Quantitative Analysis of Housing Finance Sector
Housing finance sector was growing at a healthy rate before the ILFS and DHFL crisis. Post that due to liquidity crunch and the corona virus pandemic, the sector is impacted badly. This is because of the de-growth of housing credit as well as worsening asset qualities due to lower disposable income. Let us do a quantitative analysis of housing finance sector in India and find out how the sector is treading through these difficult times.
Please note that we have done this analysis with the only purpose of screening good companies. Analysis done is completely on quantitative basis. No suggestions are being made to directly go and invest in the top scoring companies of this analysis. We suggest that one should perform a qualitative analysis of top scoring companies in this analysis and take investment decision based on risk profile.
Housing Finance Quantitative Analysis
Companies selected for analysis:
- These 10 companies are analysed on following parameters and ranked and scored accordingly. For example, if a company has higher PE ratio, it has a lower rank , hence has scored lesser points. Similarly, if a company has higher RoE, it has higher rank and has scored higher points.
- Here , 1 means that the company has scored lowest points and 10 means the company has scored highest points.
- At the end, we have added all the points together and companies are ranked accordingly.
- PE is basically how much an investor pays for each rupee of profit earned. Here, we have considered consolidated PE.
- Repco Home Finance is trading at cheapest valuations, whereas Avas Financiers has the highest PE.
- HDFC is trading at a moderate PE of 14.5x
- Since PE ratio for DHFL is not available, it is ranked at last position.
- PB is basically the price that an investor pays for book value of the company per share.
- It is also a valuation metric and it is more relevant in case of banks and other financial institutions as most of their assets and liabilities listed at market price.
- Here, Indiabulls Housing Finance is trading at lowest PB whereas Avas Financiers is trading at highest PB of 4.45 x.
3. Return on Equity (RoE)
- One of return ratios that is used widely in fundamental analysis is Return on Equity (RoE) which is Net Income/ Total Shareholder’s equity (Equity share capital + Reserves/Surplus).
- For banks and financial institutions, RoCE is usually not that relevant. Hence we have not considered RoCE in this analysis.
- Here,HDFC Ltd tops the list with RoE of 22%.
- PNB Housing Finance Ltd has the lowest RoE of 8.9% and hence it has lowest rank.
4. Return on Assets (RoA)
- For housing finance companies, core assets are mainly the loans it has given to its customers. Its core operating income is basically interest earned on these loans.
- Hence, it is important to look at how much income these assets are earning for the these companies.
- Return on Assets (RoA) is Net Income/Total Assets.
- Here, Avas Financiers has highest RoA, followed by HDFC Limited.
- PNB Housing Finance and Dewan Housing Finance have lowest RoA and hence are ranked at lowest position.
5. Pledged Promoter Shares
- Pledged Promoter shares is also a parameter of corporate governance and ideally there should not be any shares pledged by promoter.
- Here, except for DHFL , none of the companies have any pledged promoter shares.
- Hence DHFL is ranked and scored lowest.
6. Institutional Holding (FII + DII)
- According to corporate governance parameters, more the institutional holding, the better it is.
- Here, as seen HDFC has highest institutional holding, followed by Indiabulls Housing Finance.
- Since HDFC is a part of NIFTY 50, it has passive funds inflow, resulting in higher institutional holding.
- Here, HUDCO has lowest institutional holding and hence it is ranked at last position.
7. 5 Year Sales and Net Profit growth
- If we take a look at 5 Year Sales and Net Profit growth, Avas Financiers has stellar 5 Year Sales and Profit growth.
- On the other hand, Indiabulls Housing Finance has lowest sales and net profit growth and hence it is ranked at last position.
8. 3 – Year Sales and Net Profit growth
- If we take a look at 3 year sales and net profit growth, here also Avas Financiers leads the list with highest growth.
- This shows that there is consistency in company’s sales and net profit growth.
- On the other hand, Indiabulls Housing Finance has lowest sales and net profit growth. Hence, it is ranked at last position.
9. Net Interest Income (NII) as a % of Operating Income
- Net Interest Income (NII) is Interest Income – Interest Expended.
- This metric shows how much operating profit is earned from company’s core business.
- Here, GIC Housing Finance has the highest NII share in operating income, whereas Indiabulls Housing Finance has lowest.
10. Average Loan to Value
- Loan to Value is the ratio of borrowed money divided by the appraised value of the property.
- The lesser the Loan to Value ratio, the better it is. This means that the company is conservative in providing finance and thus ensures the asset quality of the company.
- Here, Repco Home Finance has lowest loan to value ratio , hence it ranks first.
- On the other hand, GIC Housing Finance and DHFL have highest loan to value ratio and hence they are ranked at last position.
11. Retail Housing Loans % of total loans
- Retail Loans are usually considered safer as compared to wholesale loans. Hence, higher proportion of retail loans is considered good during normal circumstances.
- Here, Can Fin Homes have highest proportion of retail loans in their loans and hence it ranks at first position.
- HUDCO has lowest proportion of retail loans and hence it is ranked at last.
12. Salaried Individuals in Individual Loans
- Probability of salaried individuals defaulting on loan is lesser than those of non-salaried people. Hence, higher the % of salaried individuals in individual loans, the better as it ensures to have stable asset quality.
- Here, LIC housing Finance has highest % of salaried individuals, followed by HDFC.
- Aavas Financiers has lowest salaried individuals in loan mix and hence it ranked at last position.
13. Gross NPA
- NPAs stand for Non- Performing Assets. These are the loans which have turned into bad-loans, thus affecting company’s profitability.
- Aavas Financiers have lowest Gross NPAs , thus indicating superior asset quality. Hence it is ranked at first position.
- Here, DHFL has highest Gross NPAs and hence it is ranked lowest.
14. Moratorium as a % of total loans
- Moratorium is the period in which borrower can skip EMIs. Once the moratorium is over, borrower will start paying in EMIs. However borrower has to pay interest on the period of moratorium as well.
- Till 31st August ’20, RBI had mandated all financial institutions to provide moratorium to the customers if required.
- However since pandemic has affected salaried , self employed personnel as well as corporates, chances of loans under moratorium turning to bad loans is higher.
- Thus, lower the loans under moratorium, the better.
- Here, Can Fin Homes has lowest % of loans under moratorium and hence it ranks first. PNB Housing Finance has highest % of loans under moratorium and hence it ranks last.
15. Net Interest Margin
- Net Interest Margin (NIM) is Net Interest Income/ Total income bearing assets. Higher the NIM, the better it is.
- Here, Aavas Financiers again tops the list with NIM of 6.2%. On the other hand, Indiabulls Housing Finance has lowest NIM of 0.85% and hence it is at lowest rank.
16. Cost to Income
- Cost to income is another efficiency ratio which affects the profitability. The lower the cost to income ratio, better it is.
- HDFC Ltd has lowest cost to income, which also indicates that the company is managing its costs quite efficiently.
- HUDCO has highest cost to income ratio and hence it is ranked at last position.
17. Capital Adequacy Ratio (CAR)
- Capital Adequacy ratio is basically capital available as compared to company’s risk weighted assets. Higher the CAR, the better it is as it indicates the capacity of the company to sail through COVID pandemic and its after effects.
- Here, HUDCO has highest CAR of 57% as there is some capital infusion by government.
- Aavas Financiers also has a good CAR of ~56%. Overall except for DHFL, this sector seems to be well capitalized.
- DHFL and LIC housing Finance have lowest CAR and hence they are ranked lowest.
18. Number of outlets
- Higher the number of branches, better the geographical diversification a company has.
- This also plays a part in keeping asset quality under check. However it comes with the cost of increased operating expenses.
- HDFC has a very good reach across the country with 585 outlets. Hence it is ranked at first position.
- GIC Housing Finance has least number of outlets pan India and hence it is at lowest position.
- As seen, HDFC Ltd tops the list followed by Can Fin Homes, Aavas Financiers and other companies.