Stock Review: HOUSING Development FINANCE Corporation (HDFC)

THE events that have unfolded in the past couple of days seem to have shaken the confidence of investors in the housing finance segment. Stocks of housing finance companies, including LIC Housing Finance (LICHFL) and Dewan Housing Finance (DHFL), have tumbled by 10-20% in the past two trading sessions. The latest troubles surrounding the sector are governance-related and that the sector looks structurally sound with growth being robust over the past few years.

   The fundamentals of the key players, including LICHFL, DHFL, and HDFC Bank, appear strong, backed by healthy credit growth and improving asset quality over the past three years. Also, over the past couple of quarters, the growth in disbursement has been driven in parts by higher average loan size, also called the ticket size of loans.

   According to a research report by Religare Securities, the average ticket size for HDFC and LICHF has grown by 22–23% CAGR in the past five years. Also, in the past three years, when property prices were relatively stable, the average ticket size rose 20% for HDFC and 31% for LICHF, says the report. Further, the disbursement growth has been complemented by a consistent improvement in asset quality. One concern is that there could be a short spike in LICHFL's NPAs, if the scam-tainted loan disbursals turn non-performing. But this is not likely to impact its long-term prospects because its exposure to builder loans is limited to 11.3% of its total portfolio and its NPAs are a negligible 0.08% even without taking into account the provisions for bad loans.

   In the near term, disbursement growth may slow down marginally due to a possible tightening of the credit-appraisal processes further by the housing finance companies after the latest scam. Another headwind could be on the margin front. The net interest margin, at a healthy 2.5% on an average now, may come under pressure due to the rising interest rates and growing competition from banks in the housing loan segment. Greater transparency in the credit processes and a high bottomline growth may help companies regain investor confidence.