Don't chase housing financing stocks due to Bajaj Housing Fin IPO: Analysts

Bajaj Housing Finance IPO: Analysts advise investors to focus on the fundamentals of the individual companies and accumulate the shares on dips from long-term gains

The jaw-dropping response to the initial public offering (IPO) of Bajaj Housing Finance (BHFL) may aid the recent rally seen in most of the shares of housing finance firms, albeit for a short term, according to analysts.

They advise investors to focus on the fundamentals of the individual companies and accumulate the shares on dips for long-term gains.
 

“The magnificent response to Bajaj Housing Finance’s IPO is expected to create some short-term buzz around related stocks. In the long-term, however, it all boils down to fundamentals and earnings growth,” said Kranthi Bathini, director-equity, WealthMills Securities.
 

He said most of the housing finance stocks were trading near their fair value. Lucrative returns, therefore, will be generated by the ones that can manage their margins and asset quality in a better way.

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On the bourses, shares of housing finance companies have traded mixed since Bajaj Housing filed its draft red herring prospectus (DRHP) with the markets regulator Securities and Exchange Board of India (Sebi) on June 14, 2024.
 

The share price of PNB Housing Finance has surged 33 per cent since then till September 11, followed by India Shelter Finance Corp (8.3 per cent), Aadhar Housing Finance (4 per cent), CanFin Homes (3.67 per cent), and Home First Finance (3.4 per cent), ACE Equity data shows.
 

On the flip side, Hudco has tumbled 13 per cent, Aptus Value Housing Finance 8 per cent, LIC Housing Finance 7.6 per cent, and GIC Housing Finance 5.6 per cent during this period.

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By comparison, the Nifty50 index has added 6.2 per cent, and the Nifty Financial Services 5.2 per cent on the National Stock Exchange. Bajaj Housing Finance became the second IPO on Wednesday whose bids from investors beat shares on offer by a wide margin. The Rs 6,560 crore offering received bids worth over Rs 3.2 trillion. In 2008, Reliance Power’s Rs 11,563 crore IPO had bagged bids worth Rs 7.5 trillion. The response, analysts believe, has more to do with ‘brand Bajaj’ rather than investors’ perception of the housing finance sector, in general.

“Bajaj Housing Finance IPO saw huge investor demand due to its linkage with Bajaj Finance. The parent non-banking finance company is a large, well-marketed company with a wide retail reach. While a part of the response may be attributed to the IPO frenzy and sufficient liquidity, the housing finance arm belongs to Bajaj Group, having a stable management,” said Nipun Lodha, director — corporate finance, PL Investment Banking.

While analysts believe the issue’s fair valuations and the management's robust business projections aided the sentiment around the offer, they opine that the positive rub-off of the IPO has already happened over other housing financiers. They believe it will be the earnings growth that will drive the momentum ahead. They added that housing financiers have been consolidating on the bourses amid a tight monetary policy regime, and any reversal in the policy stance ahead may positively impact select housing financing companies.
 

According to an analysis by global brokerage Nomura, the spread between 10-year government securities and repo rate has come down to 0.4 per cent, compared to the long-term average of 1.2 per cent. This indicates that the bond market is pricing in substantial rate cuts from the Reserve Bank of India, it said. 
 

Assuming a 50 basis points (bps) repo rate cut, the brokerage sees Bajaj Finance’s (consolidated) cost of funds improving by 25 bps by FY26, 23 bps for LIC Housing Finance, and 28 bps for Cholamandalam Investment and Finance Company.