Comparison of Top 10 Housing Finance Companies

Which are the top 10 housing finance companies in India? Quantitative analysis of Indian mortgage financing sector based on following parameters.

Quantitative Analysis of Housing Finance Sector

Introduction

mortgage companies 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 mortgage lenders.

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Housing Finance Quantitative Analysis

Companies selected for analysis:

Housing Finance Companies Market Capitalization

• 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.
• mortgage lender, we have added all the points together and companies are ranked accordingly.

Valuation Ratios

1. PE

Housing Finance Companies PE

• 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.

2. PB

home finance companies in India

• PB is basically the price that an investor pays for the book value of the company per share.
• It is also a valuation metric and it is more relevant in the case of banks and other financial institutions as most of their assets and liabilities are listed at market price.
• Here, house loan companies is trading at the lowest PB whereas Avas Financiers is trading at the highest PB of 4.45 x.

3. Return on Equity (RoE)

• One of the 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 housing loan companies, RoCE is usually not that relevant. Hence we have not considered RoCE in this analysis.
• Here, HDFC Ltd tops the list with a RoE of 22%.
• PNB Housing Finance Ltd has the lowest RoE of 8.9% and hence it has the lowest rank.

4. Return on Assets (RoA)

• For housing finance companies, core assets are mainly the loans it has given to their customers. It’s 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 these companies.
• Return on Assets (RoA) is Net Income/Total Assets.
• Here, Avas Financiers has the highest RoA, followed by HDFC Limited.
• PNB Housing Finance and Dewan Housing Finance have the lowest RoA and hence are ranked at the 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 the 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, the more the institutional holding, the better it is.
• Here, as seen HDFC has the 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 the lowest institutional holding, and hence it is ranked at the 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 the lowest sales and net profit growth and hence it is ranked at the 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 the highest growth.
• This shows that there is consistency in the company’s sales and net profit growth.
• On the other hand, Indiabulls Housing Finance has the lowest sales and net profit growth. Hence, it is ranked at the 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 the 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.
• home loan companies have the lowest loan-to-value ratio, hence it ranks first.
• On the other hand, GIC Housing Finance and DHFL have the highest loan-to-value ratio and hence they are ranked in the last position.

11. Retail Housing Loans % of total loans

• Retail Loans are usually considered safer as compared to wholesale loans. Hence, a higher proportion of retail loans is considered good during normal circumstances.
• Here, Can Fin Homes have the highest proportion of retail loans in their loans and hence it ranks in the first position.
• HUDCO has the lowest proportion of retail loans and hence it is ranked last.

12. Salaried Individuals in Individual Loans

• The probability of salaried individuals defaulting on loans is lesser than those of non-salaried people. Hence, the higher the % of salaried individuals in individual loans, the better as it ensures to have stable asset quality.
• Here, LIC housing Finance has the highest % of salaried individuals, followed by HDFC.
• Aavas Financiers has the lowest salaried individuals in loan mix and hence it ranked at last position.

13. Gross NPA

• NPAs stands for Non- Performing Assets. These are the loans that have turned into bad loans, thus affecting the company’s profitability.
• Aavas Financiers have the lowest Gross NPAs, thus indicating superior asset quality. Hence it is ranked at the first position.
• Here, DHFL has the highest Gross NPAs, and hence it is ranked lowest.

14. Moratorium as a % of total loans

• A moratorium is a period in which borrowers can skip EMIs. Once the moratorium is over, the borrower will start paying in EMIs. However, the borrower has to pay interest on the period of the moratorium as well.
• Till 31st August ’20, RBI had mandated all financial institutions to provide a moratorium to the customers if required.
• However since the pandemic has affected salaried, self-employed personnel as well as corporates, the chances of loans under moratorium turning to bad loans is higher.
• Thus, the lower the loans under the moratorium, the better.
• Here, Can Fin Homes has the lowest % of loans under the moratorium and hence it ranks first. PNB Housing Finance has the highest % of loans under the 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.
• With a NIM of 6.2%, Aavas Financiers again tops the list. Indiabulls Housing Finance, on the other hand, has the lowest NIM of 0.85% and therefore ranks lowest.

16. Cost to Income

• Cost to income is another efficiency ratio that affects profitability. The lower the cost-to-income ratio, the better it is.
• HDFC Ltd has the lowest cost to income, which also indicates that the company is managing its costs quite efficiently.
• HUDCO has the highest cost-to-income ratio and hence it is ranked at the last position.

17. Capital Adequacy Ratio (CAR)

• The capital Adequacy ratio is basically capital available as compared to the company’s risk-weighted assets. Higher the CAR, the better it is as it indicates the capacity of the company to sail through the COVID pandemic and its after-effects.
• Here, HUDCO has the highest CAR of 57% as there is some capital infusion by the 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 the lowest CAR and hence they are ranked lowest.

18. Number of outlets

• Higher the number of branches, the 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 the first position.
• GIC Housing Finance has the least number of outlets pan India and hence it is at the lowest position.

Final Points

Housing Finance Companies ranked as per Quantitative Analysis

• As seen, HDFC Ltd tops the list followed by Can Fin Homes, Aavas Financiers and other companies.