Will the rally in Housing Finance Companies' stocks continue?

Smaller firms like Repco, Can Fin, Gruh could benefit more: Analysts

The stocks of housing finance companies (HFCs) such as GIC Housing, Indiabulls Housing, HDFC, LIC Housing, and Gruh Finance have rallied 4-10 per cent in a fortnight, outperforming the S&P BSE Sensex (up 2.3 per cent). Anticipation of a host of reforms for affordable housing segment in the upcoming Budget is the key catalyst behind this rally. The Street expects increased allocation to rural housing funds, sops for builders to develop affordable homes, and an increase in deductions for repayment of housing loan (both principal and interest) to be announced in the Budget.

While the above measures will benefit all HFCs, the degree of gains will vary. Larger players such as HDFC and LIC Housing Finance might not witness a huge spike in their loan book on higher demand for affordable housing given their higher average ticket size and the fact that affordable housing forms a relatively smaller part of their loan book. Smaller players such as Repco, Dewan Housing Finance, Can Fin Homes and Gruh Finance (a subsidiary of HDFC) are expected to gain more (higher growth in loans) as the affordable housing segment forms a significant part of their loan books. Also, the smaller players cater to the under-served segment of unorganised, self-employed borrowers, which has limited competition from banks and larger HFCs. Focus on the small-ticket size segment also gives higher pricing power to these smaller HFCs, although the risk is also higher. Smaller companies, thus, will post at least 20 per cent loan growth over the next two to three years, giving them strong earnings visibility, say analysts.

Digant Haria, assistant vice-president (research) at Antique Stock Broking, says: “There are a lot of expectations from this Budget on affordable housing, which have fuelled the rally. We believe this rally will continue as affordable housing is a key area for economic revival.” Haria is bullish on smaller companies as he believes they will benefit more from the growth in the affordable housing segment, with lower interest rates reducing their cost of funding as well.

Vaibhav Agrawal, vice-president research-banking at Angel Broking, agrees. “Clearly, smaller HFCs will benefit more. This is because HDFC and LIC HF are aiming mostly at top seven to 10 cities. The smaller players are confirming to the priority-sector limit of housing loans up to Rs 15 lakh and are also eligible for NHB (National Housing Bank) funding.”

However, there are gains for larger HFCs too. Increase in deduction on interest and principal repayment of home loan would benefit the larger players more than the smaller players (average loan ticket size of Rs 10-12 Lakhs) given their higher ticket size and the fact that most of their borrowers fall in income brackets that enable them to avail benefits of these deductions.

While expectations are high from the Budget, if these measures are not announced, then HFCs’ stocks could witness some correction. Nevertheless, investors could still consider them given the expectations of pickup in economic growth and policy rate cuts by RBI in the coming months.