Top 3 HFCs struggle as liquidity tightens: should you buy their stocks?

Share prices of Dewan Housing, Indiabulls Housing, and PNB Housing have declined 30-80% in the past one year

The Reserve Bank of India (RBI) stating it’s not just the liquidity crisis for non-banking financial companies but that of solvency seems the latest blow to the sector, further weighing down stocks of Indiabulls Housing Finance (IHFL) and Dewan Housing Finance (DHFL), the third and fourth housing finance companies (HFCs) in order. 

Despite Monday’s generous support to these stocks as well as that of PNB Housing Finance (fifth in top five), they are still down 30-80 per cent in the last one year. For DHFL, the adverse developments with its deposit book put further pressure on the stock, taking it down nearly 10 per cent on Wednesday, while IHFL fell over 2 per cent after Tuesday’s development.

Interestingly, while only loan growth has been patchy for the market leaders — Housing Development Finance Corporation and LIC Housing — the next three players don’t seem to be out of the woods. DHFL is faced with multiple downgrades by rating agencies. The latest can be ascribed to stretched timelines for finding a strategic partner. 

PNB Housing has also been in the eye of downgrades. Backed by strong promoters — Punjab National Bank (PNB) and private equity investor Carlyle — the HFC is faced with other issues. PNB’s attempt to monetise its stake in PNB Housing hasn’t materialised. Even if business incrementally improves, the long-pending stake sale could keep PNB Housing stock on tenterhooks. 

Fundamentally, repairs are under way to recalibrate its liability franchise. During good times, PNB Housing relied on cheap short-term non-convertible debentures — about 40 per cent of its liability profile. With that source now turning expensive, it is getting its liabilities re-priced at a higher cost and bridging the asset liability management (ALM) gap.

In the case of IHFL, for the first time in many years, the housing financier’s assets under management (AUM) dipped 3 per cent sequentially in the March 2019 quarter (fourth quarter, or Q4), which can be attributed to high repayments and sell-down of loans. 

Though the pace of disbursement has seen some pick-up, net profit fell short of analysts’ estimates. Its proposal to merge with Lakshmi Vilas Bank should help it turn into a bank, but the same hinges on the regulator’s discretion. 

For investors, the dilemma is whether to stick to these names or migrate to safer pastures. The answer may not be straightforward, given the correction these stocks have undergone in the past one year. Expectations that the RBI may infuse liquidity — a reason for intermittent share price gains in these counters — have also been belied.

“Even if they find partners, it’s a long consolidation phase before clarity emerges and fund infusion happens. Investors should prefer to be risk averse,” says Siddharth Purohit of SMC Capital.

Nilesh Shah, managing director, Envision Capital, says the real question is whether to place ALM mismatch ahead of asset quality, or vice versa. “ALM mismatch seems to be the lesser evil,” he says. While asset quality hasn’t been disturbed much, with PNB Housing and IHFL maintaining gross non-performing assets at less than a per cent, the provision coverage ratio fell from the 25-per cent mark for both HFCs to 20.8 per cent and 22 per cent, respectively, in Q4. 

Also, with IHFL and DHFL resorting to securitise their loans to raise funds, capital has come at the cost of a leaner loan book. Importantly, for DHFL and IHFL, the ongoing strategic developments will be key to secure stable growth.

Given these concerns, experts say PNB Housing seems better of the three, if investors should look at the sector valuations perspective. It posted 6 per cent sequential growth in its AUM, compared to a dip reported by its peer. 

DHFL is yet to publish its Q4 results. “Sell-downs haven’t become so critical to PNB Housing, compared to its competitors. While 2019-20 (FY20) will be a year of weak growth, it won’t need a strategic investor or a banking channel for long-term survival,” says an analyst with a foreign brokerage. 

Valuations, too, at 1.1x FY20 book (from 2.1 six months back) have turned favourable for investors.