Limited loan growth gains for smaller home finance companies

HFCs give smaller-sized loans largely to the self-employed borrowers where banks' presence is low

Year 2017 has started on a good note for affordable housing finance companies (HFCs) such as Gruh Finance (Gruh), Repco Home Finance (Repco), Can Fin Homes (Canfin), among others. First, a slew of lending rate cuts from banks will benefit these companies more than their larger peers. This is because the larger HFCs operate in segments wherein they compete directly with banks and, hence, have limited pricing power. 

The affordable HFCs, on the other hand, give smaller-sized loans largely to the self-employed borrowers where banks have a lower presence. Also, unlike these HFCs, which have high dependence on bank borrowings, the larger HFCs meet their funding needs from the bond markets. Thus, the former will benefit more from reduced bank lending rates.

Second, the Prime Minister recently extended the interest subvention benefits under the Pradhan Mantri Awas Yojana (PMAY) to include loans of higher ticket sizes. In its earlier avatar, the scheme provided interest subsidy of 6.5% for housing loans up to Rs 6 lakh.

According to the new scheme, home loans between Rs 6 lakh and Rs 9 lakh will attract interest subsidy of four% and those worth Rs 9 lakh to Rs 12 lakh will get subsidy of three%. Even as the exact details of this scheme are awaited, the jury is out on whether it will boost affordable HFCs loan growth meaningfully.

Sunesh Khanna, analyst at Motilal Oswal Securities, for instance, believes this move will add to the strong growth witnessed in affordable home loans so far.
 

Not all agree. This is because the PMAY scheme has had limited success so far. 

“This scheme has some clauses, which limit the size of the house to below 30 square metres for economically weaker segment and less than 60 square metres in the lower income group segments. This clause has been a big constraint as outside Mumbai and Delhi, people want to live in bigger houses, which are not covered in this scheme,” says Digant Haria of Antique Stock Broking. 

In fact, Gruh Finance management, too, indicated that only 13,500 families availed the benefits of this scheme till October 2016 with total subsidy worth only Rs 250 crore. More details on this scheme are likely in the coming days and would provide clarity on whether some of these clauses are eased. Overall, this scheme re-emphasises the government’s thrust on the affordable housing segment, which is a positive for these HFCs.

Although the scrips of Repco and Canfin surged 1.7% and 4.3%, respectively, on Monday, they are lower than pre-demonetisation levels. Demonetisation has pulled down these stocks meaningfully and these now trade at attractive valuations of three to four times FY17 estimated book value.

The Gruh scrip, though, has been most resilient and has corrected only a% since November 8 when the note ban was announced. At current levels, the stock commands hefty valuations of 12 times FY17 estimated book. These two factors are also reflected in the stock’s two% gains in Monday’s trade.

Although most analysts are positive on these companies’ business prospects, they are keeping away from Gruh given its high valuations. Any meaningful correction in this scrip can be used to enter the stock, believe analysts.