Which is the best Housing Finance stock? Here is a detailed comparison of the Top 5 Housing Finance Companies (HFCs) on 23 different quantitative parameters based on Q3 FY22 results.
In India, housing finance can be raised from banks and housing finance companies. The Indian housing market has been dominated by Housing Finance Companies (HFCs). As per Investing.com, the Indian housing finance market witnessed a decent rise in home loan outstanding of ~16% from fiscal 2015 to 2020. It was primarily due to higher disposable income, robust demand, and a more significant number of competitors entering the vertical. In fiscal 2020, the total housing loan outstanding remained at Rs. 20.4 trillion. PSBs and HFCs accounted for 40% and 39% of the market share based on the housing loan outstanding in FY2019. Over the last few years, the share of housing finance companies has expanded, whereas the same has contracted for public sector banks in the market based on housing loans outstanding.
Please note that we have done this analysis with the only purpose of screening good companies. The analysis done is completely on a 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 decisions based on risk profile.
Housing Finance Sector Quantitative Analysis
Companies selected for Analysis:
We have selected the following five Housing Finance companies for our Quantitative Analysis.
Market Capitalization of 5 Housing Finance Stocks (Rs. Cr): (As of 14th March 2022)
- HDFC Limited- Rs. 4.12 Lakh Cr.
- Aavas Financiers- Rs.19,624 Cr
- LIC Housing Finance- Rs.19,285 Cr
- Can Fin Homes- Rs.7,886 Cr
- Indiabulls Housing Finance- Rs. 6,999 Cr.
The procedure of Analysis and its Interpretation
- These 5 Companies are analyzed on the following 23 parameters and ranked and scored accordingly. For example, a company with a higher PE ratio is provided with a lower rank, hence has scored lesser points. Similarly, if a company has higher RoE, it has a higher rank and has scored higher points.
- Here, 1 means that the company has scored the lowest points and 5 means the company has scored the highest points.
- In the end, we have added all the points together and companies are ranked accordingly.
Parameters of Quantitative Analysis:
1. PE Ratio:
- PE of a company means how much investors should pay for the stock based on their current earnings. A company with a lower PE Ratio is considered to be undervalued and has a huge potential to unlock its value. Hence, full points will be rewarded to that company.
- With the lowest PE Ratio of 6.10, Indiabulls Housing Finance gets the first position and 5 points. And Aavas Financiers with the highest PE of 59.98 among peers is awarded 1 point only.
2) P/B Ratio:
- P/B ratio or Price-to-Book Ratio is an important valuation ratio that evaluates whether a company’s stock is overvalued or undervalued by comparing the price of all outstanding ratios with the net assets of the company.
- It can be calculated by the following formula: Current Market Price of a Stock/ Book Value per share.
- Companies with lower P/B ratios are considered better and vice versa.
- In this case, Indiabulls Housing Finance grabs the first position with a PB ratio of 0.41. After Indiabulls Housing Finance, the lowest PB ratio is of LIC Housing Finance of 0.80 and hence given 2nd rank and 4 points.
- Here also, Aavas Financiers is awarded the last position for possessing the highest PB ratio of 7.52 among all other mentioned HFCs.
3) Return on Equity (RoE):
- Return on Equity (RoE) is another most common ratio used in fundamental analysis. We can calculate RoE by the following formula: Net Income/ Total Shareholder’s equity (Equity share capital + Reserves/Surplus).
- RoE signifies how well the company generates the return on shareholders’ investment.
- Here also, the company with higher RoE is considered to be strong and vice versa.
- Can Fin Homes is providing the highest return on equity of 16.6% and hence is rewarded with first position and full points as well.
- Aavas Financiers has the second-highest RoE of 13.2% after Can Fin Homes.
- In this scenario, LIC Housing Finance has performed the worst and is having an ROE of 7.1%, thereby have done ranking and scoring accordingly.
4) Return on Asset (RoA):
- RoA simply indicated how well the company can generate profits from its assets.
- The formula for calculating RoA: Net Income + Total Assets
- In the case of Banking & NBFC Institutions, Loans are the assets of these institutions and hence profit generated via interests, etc. by banks & NBFC are referred to as Return on Asset.
- Like RoE, the higher the RoA of a company, the stronger its position and vice versa.
- Here, Aavas Financiers outperforms all other HFCs by maintaining an RoA of 3.37% and grabs the first position as well.
- The second-best RoA among the top-5 HFCs is HDFC Limited at 2.60%.
- The last position and lowest points among all the HFCs are awarded to Indiabulls Housing Finance for maintaining an RoA of just 1.26%.
5) Institutional Holding (FII + DII) as a % of Free Float:
- Institutional Investors (FII + DII) as a % of Free Float has the highest stake in HDFC Limited, collectively of 88.9% and hence it is rewarded with full points and first rank.
- FIIs and DIIs also hold around 82.3% stake in Aavas Financiers and hence it secures the 2nd position in this criterion and scores 4 marks.
- Can Fin Homes has the lowest stake of institutional investors of 32% in the Company’s shareholding pattern and hence is given 1 point only.
6) Sales & Net Profit Growth 5 Years CAGR:
- In terms of Sales Growth, Aavas Financiers has registered the highest sales growth based on 5 years CAGR of 42% and hence given full points and first position.
- While Can Fin Homes with 13.3% and LIC Housing Finance with 9.8% sales growth on 5 years CAGR basis have obtained 2nd and 3rd positions respectively.
- Coming next to Profit Growth based on 5 years CAGR basis, then Aavas Financiers has delivered the maximum profit of 54.6% among all others and hence received full points and the first rank as well.
- Can Fin Homes manage to safeguard the second position with Profit Growth based on 5 years CAGR of 23.8%. HDFC Limited with profit growth of 11.1% receives 3 points and 3rd position as well.
- Indiabulls Housing Finance with profit de-growth of 14.3% got the least marks and the last position as well.
7) Sales & Net Profit Growth 3 Years CAGR:
- In the context of Sales Growth of Top-5 HFCs based on 3 years CAGR, Aavas Financiers once again has grabbed the first position with 30.8% sales growth.
- Next to Aavas Financiers are LIC Housing Finance, Can Fin Homes, and HDFC Limited with Sales growth of 10.2%, 10%, and 5.8% respectively.
- Talking about the profit growth of Top-5 HFCs based on 3 years CAGR, Aavas Financiers has registered the lowest Profit Growth of 46% in the last 3 Years and hence ranked last.
- In the same period, Indiabulls Housing Finance has reported a profit de-growth of 30.7% and obtained the last position.
8) Asset Under Management (AUM):
- HDFC Limited has reported the highest Assets Under Management (AUM) of Rs. 6,18,917 Cr. and hence gets a full point and the first rank.
- Next to HDFC Limited is LIC Housing Finance which is having AUM of Rs. 2.43 Lakh Cr. Here, Aavas Financiers is having the lowest AUM of Rs. 10,612 Cr. and hence gets only 1 point.
9) Market Cap vs AUM:
- HDFC Limited is having market capitalization of Rs. 4.12 Lakh Cr. 20 times larger than LIC Housing Finance, whose market capitalization is around Rs. 9,285 Cr., but in terms of AUM, the difference between the size of both the company is just 3 times.
10) Net Interest Income as a % of Operating Income:
- It reflects the earnings of the bank from its core operations. Net Interest Income refers to the difference between the Interest Earned and Interest Expenditure.
- The more the Net Interest Income for a bank, the better it is for a bank and vice versa.
- Can Fin Homes with the highest Net Interest Income as a % of Operating Income of 99.90% has been awarded 5 points and first rank.
- Aavas Financiers with 99.87% NII as a % of Operating Income receives the second position.
- The lowest marks and last position is scored by LIC Housing Finance with 98.94% NII as a % of Operating Income.
11) Average Loans to Value Ratio:
- Average Loan to Value Ratio means the value of the asset against which the loan has been granted. The lower loan to value ratio is considered better in terms of risk management.
- Here, LIC Housing Finance is having this ratio of 49% and hence the company gets first rank and full points in this quantitative analysis.
- Can Fin Homes is having the highest loan to value ratio of 81% hence it is rewarded with the least score and rank.
12) Retail Housing Loan Book %:
- In terms of Retail Housing Loan Book, Aavas Financiers is having the biggest retail loan book of 99.9%, and hence its ranked and scored accordingly.
- Indiabulls Housing Finance with the lowest exposure of 59% in the list gets the last rank and one point only.
13) Salaried % in Individual Loans:
- In terms of Salaried % in Individual Loans, LIC Housing Finance is having the highest salaried individuals base of 88%, and hence its ranked and scored accordingly.
- Indiabulls Housing Finance with the nil exposure towards a salaried employee in the list gets the last rank and one point only.
14) Gross NPA:
- LIC Housing Finance is having the highest Gross NPA of 5.04% among all other concerned players in the list and hence receives fifth rank and one point only.
- Can Fin Homes has the lowest Gross NPA among all at only 0.71% and hence given full points.
- HDFC Ltd is having Gross NPA of 2.32% and hence ranked 3rd rank. The reason is:
- Asset quality eroded QoQ on account of Individual Portfolio
- Individual segment’s Gross NPA Rose to 1.44% in Dec-21 from 1.10% in Sept-21 quarter
15) Provision Coverage Ratio (PCR):
- HDFC Limited has made the highest provision of 49% in these 5 HFCs and therefore given 5 points and first rank.
- Can Fin Homes with a Provision Coverage Ratio of 45.1% is ranked second.
- Whereas Aavas Financiers has the lowest Provision Coverage Ratio of 23.4% and hence given 1 point and 5th rank.
- Yield is the rate of return or the earnings generated on investment over the period.
- Here, Aavas Financiers is having the highest yield of 12.79% and is hence awarded 1st rank and 5th points.
- Can Fin Homes has been ranked last and given only 1 point due to its lower yield of 8.05%
17) Cost of Funds:
- Cost of funds refers to how much banks and financial institutions spend to acquire money to lend to their customers.
- Here, Can Fin Homes is having the lowest cost of funds of 5.56% and is hence awarded 1st rank and 5th points.
- Indiabulls Housing Finance acquires money at a higher cost which is around 8.10% and hence it is ranked last.
- Spread refers to the difference between the interest rate a financial institution pays to depositors and the interest rate it receives from loans.
- Aavas Financiers with the highest spread of 5.76% gets the first rank and 5 points as well.
- On this front, LIC Housing Finance has performed the worst with a Spread of just 1.83% and hence it is given only one point.
19) Net Interest Margin:
- Net Interest Margin can be calculated by dividing Net Interest Income by Yielding Assets. It is declared in terms of percentage.
- In this context, Aavas Financiers overperforms other HFCs and tops the list with the highest Net Interest Margin of 8.11% among these HFCs.
- Indiabulls Housing Finance has a nil Net Interest Margin and hence receives only one point and last rank.
20) Cost to Income Ratio:
Top-5 HFCs- Cost to Income Ratio
- Overall, Cost to Income can be considered as a performance ratio that presents the cost incurred for generating income.
- The lower the Cost to Income ratio, the better it is and vice versa.
- HDFC Limited has reported the lowest Cost to Income Ratio of 8.4% and hence ranked first.
- Aavas Financiers has the highest Cost to Income Ratio of 41..3% and therefore ranked and scored accordingly.
21) Capital Adequacy Ratio:
- Ideally, the Capital Adequacy Ratio of the bank, NBFCs, and HFCS should be a big number.
- Here, Aavas Financiers outscores others by reporting the highest Capital Adequacy Ratio of 50.9% among all others and grabs the first position as well as full points.
- LIC Housing Finance has a Capital Adequacy Ratio of 17% and is hence marked and ranked accordingly.
22) Franchise- Number of Branches:
- HDFC Limited has the largest network of branches of 65 branch1es in India as of December 2021 and hence tops the list with full points.
- Next to HDFC Limited is Aavas Financiers with 298 branches, 4 points, and a second position given.
- The third and fourth positions are acquired by LIC Housing Finance and Can Fin Homes with 282 branches and 187 branches respectively.
- Indiabulls Housing Finance has the lowest network of a branch of only 135 hence ranked last.
23) Final Score:
- Considering the above quantitative analysis on certain parameters, Aavas Financiers comes up as a clear winner among its peers with the highest 83 points.
- Can Fin Homes and HDFC Limited both get the second position with 74 points each.
- LIC Housing Finance scored 64 points and ranks fourth among its peers.
- Indiabulls Housing Finance with 50 points is at the bottom of the list.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.