Monday, August 6, 2012

>HOUSING FINANCE: Still have defensive quality

Whilst outperforming the bankex (HDFC by 27% & LICHF by 64%) in CY12, the housing finance stocks have underperformed the bankex (HDFC by 23% & LICHF by 13%) YTD given concerns on margins. These concerns were accentuated by declines in yields for most of the HFCs in Q1. We think we may have seen the worst in terms of margins for the HFCs given that most of the margin deterioration was due to the increase in cost of funds and not yields. Also, NPLs for the sector have remained low. We see this as the most defensive sector in the financials space, retaining LICHF as our top pick. DEWH has the highest upside potential, but any re-rating appears to currently be held back by perceptions around governance, though the operating performance has remained robust.

Results broadly in-line
Current quarterly results have been broadly in line with our expectations;
a) Loan growth for HFCs we cover remained > 20%, given that the disbursement growth was in excess of 20%; no significant increase in repayments even after abolition of prepayment penalties.
b) Gross NPLs declining on YoY basis, although on QoQ basis they have deteriorated slightly due to the seasonal impact for Dewan and LIC Housing.
c) NIMs have fallen on a QoQ basis for most HFCs, which is seasonal as well as due to the rise in cost of funds. However LIC has negatively surprised as the increase in cost of funds was more than our expectations.

Still remains the most defensive area in financial sector
We view this sector as the most defensive in the financial sector given:
a) Growth rates should remain high given that affordability is still good and we have not seen any indication of a significant reduction in demand from anywhere in India other than Mumbai.
b) NPLs should remain low as we are yet to see heavy job losses. In addition, most loans in India are for own use so this is the last asset a person would likely default against. Also, the LTVs have come down with the RBI reducing the maximum LTV from 95% to 80% over the last couple of years. c) NIMs have been declining for a few quarters, but we think we may have seen the bottom given yields are expected by us to increase in coming quarters with teaser rate loan repricing (for LICHF) and incremental loan portfolio at a higher yield than the average yield of the portfolio.

Dewan looks attractive but LICHF remains our top pick
On a relative as well as absolute basis, DEWH looks attractively priced given a 20% ROE, in excess of 25% loan book growth and around 20% earnings growth and the stock trading at just 0.9x FY13E book and 5x FY13E earnings. However, perceived corporate governance issues due to promoters’ relatives involved in real estate activities means that the stock’s performance may remain subdued in near term. Hence, although we have just 5% upside on LICHF compared to 78% upside on DEWH, LICHF may well do better in the near term given no corporate governance noise and our expectations for an increase in NIM. At 4.3x FY13E P/BV HDFC looks appropriately priced and we do not see much upside given it already trades at a premium valuation. We have tweaked our estimates for HDFC and DEWH to incorporate FY12 results with no resulting changes to our FVs.

Risks to the investment case
The sharp rises in the interest rate environment, high property prices in some locations and economic slowdown have resulted in a meaningful reduction in demand for housing in the two biggest cities, Delhi and Mumbai. Were rates to continue at these high levels and the economic environment were to deteriorate significantly we could see growth rates for the HFCs coming down.

To read report in detail: HOUSING FINANCE