Housing Finance NBFCs - Small is indeed beautiful - Antique

The Housing Finance Companies (HFCs) continue to remain in a sweet spot given the multiple long term growth drivers - improving geographic reach, continued urbanization, affordable housing and emergence of Loan Against Property (LAP) as a retail product. Although banks and large HFCs compete aggressively in the salaried segment in urban areas, competition in nonmetro areas and specifically the self-employed segment is limited. Niche HFCs such as Gruh Finance and Repco Home Finance have developed robust models to operate in the under-served markets. They are well poised to make market share gains and deliver strong earnings growth over FY13-16E and beyond. Initiate on Repco Home Finance and Gruh Finance with a positive stance.

Huge opportunity emanating from Urbanization, thrust on affordable housing and LAP

The opportunity size for housing financiers continues to remain large given the multiple growth drivers - i) Continued urbanization will ensure strong housing demand in tier-2 and tier-3 cities, ii) excessive slum development and housing shortage in urban areas resulting in increased thrust on affordable housing, which is a ~Rs6,500bn opportunity, and iii) emergence of LAP as a retail product. Players in this space could witness higher than system loan book growth over 2013-2020 as these mega trends translate into meaningful lending opportunities.

Ease of appraisal determines competitive intensity, room for niche players exists

Ability to assess the borrower's repayment capabilities and understanding the legal & practical aspects of the property being financed determines the ease of appraisal. Regular cash-flows make salaried individuals the easiest borrower class to appraise. Similarly, clear property titles in metro areas increase the ease of property appraisal. As such, commercial banks as well as large HFCs continue to focus on salaried segments in metro and urban areas. This leaves ample room for the niche HFCs like Repco Home, Dewan and Gruh Finance even in metro and urban areas, not to mention the low level of competition in tier-2 and tier-3 cities.

NHB refinancing to aid borrowing cost for niche HFCs

While access to the debt markets allows large HFCs to mobilize resources at competitive rates, niche HFCs have benefited from National Housing Bank's (NHB) refinance schemes. NHB runs various schemes under which it re-finances the banks and HFCs. Most of these schemes are formulated to encourage lending in semi-urban, rural areas and periphery of urban areas where ticket sizes are generally low. Given the increasing budgetary support for NHB and government's increasing thrust on rural and affordable housing, niche HFCs will continue to enjoy re-finance support from HFCs and control their borrowing costs.

Sector economics attractive, initiate with BUY on Repco Home & Gruh Finance

Secured nature of lending, favorable regulatory regime in terms of capital adequacy norms, liability support from NHB and large opportunity size has enabled most HFCs to deliver reasonable long term returns. In the medium term, we expect this sector to be the largest beneficiary of the rate easing cycle as well. Niche HFCs remain our preferred picks to play the sector. Aggression from banks and withdrawal of favorable regulations remain the key risks.

Source : Equity Bulls

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