PEs set sight on housing finance companies

Low delinquencies and attractive returns on equity are proving key attractions

With low delinquencies and attractive returns on equity, the housing finance business in India is beginning to attract private equity (PE) players’ interest. A recent case in point is Repco Home Finance, going for an initial public offering. Global PE firm Carlyle holds 23.75 per cent stake in Repco.

In January 2013, Wolfensohn Capital Partners picked up nearly 13 per cent from Carlyle in Repco. The deal valued the Chennai-based housing finance outfit between Rs 700 crore and Rs 800 crore. Carlyle had moved into Repco in early 2008.

The housing finance sector is attracting those PEs funds which are prepared to stay for a long run, according to R V Verma, chairman, National Housing Bank. The strong growth outlook, better quality assets (low defaults), profitability and stable regulatory and supervisory environment are key factors in driving their interest.

H V Harish, partner with Grant Thornton India, said large players such as Housing Development Finance Corp (HDFC) had lent credibility to the sector by building a viable business brick-by-brick. CMP Asia Ltd, a Carlyle group arm, had invested $650 million (Rs 3,530 crore today) in HDFC in May 2007.

While there is competition from banks for hawking loans, the gap between demand and supply (of housing units) is yawning. Funding the salaried class to buy houses is less risky with their assured income and very low delinquency.

Vibha Batra, senior vice-president and co-head financial sector rating at Icra, said it could be a challenge to get access to funds, especially from banks, for nascent housing companies. Typically, housing finance companies (HFCs) require a three-year record before lending institutions could consider extending the facility. It is here that PEs could play the crucial role of chipping in funds, albeit high cost equity capital, during the formative stage, she said. This equity capital by PE funds could be leveraged once  lenders develop comfort to lend, after a reasonable track record.

Establishing branch network, systems and processes and risk management practices are crucial for new HFCs to grow in sustainably. PE funds with presence on board can provide support in the formative stage.

Upcoming HFCs are also looking for PE money. DMI Finance, a Delhi-based non-banking finance company, has  just floated a housing finance unit and is looking for capital infusion. In January 2013, the Burman family, promoters of consumer goods major Dabur,  picked up a significant stake in DMI.

Shivashish Chatterjee, co-founder of DMI Finance, said  besides investing money, PE firms could help to nurture international best practices to keep cost practical. This would help convert higher top line growth into a robust bottom line. According to ratings agency CRISIL, while housing finance outfits have a higher cost of funds compared to banks, they have been able to maintain comparable spreads. With improved efficiencies, lower operating costs and better risk management, HFCs are reporting higher net interest margins. WHY PES ARE BULLISH ON HFCS

• Strong loan demand in dwelling starved market
• Decent and stable return on equity
•  Better quality assets (low-loan default record)
• Stable regulatory and supervisory regime