2 years. In 1QFY21 and 2QFY21 the sell down has been about Rs 30 bn and 21 bn respectively. These developer loans are being refinanced by Indian PSU and private banks, as well as through a few securitization transactions with foreign institutions.
• Of the Rs 180 bn sell downs so far, there has been no discount required as the properties are prime with good LTVs of ballpark 50%.
• As a result of reduction in developer loans book, Indiabulls Housing is getting converted into a retail lending focused company.
• As Indiabulls Housing pursues growth in retail book, management expects AUM growth of 10% for FY21E. True to the adopted asset light model, the balance sheet growth will remain lower at 5%.
• Within retail book, the ratio of home loans to Loan Against Property (LAP) is 60:40.LAP segment on a risk adjusted basis has attractive RoA. On the asset quality front, this product has a 50% LTV and monthly principal amortization and the product is performing well.
• Through the last few months, initially 50-55% of LAP borrowers had taken moratorium but by August the number had declined to 20%. By September, the EMIs are getting backed and there is no significant increase in people who are not able to pay.
• Indiabulls Housing also raised Rs 15 bn to put into completion of projects which is a positive for the industry. Over the last 60-90 days, apartments across the board are selling at a strong momentum.
• Indiabulls Housing is now at a quarterly pre-provisioning operating profit (PPOP) level of about Rs 6,000 mn. Like in 1QFY21, material portion of the PPOP will be used to make provisions throughout FY21E. Indiabulls Housing will not need to dip into capital for provisioning.

Consensus Estimate (Source: market screener and investing.com websites)
• The closing price of IBULHSGFIN was ₹ 187/- as of 16-September-2020. It traded at 0.5x/ 0.5x/ 0.4x the consensus BVPS estimate of ₹ 392/408/ 445 for FY21E/ FY22E/ FY23E respectively.
• The consensus target price of ₹ 160/- implies a PE multiple of 0.3x on FY23E EPS of ₹ 473/-.

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.”

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.”

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/-.

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