Home finance co valuations to drop

Last 10 years have provided a phenomenal wealth creation opportunity for the housing finance companies (HFCs) in India. Combined revenues of 6 listed HFCs have gone up over 6-fold, while the net profits rose exactly 5-fold in the last 10 years.  The individual market cap of these HFCs jumped anywhere from 5 to over 31 times in the same period.

However, the year 2017 could be a tough one for the HFCs. Of course, the long-term potential remains strong—falling interest rates and expected fall in real estate prices would ultimately make housing affordable in the next 2 to 3 years to a larger proportion of population. But the pressures on the competitive scenario and also on margins are emerging quite strongly for the HFCs now.  

The State Bank of India slashed lending rates as low as 8% based on marginal cost of funding. Banking sector’s non-food credit growth has fallen as low as 5.3% YoY whereas their deposits are still growing in strong double-digit (thanks to demonetization) at around 15% YoY.

Flushed with resources at relatively cheap marginal costs, the banks are likely to give tough competition especially to the HFCs, which are not subsidiaries of the banks. Recently, some of the HFCs have mobilised funds around 9% interest costs, making their competitive capability in terms of loan pricing a tough task.

Further, the competition in the housing finance industry is set to emerge fierce with entry of many new players. For example, most recently Piramal Enterprises (with a net worth of over Rs.14,000 crore) has announced its foray into this business. Many small finance banks are also likely to target affordable housing segments.

Demonetization and the government’s consequent proposal to re-monetize only to a limited extent would be another major threat to HFCs in the short-term. Limited re-monetization would curb the supply of black money, which in turn would reduce the demand for real estates. Hence, there is a lot of expectation on fall in real estate prices which  would eventually lead to considerable delays in demands for housing this year.    

In the last two years, large pharma companies saw steep contraction in their price-to-earnings (PE) multiples and market caps as the regulatory hurdles curtailed their profit growth. Similarly, large IT companies saw their PE multiples shrinking consequent to growth in their dollar revenues falling to single digits.

Hence, steep fall in the interest rates, demonetization, a renewed interests from the banks and emerging competition from the new HFCs would make a price to book value multiples of 5 to 10 times enjoyed by some of these HFCs unsustainable in the short-to medium terms.

The writer is founder & managing director, Equinomics Research & Advisory Pvt Ltd