ET NowIn a chat with ET Now, Digant Haria, AVP, Equity Research, Antique Stock Broking, shares his outlook for the housing finance space in the backdrop of the upcoming Budget. Excerpts:
ET Now: The broad market expectations ahead of the Budget 2015 are that FM Jaitley will do something special for the housing sector. Your take?
Digant Haria: There are two aspects related to the housing sector. The first is on the budget side — what the Finance Minister can do is just increase the income tax exemption on a housing loan.
The interest exemption and the principal exemption could be increased by Rs 1 lakh. That basically motivates the middle class or the salaried class to go for a housing loan. That could be beneficial for the large housing finance companies and banks like HDFC as also LIC.
The second part is the more important one. The government has the target of housing for all by 2022. If the government has to implement it, there have to be more than 2 crore houses which have to be constructed in the next seven years. Most of these will have to be constructed for the economically weaker section of the society.
So I expect that in Budget 2015 there will be a lot of policy measures for the affordable housing space — which is housing below Rs 25-lakh ticket size. That is where a lot more action would happen versus the large ticket housing space.
ET Now: From a stock point of view, where do you think is the best risk-reward when it comes to the housing finance companies? The stocks have seen a very strong run-up on expectations that the EPFO could increase its stake, its investment and exposure to the segment.
Digant Haria: We think the best risk-reward lies in the smaller housing space. It's primarily because that space is very difficult to do business in. The small borrower does not really have all documents in place. Somebody who can actually appraise and lend money to them can make more profit.
Secondly, in the large housing space, there is a lot competition from banks. So, the profitability ratios get quite skewed. We have seen in the last two years that banks have got pretty aggressive in the large housing space. So we think that whatever benefit flows out of the budget and outside the budget in terms of affordable housing, a large part of it would accrue to the small housing financers like Repco, Gruh, Can Fin Homes or GIC Housing.
These are the ones who operate largely outside the metros and the large-ticket space. That is where we see a lot of value, and we think growth in that segment will continue for many years to come.
It is not for just a year or two that you will see 25% to 30% kind of growth there. Such growth can continue all the way up to 2022, if the government comes out with a meaningful policy on affordable housing. Therefore, we will place our bets on the small housing finance companies.
ET Now: Just about everyone who has bought into HFC stocks has done so with the assumption that there is earnings visibility and growth potential for the next 5 to 15 years. How much of this current template is already in the price?
Digant Haria: You are absolutely correct. If you talk of Gruh Finance, it trades at almost 10 times price to book, 27 times price to earnings on a forward basis. That makes it one of the most expensive stocks in the world, let alone India. You will hardly find any financials trading at such high valuations.
But if I go back in history, there were stocks — for example, the HDFC twins — that used to trade at such lofty valuations. It was back in 1998-2000. In the next 10 years that India boomed, the earnings and the opportunity size for these stocks expanded so much that the valuations did not look that stretched in hidnsight.
I would like to believe that the same story can work for stocks like Gruh and Repco. Affordable housing is one place where we have not seen any meaningful government action during the last 20 years. In the next 10 to 15 years, there could be some meaningful action.
These companies are very well positioned to capture momentum. We do not know the exact timing, but our view is that these stocks definitely offer value in the long term.
In case of stocks like HDFC and LIC, we really believe that competition from banks is not allowing them to generate great return ratios. The place where the small ones operate, it is difficult for the others to come in. So, while I agree that there is little scope for valuations to expand, that revenue growth will still give you reasonable returns in the years to come.
ET Now: The broad market expectations ahead of the Budget 2015 are that FM Jaitley will do something special for the housing sector. Your take?
Digant Haria: There are two aspects related to the housing sector. The first is on the budget side — what the Finance Minister can do is just increase the income tax exemption on a housing loan.
The interest exemption and the principal exemption could be increased by Rs 1 lakh. That basically motivates the middle class or the salaried class to go for a housing loan. That could be beneficial for the large housing finance companies and banks like HDFC as also LIC.
The second part is the more important one. The government has the target of housing for all by 2022. If the government has to implement it, there have to be more than 2 crore houses which have to be constructed in the next seven years. Most of these will have to be constructed for the economically weaker section of the society.
So I expect that in Budget 2015 there will be a lot of policy measures for the affordable housing space — which is housing below Rs 25-lakh ticket size. That is where a lot more action would happen versus the large ticket housing space.
ET Now: From a stock point of view, where do you think is the best risk-reward when it comes to the housing finance companies? The stocks have seen a very strong run-up on expectations that the EPFO could increase its stake, its investment and exposure to the segment.
Digant Haria: We think the best risk-reward lies in the smaller housing space. It's primarily because that space is very difficult to do business in. The small borrower does not really have all documents in place. Somebody who can actually appraise and lend money to them can make more profit.
Secondly, in the large housing space, there is a lot competition from banks. So, the profitability ratios get quite skewed. We have seen in the last two years that banks have got pretty aggressive in the large housing space. So we think that whatever benefit flows out of the budget and outside the budget in terms of affordable housing, a large part of it would accrue to the small housing financers like Repco, Gruh, Can Fin Homes or GIC Housing.
These are the ones who operate largely outside the metros and the large-ticket space. That is where we see a lot of value, and we think growth in that segment will continue for many years to come.
It is not for just a year or two that you will see 25% to 30% kind of growth there. Such growth can continue all the way up to 2022, if the government comes out with a meaningful policy on affordable housing. Therefore, we will place our bets on the small housing finance companies.
ET Now: Just about everyone who has bought into HFC stocks has done so with the assumption that there is earnings visibility and growth potential for the next 5 to 15 years. How much of this current template is already in the price?
Digant Haria: You are absolutely correct. If you talk of Gruh Finance, it trades at almost 10 times price to book, 27 times price to earnings on a forward basis. That makes it one of the most expensive stocks in the world, let alone India. You will hardly find any financials trading at such high valuations.
But if I go back in history, there were stocks — for example, the HDFC twins — that used to trade at such lofty valuations. It was back in 1998-2000. In the next 10 years that India boomed, the earnings and the opportunity size for these stocks expanded so much that the valuations did not look that stretched in hidnsight.
I would like to believe that the same story can work for stocks like Gruh and Repco. Affordable housing is one place where we have not seen any meaningful government action during the last 20 years. In the next 10 to 15 years, there could be some meaningful action.
These companies are very well positioned to capture momentum. We do not know the exact timing, but our view is that these stocks definitely offer value in the long term.
In case of stocks like HDFC and LIC, we really believe that competition from banks is not allowing them to generate great return ratios. The place where the small ones operate, it is difficult for the others to come in. So, while I agree that there is little scope for valuations to expand, that revenue growth will still give you reasonable returns in the years to come.
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