hfy

Housing Finance

Company

2021

14 January

name

Sector update | Sector: HFC

Record

low

interest

rates

Stagnant real

estate prices

Govt.

Incentives/

Reforms

A Home Run!

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Research Analyst: Alpesh Mehta

(Alpesh.Mehta@MotilalOswal.com) |

Piran Engineer

(Piran.Engineer@MotilalOswal.com)

Nitin Aggarwal

(Nitin.Aggarwal@MotilalOswal.com) |

Divya Maheshwari

(Divya.Maheshwari@MotilalOswal.com)

Housing Finance: A Home Run!

Improving Affordability | Supportive regulation| Healthy profitability

01

Page #3

02

Page #7

Summary

Revival in the RE space

03

Page #14

04

Page #16

Consolidation in the HFC

space positive for incumbents

Minimal Covid-19 impact on

asset quality

05

Page #18

06

Page #22

Valuation & View

Key takeaways from business

leaders

COMPANIES

HDFC

LIC Housing Finance

AAVAS Financiers

Can Fin Homes

PNB Housing Finance

Repco Home Finance

Aadhar Housing Finance

Home First Finance

Well-placed to capture market share .................... Pg24

Business turning around ....................................... Pg30

Building a foundation for the long term ................ Pg35

A balanced player ................................................. Pg56

Preserving capital; De-risking the balance sheet ... Pg71

Prioritizing asset quality over growth .................... Pg75

Pan-India affordable housing finance player ......... Pg79

A niche player ....................................................... Pg84

Sector Update | January 2021

Thematic: Housing Finance

Housing Finance

A Home Run!



Improving Affordability | Supportive regulation| Healthy profitability

After 5 years of stagnant Residential Real Estate (RE) sales, the RE and the Housing

Finance sectors have bottomed out. Affordability is the best in the past two decades,

with flattish RE prices over FY15-20 and price cuts triggered by the COVID-19

pandemic. In addition, current interest rates (starting at sub-7% for prime customers)

are at an all-time low and ~300bp lower than those five years ago. Economic

indicators point to an upward trend and the resolve of the government and regulator

to solve issues affecting the sector is also encouraging.

Over the past four years, housing sales in India’s top seven cities have exceeded

launches, resulting in a meaningful decline in inventory overhang. While sales

plummeted ~65% YoY, after the lifting of COVID-19 lockdown restrictions there are

early signs of a revival now. Sales in Mumbai have picked up since Sep’20 and even

grew on a YoY basis in Nov’20. Over the past four years, we have noted a

consolidation in market share for the top-10 developers in the top-6 cities.

Over the past two years, the top two Housing Finance companies (HFCs) have

outperformed on account of strong parentage and access to debt capital. These

players have been able to capture the revival in the RE space, with disbursements

surpassing pre-COVID levels. We expect these players to disproportionately benefit

from a pick-up in RE volumes and consolidation in the builder space. Given the sharp

decline in the cost of funds and moderate impact of the lockdown on asset quality,

profitability is likely to remain healthy.

With the government’s focus of ‘Housing for All’ by 2022, Affordable Housing has

seen strong growth over the last six years. Smaller players like Can Fin Homes (CANF),

Aavas Financiers (AAVAS), Aadhar Housing Finance, and Repco Home Finance have

created a niche in this space and are capitalizing on this multi-year opportunity.

As credit costs normalize in FY22, we expect HFCs under our coverage to generate 12-

17% RoE in FY22-23E. Similar to the RE space, we expect further consolidation in the

HFC sector to play out, with the top two players gaining market share. While

valuations have re-rated in the past 2-3 months, the risk-reward is favorable in our

view. HDFC remains a preferred pick in the sector. We are initiating coverage on

AAVAS/CANF with a Neutral/Buy rating. We maintain our Neutral stance on PNB

Housing Finance (PNBHF) due to capitalization challenges.



Loan growth to pick up

AUM gr. %

FY20 FY21E FY22E

HDFC

11.9

11.0

12.5

LICHF

7.8

8.1

8.3

PNBHF

-1.6

-2.5

6.8

CANF

12.6

4.5

8.7

AAVAS

31.2

18.9

19.3

Repco

9.1

4.9

7.1





Credit costs to normalize by FY22E

Credit cost %

FY20 FY21E FY22E

HDFC

0.4

0.3

0.3

LICHF

0.5

0.4

0.4

PNBHF

1.8

1.1

1.1

CANF

0.3

0.6

0.3

AAVAS

0.3

0.7

0.4

Repco

0.5

0.5

0.4



Multi-year opportunity – Sector tailwinds to accelerate growth…

Housing Finance is a strong multi-year growth opportunity given the trend in

urbanization, nuclearization, favorable demographics, and low housing penetration.

In addition, access to finance has improved considerably over the last decade.

Interest rates are at all-time lows (down ~300bp over the past five years), thus

enhancing affordability.

Other tailwinds include:

a) fall in RE prices post-COVID,

b)

cut in stamp duty in a few large states,

c) strong and broad-based economic revival

leading to job creation and income growth,

and

e) focus of the government on

resolving the issue of stuck RE projects

have further accelerate growth. As a result,

affordability has improved to the best ever in the past two decades (refer Exhibit 2).

January 2021

3

Thematic: Housing Finance

AAVAS has the highest RoA…

RoA (%)

FY20 FY21E FY22E

HDFC

1.8

1.8

1.8

LICHF

1.2

1.3

1.3

PNBHF

0.8

1.2

1.4

CANF

1.9

2.0

2.0

AAVAS

3.8

2.8

3.3

Repco

2.4

2.4

2.3

…and focused efforts on Affordable Housing

…but CANF the highest RoE

RoE (%)

FY20 FY21E

HDFC

13.1

12.5

LICHF

14.3

15.8

PNBHF

8.3

11.4

CANF

19.1

18.7

AAVAS

12.7

10.6

Repco

16.9

15.2

FY22E

12.6

15.1

12.2

17.0

12.8

14.0

Over the past five years, Affordable Housing has been the key growth driver for the

industry, led by the huge stimulus from the government, given its target of ‘Housing

for All’ by 2022.

The government tackled the demand side with its flagship Credit

Linked Subsidy Scheme (CLSS). Till date, over 1.1m families have benefited from

the interest subsidy. It even extended CLSS to MIG customers by one-year to

Mar’21. In order to tackle the supply side, the government incentivized house

construction under the Pradhan Mantri Awas Yojana (PMAY). Over 3.4m houses

have been constructed and allotted so far.

Developers have been offered 100% tax

deduction on construction of affordable housing units up to 31

st

March, 2021.

HFC consolidation underway; top two players to benefit disproportionately

Over the past two years, large banks like SBIN, ICICIB, and AXSB have been

aggressive in home loans. Given the lack of growth in corporate lending, these

banks are likely to remain aggressive in the foreseeable future. However, HFCs with

strong parentage are able to compete effectively with banks given the sharp decline

in their incremental cost of funds (three-year borrowing at ~5%). Given the huge

scope of the market, these players have enough opportunity to grow despite the

intensifying competition.

While HFCs are expected to lose market share to banks

on the whole, the top two HFCs should maintain or gain market share.

Best asset quality performance across cycles

Retail Housing Finance has demonstrated the best asset quality performance across

cycles due to higher equity of the borrower, strong emotive value attached to

security, and less speculative activities. With most sectors of the economy reviving

close to pre-COVID levels, the fear of job losses or salary cuts has abated.

Most

companies are confident of restricting the stressed pool to less than 2-3% of

loans.

Within the developer segment, the fear of delinquencies or restructuring has

also abated due to improvement in demand and the ability of larger players to raise

funds and service their debt.

There has been some consolidation in the RE space,

with the share of top-10 developers in housing sales rising to 31% from 23% over

CY16-20E in the top six cities.

Valuations attractive; reiterate positive stance on the sector

Post COVID-19, valuations for HFCs corrected sharply due to concerns on: a) decline

in loan growth, b) pressure on spreads owing to lending rate pressures from banks

and tight liquidity, and c) deterioration in asset quality on account of job losses and

stressed developers. However, with a sharper than earlier anticipated economic

recovery, disbursements for larger players have picked up meaningfully. Abundant

system-wide liquidity has led to a sharp decline in the cost of funds. Asset quality

concerns are reducing. HDFC and Indiabulls Housing Finance (IHFL) have also raised

capital. The stance of the regulator is incrementally more supportive. We believe

the excess liquidity and low interest rate environment would sustain in the near-to-

medium term, which augurs well for the RE sector, and in turn, for HFCs. With

growth and profitability normalizing, the sector is likely to see a re-rating. The risk-

reward at this point is favorable. We reiterate HDFC as our top pick. We are also

initiating coverage on AAVAS with a Neutral rating and CANF with a Buy rating.

January 2021

4

Thematic: Housing Finance

KEY EXHIBITS

Exhibit 1: Comparison of various HFCs on key parameters

AUM (INR b)

AUM mix (%)

Home Loans

Corporate

LAP, NRP, etc.

Share of off-BS AUM (%)

Customer Mix (%)

Salaried

Self-employed

Borrowings (INR b)

Borrowing mix (%)

Banks & FIs

NCD

CP

Deposits

Others

Key Financial Parameters (FY20)

PAT (INR b)

RoA (%)

RoE (%)

Loans/Equity (x)

HDFC

5,403

70

25

5

12

80

20

4,209

21

37

7

35

0

96.2

1.8

13.1

6.5

LICHF

2,133

77

7

16

0

87

13

1,903

23

60

3

9

5

24.0

1.2

14.3

11.7

PNBHF

812

57

17

26

18

54

46

662

29

21

3

25

22

6.5

0.8

8.3

9.1

CANF

208

90

0

10

0

71

29

187

60

17

0

2

21

3.8

1.9

19.1

9.9

AAVAS

84

74

0

26

20

35

65

60

48

24

0

0

28

2.5

3.8

12.7

2.8

REPCO

121

81

0

19

0

48

52

103

82

3

0

0

15

2.8

2.4

16.9

6.8

Source: MOFSL, Company

Exhibit 2: Affordability is the best over past two decades

Affordability

5.9

5.3

5.1

5.1

5.1

4.7

4.3

4.7

5.0

4.5

4.7

4.8

4.6

4.7

4.6

4.4

4.1

3.8

3.7

3.5

3.3

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: MOFSL, HDFC; Note: Affordability = Property Value/Annual Income

Exhibit 3: Slow growth in housing prices

Housing Price Index

101

103

104

106

107

107

109

113

112

112

Exhibit 4: Top-7 cities have witnessed stagnant prices

4

3

Price (INR/sqft)

2

2

1

Growth (%)

99

100

98

97

1

-1

6,605

6,869

6,993

7,157

7,254

7,294

7,207

Source: NHB

Source: PropEquity; Note: CY20 data as of Oct ‘20

January 2021

5

Thematic: Housing Finance

Exhibit 5: Sales have exceeded launches in the prior 3 years leading to lower inventory

599

Sales (Mn sqft)

567

474

New Launches (Mn sqft)

412

381

358

354

446

425

246

295

294

352

367

309

211

184

376

Source: MOFSL, PropEquity; Note: CY20 data as of Oct ‘20

Exhibit 6: Market share of the Top-2 HFCs in NBFCs improving since FY18; Expected to continue (%)

HDFC

26

26

48

32

27

42

31

28

41

31

27

40

30

27

41

LICHF

31

26

40

PNBHF

Others

32

25

40

33

23

39

34

21

40

31

21

41

25

23

45

Source: MOFSL, Company

Exhibit 7: Sharp decline in NCD issuance cost for HDFC…

Interest Rate (%)

7.35

6.99

6.95

7.25

5.40

4.95

5.78

Date of Issue

10-Feb-20

13-Feb-20

27-Apr-20

17-Jun-20

11-Aug-20

09-Sep-20

25-Nov-20

Tenure (yr)

5.0

3.0

3.0

10.0

3.0

2.0

5.0

Source: NSE

Exhibit 8: …and LICHF to keep spreads stable

Interest Rate (%)

7.45

7.97

7.33

6.57

5.45

6.19

5.53

Date of Issue

10-Jan-20

28-Jan-20

12-Feb-20

12-Feb-20

26-Aug-20

25-Sep-20

01-Dec-20

Tenure

3.1

10.0

5.0

1.4

3.0

4.2

4.1

Source: NSE

January 2021

6

Thematic: Housing Finance

Revival in the RE space

Record low interest rates, economic revival, government impetus key drivers











After a sustained downcycle, the residential real estate sector has bottomed out, in

our view. Affordability has been the best over the past two decades, driven by wage

inflation exceeding real estate price inflation, record low interest rates and reduction

in stamp duty by some state governments. Interest rates currently are ~300bp lower

than levels five years ago.

More importantly, we note that the government and the regulator are firm on

resolving issues that have been plaguing the sector in the past 4-5 years. We expect

the regulator to favor high liquidity and low interest rates at the system level to

revive growth, which augurs well for the RE sector.

The AIF set-up by the government has seen some early traction. In addition, the

government has taken several steps to reduce inventory by announcing GST cuts on

under-construction and affordable housing projects. Lastly, the flagship PMAY project

of the government is witnessing improved traction.

The Reserve Bank of India (RBI) is also being supportive. It has reduced RWA for

housing loans, allowed extension of DCCO and one-time restructuring without

downgrading accounts to NPAs.

Over the past three years, housing sales in the top-7 cities exceeded launches,

resulting in a meaningful decline in inventory overhang. While sales plummeted ~65%

YoY immediately post the lockdown, there are early signs of revival. Moreover, we

note of a consolidation in market share of the top-10 developers in the top-6 cities

over the past four years.

Record low interest

rates, increased

affordability and

continued government

support make us positive

on the RE sector.

Why are we incrementally bullish on the real estate sector?







Affordability has improved to its best over the past two decades, driven by a

combination of largely stagnant real estate prices over the past five years

(significant time correction), wage inflation and multi-year low interest rates.

Post-COVID, developers have reduced prices (directly/indirectly) by 10-15%,

which has led prices back to 2014-15 levels.

Firm resolve on the part of the government and regulator to solve issues

plaguing the real estate sector and to boost affordable housing as a sector

remains the key for economic revival.

Post the demand shock immediately after the lockdown, demand has been on

an uptrend and is likely to revert to pre-COVID levels soon.

Additionally,

demand has outpaced supply over the past few years, leading to a reduction

in inventory overhang during the same period.

January 2021

7

Thematic: Housing Finance

REAL ESTATE SECTOR ON THE CUSP OF RECOVERY

1

3 REASONS TO

TURN

POSITIVE ON

REAL ESTATE

Improved affordability,

Low interest rates

2

Sales have exceeded launches in

last 3 years

3

Firm resolve of GoI and regulator

to solve real estate sector issues

Source: MOFSL

Affordability best now

over the past two

decades.

Affordability better than ever now in the past two decades







Over the past few years, property prices in most metros have been largely

stagnant, driven by a large supply-demand mismatch. On the other hand,

wages have grown in line with or above inflation.

According to HDFC, affordability (property price/annual income) has declined

from 4.7x in 2010 and 4.4x in 2015 to 3.3x in 2020.

In addition, the cost of borrowing has declined to multi-year lows.

Interest

rates on home loans at ~7% (for Prime category borrowers) are 150-200bp

lower than those three years ago.

As a result, EMI has reduced by ~10% for a

20-year loan (refer Exhibit 10).

Exhibit 9: Affordability is the best over past two decades

Affordability

5.9

5.3

5.1

4.7

4.3

4.7

5.0

5.1

5.1

4.5

4.7

4.8

4.6

4.7

4.6

4.4

4.1

3.8

3.7

3.5

3.3

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: MOFSL, HDFC; Note: Affordability = Property Prices/Annual Income

January 2021

8

Thematic: Housing Finance

Exhibit 10: Sensitivity of EMI to change in interest rate and ticket size

150bp reduction in

interest rates reduces

EMI by ~10%.

Interest Rate/Loan Amount (INR '000)

100

110

120

130

140

6.5%

746

820

895

969

1,044

7.0%

775

853

931

1,008

1,085

7.5%

806

886

967

1,047

1,128

8.0%

836

920

1,004

1,087

1,171

8.5%

868

955

1,042

1,129

1,215

Source: MOFSL, Company; Note: 20 year loan



According to NHB’s Residex, housing prices for the top-50 cities has increased

12% cumulatively over the past 3-4 years. Our interactions with managements

suggest that this is largely due to non-metro locations rather than the top 7

cities, wherein prices have been flattish/modestly growing over the past 3-4

years. Post the lockdown, developers have been proactive in giving discounts,

freebies and innovative payment schemes to lure buyers.

Exhibit 12: Top-7 cities have witnessed stagnant prices

4

3

Price (INR/sqft)

2

1

1

7,207

-1

6,605

6,869

6,993

7,157

7,254

7,294

Growth (%)

Exhibit 11: Slow growth in housing prices

Housing Price Index

113 112 112

106 107 107 109

100 99 98 97 103 101 104

2

Source: NHB

Source: PropEquity; Note: CY20 data as of Oct ‘20

Reduction in GST, set-up

of AIF, improved traction

in PMAY – key support

measures of the

government.

Firm resolve of GoI and regulator to tackle RE sector issues







Over the past few years, the government has taken several steps to boost the

housing sector, especially affordable housing. The most prominent scheme,

PMAY (Pradhan Mantri Aawas Yojna), has witnessed fair success over the past

three years.

Other initiatives include



tax breaks for affordable housing,



GST reduction on under-construction housing projects from 12% (with

Input Tax Credit (ITC)) to 5% (without ITC), and on affordable housing

projects from 8% (with ITC) to 1% (without ITC) from 1

st

Apr’19,



extension of deadline for CLSS-MIG scheme under PMAY by one year up to

Mar ’21, and



additional tax deduction of up to INR0.15m for interest paid on housing

loans sanctioned in current fiscal for homes priced is below INR4.5m

In order to resolve stuck projects across the country (estimated at 458k units),

the government has introduced a fund called SWAMIH (Special Window for

Affordable and Mid-Income Housing) with a corpus of INR105b in 2019. In

addition to the government, the fund has received investments from

institutional investors too. The objective of this fund is to provide last-mile

January 2021

9

Thematic: Housing Finance









financing to stuck projects.

So far, SWAMIH has approved INR120b to 123

stuck projects comprising 80k+ housing units

Recent stamp duty cuts announced by the Maharashtra, MP and Karnataka

governments have also helped improve demand

Cut in construction premiums by 50% by the Maharashtra government

Allowance of one-time restructuring of real estate projects as well as

extension of DCCO for commercial projects by one year without change in

classification, and

Reduction in risk weights on housing loans based on the LTV v/s ticket size

earlier should also lead to higher push from financiers.

Inventory overhang is

down from record 43

months in 2017 to 31

months in 2019.

Real estate inventory overhang declining over past few years







In the prior four calendar years, sales in the top-7 cities of India exceeded new

launches, leading to a decline in the inventory overhang (calculated as unsold

inventory/prior 4-quarter sales) from a record 43 months in 2017 to 31

months in 2019.

Post the outbreak of COVID-19, home sales plummeted, falling 65% YoY in

1QFY21 to 8m sqft in the top-7 cities.

However, with increased discounts offered by developers, reduction in stamp

duty in some states and reduction in home loan rates by lenders, sales have

started picking up again.

For example, housing sales in Mumbai reached 86%

of pre-COVID 19 levels in Sep’20, as per a report by CRE Matrix. This trend

sustained in Oct ’20 and Nov ’20 too, with Nov ’20 sales up 17% MoM and

67% YoY. In other cities, home sales have seen a sharp recovery in the past six

months and are slightly below YoY levels.

Exhibit 13: Sales have exceeded launches in the prior 4 years…

Sales (Mn sqft)

599

567

474

New Launches (Mn sqft)

412

381

358

354

446

425

295

246

352

294

367

309

211

184

376

Source: MOFSL, PropEquity; Note: CY20 data as of Oct ‘20

January 2021

10

Thematic: Housing Finance

Exhibit 14: …leading to a decline in inventory

Inventory (Mn sqft)

34

18

22

27

34

Inventory overhang (months)

43

37

34

40

31

14

554

671

823

965

1,063

1,094

1,098

1,048

990

933

921

Source: MOFSL, PropEquity; Note: CY20* number as of Oct ‘20

Market share of top-10

developers in the top-6

cities is up from 22% to

32% over the past four

years.

Consolidation underway in the real estate sector – long-term positive





Post the implementation of demonetization, RERA and GST, the RE sector faced

several headwinds. This was more pronounced for smaller players. As a result,

there has been consolidation in the industry ever since.

Analysis of the top-6 cities reveals that the market share in housing sales of

the top-10 developers has increased from 23% in 2016 to 31% in 2020.

Exhibit 15: Consistent increase in sales market share of Top-10 developers

Sales (Mn sqft)

26

Market share (%)

31

23

23

26

64

CY16

52

CY17

70

CY18

72

CY19

35

CY20*

Source: MOFSL, PropEquity; Note: CY20 data as of Oct ‘20

INR55t opportunity in affordable housing





A study by KPMG on the housing sector estimated urban/rural housing shortage

in India to be 37m/53m units.

Assuming that even half of this shortage is met, it would create ~INR55t

financing opportunity in affordable housing.

Exhibit 17: INR55t opportunity even if 50% of shortage is met

Shortage

(Mn)

Urban

Rural

Total

37

53

90

% shortage

met

50%

50%

Avg. ticket

size (INR m)

1.8

0.8

Total funding

opportunity

(INR t)

33

21

55

Source: MOFSL, Company

Exhibit 16: Total housing shortage amounts to 90m units

Million Units

Current Shortage

Additional

Vacant Houses

Core demand

Urban

19

28

9

37

Rural

40

23

10

53

Total

59

51

20

90

Source: MOFSL, Company

January 2021

11

Thematic: Housing Finance

Recent steps by GoI and regulator to boost affordable housing





Gujarat and Maharashtra

lead the pack in terms of

number of PMAY

beneficiaries



Additional tax deduction up to INR150k for interest paid on loans to purchase

homes priced below INR4.5m extended till 31 March, 2021.

Scope of affordable housing expanded to those costing up to INR4.5m with a

carpet area of 60sqm in metros and 90sqm in non-metros.

Increased budgetary support - Allocation to PMAY increased from INR253b in

FY20 to INR275b in FY21. Extra-budgetary allocation of INR100b for PMAY-

urban & PMAY-Rural each.

Exhibit 18: Number of beneficiaries under PMAY (U) – top-10 states (‘000)

248

193

EWS/LIG

MIG

92

45

55

14

MH

MP

44

19

40 43

28 28

TN

21 16

WB

18

40

13 18

AP

13

33

GJ

RJ

UP

Kar.

Tel.

Source: MOFSL, Lok Sabha

Exhibit 19: Sharp growth in Central Assistance utilized under PMAY (U)

Central Assistance Utilized (INR b)

264

190

15

FY17

46

FY18

FY19

FY20

Source: MOFSL, Lok Sabha

Consumers waiting on the sidelines making a comeback







As per consumer research conducted by NAREDCO and Housing Research in

Apr-May’20, 47% of respondents were either uncertain or not confident of their

income outlook stability. However, as business has recovered close to pre-

COVID levels for most sectors, many of these 47% respondents would now have

greater clarity on income stability as compared to Apr-May’20, in our view.

35% of respondents preferred real estate as an asset class and 60% preferred

ready-to-move-in properties.

~80% of respondents who were looking to buy a home have put it on hold for

up to the next 12 months, i.e. Apr-May ’21.

January 2021

12

Thematic: Housing Finance

Exhibit 20: 47% customers were unsure of income stability

Income Stability Outlook

53%

Exhibit 21: RE remains the most preferred investment class

Preferred Investment Class

35%

28%

22%

29%

18%

15%

Can't Say

Not Confident

Confident

Fixed Deposit

Gold

Real Estate

Stock Market

Source: MOFSL, NAREDCO; Note: As of Apr/May ‘20

Source: MOFSL, NAREDCO; Note: As of Apr/May ‘20

Exhibit 22: Overwhelming preference for ready properties

60%

Preferred Stage of buying

Exhibit 23: 81% of respondents paused for up to a year only

Pause to look for a home

29%

24%

28%

19%

21%

10%

9%

New launch

< 3 months

3-6 months

6-12 months

Indefinitely

Source: MOFSL, NAREDCO; Note: As of Apr/May ‘20

Ready-to-move- 6-12M delivery

in

1-2Y delivery

Source: MOFSL, NAREDCO; Note: As of Apr/May ‘20

January 2021

13

Thematic: Housing Finance

Consolidation in the HFC space positive for incumbents

Top-2 players have gained 700bp market share within HFCs









While on the whole, the HFC sector lost market share in retail home loans to banks

post the IL&FS crisis, the top-2 HFCs clearly outperformed its peers with 700bp

market share gain within the space. These players enjoy strong parentage and

comfortable access to liquidity at attractive prices.

Concerns on the trajectory of spreads post the sharp home loan rate cuts by banks in

Mar-Apr’20 have abated. This is due to the fact that HFCs have witnessed anywhere

between 75-200bp reduction in incremental cost of funds over the past nine months.

Banks have reduced their lending rates by 75-100bp, thus, benefiting HFCs directly.

Further, few HFCs have moved to repo linked borrowings from Banks. At the same

time, the cost of funds from capital markets has declined ~200bp since the start of the

crisis. Hence, we believe HFCs will be able to keep spreads stable despite intense

competition.

Asset quality has deteriorated over the past three years for most players led by the

non-retail segment. Stage 2 loan ratio has increased by up to 230bp over FY17-20 with

Stage 3 ratio increasing by up to 250bp over the same time period.

Banks have gained 500bp

market share in home

loans over past two

years.

Banks have gained market share since the IL&FS crisis…





From the start of this decade till the IL&FS crisis, HFCs consistently gained

market share in home loans as compared to banks – their market share

increased from 30% to 40% over FY10-18.

However, post the IL&FS crisis, growth for some HFCs took a backseat. In

addition, some players are focused on running down their loan books to

generate liquidity. As a result, HFCs lost nearly half the market share gained

over FY10-18 in FY19-20.

Exhibit 24: Banks gained nearly 500bp market share in home loans over FY18-20 (%)

Banks

30.0

33.7

35.2

37.8

37.9

38.1

HFCs

37.7

37.7

39.6

37.9

34.9

70.0

66.3

64.8

62.2

62.1

61.9

62.3

62.3

60.4

62.1

65.1

Source: MOFSL, Company

The Top 2 HFCs have

gained 700bp market

share within the HFC

space in the past two

years.

…led by decline in the loan books of some HFCs





However, after analyzing market share trends of HFCs, we note that market

share of the top-2 HFCs is largely steady despite severe competition from

banks.

Within the HFC space, these players have gained 700bp market share

cumulatively over the past two years.

January 2021

14

Thematic: Housing Finance

Exhibit 25: While HDFC’s market share was largely stable over FY12-18, it improved over

FY18-20 (%)

HDFC

26

0

26

48

32

0

27

42

31

0

28

41

31

2

27

40

LICHF

30

2

27

41

31

3

26

40

PNBHF

32

4

25

40

33

4

23

39

Others

34

5

21

40

31

7

21

41

25

7

23

45

Source: MOFSL, Company

Sharp decline in cost of funds over past six months to protect spreads

~75-200bp decline in cost

of funds across various

instruments.









After the sharp MCLR cuts by banks in Mar-Apr’20, one of the biggest concerns

for HFCs was the sustainability of spreads. This is because loans reprice

immediately (given their floating rate nature), while borrowings, especially

market borrowings, reprice only on maturity of the borrowing.

However, in this phase, the repo rate cuts by the RBI have witnessed effective

transmission. The incremental cost of funds for HFCs from capital markets has

declined by ~200bp since the start of the crisis.

HDFC and LICHF are able to raise 3-year NCDs at ~5% and 90-day CPs at <4%.

Banks have also reduced MCLR by 75-100bp since the start of the lockdown.

Typically, the interest rate reset happens on the anniversary date of the loan –

for example, if an HFC borrowed from a bank at 1-year MCLR on 1

st

Jan’20 and

the bank cuts its MCLR on 1

st

Jun’20, the HFC would get the re-pricing benefit

on 1

st

Jan’21.

Large HFCs typically have 20-30% of their borrowings from banks

while smaller HFCs have 50-85% of borrowings from the banking system.

Exhibit 27: NCD issuance - LICHF

Tenure (yr)

3.0

3.0

10.0

3.0

2.0

5.0

2.0

Source: NSE

Interest Rate (%)

7.97

7.33

6.57

5.45

6.19

5.53

4.96

Date of Issue

28-Jan-20

12-Feb-20

12-Feb-20

26-Aug-20

25-Sep-20

01-Dec-20

01-Jan-21

Tenure

10.0

5.0

1.4

3.0

4.2

4.1

2.8

Source: NSE

Exhibit 26: NCD issuance - HDFC

Interest Rate (%)

6.99

6.95

7.25

5.40

4.95

5.78

4.23

Date of Issue

13-Feb-20

27-Apr-20

17-Jun-20

11-Aug-20

09-Sep-20

25-Nov-20

23-Dec-20

Exhibit 28: 80-90bp reduction in 1-year MCLR by leading banks since Jan’20 (%)

8.20

8.20

8.15

8.00

SBI

7.75

7.70

7.55

ICICIB

7.45

7.40

7.35

7.35

7.35

7.90

7.85

7.75

7.40

7.25

7.00

7.00

7.00

7.00

7.00

7.00

7.00

Source: MOFSL, Company

January 2021

15

Thematic: Housing Finance

Minimal Covid-19 impact on asset quality

Economic revival better than expected





With most sectors of the economy reviving close to pre-COVID levels, the fear of job

losses or salary cuts has abated. Most companies are confident of restricting the

stress pool in retail loans to less than 2-3% of the overall book.

Over the last three years, the non-retail segment has led to sharp rise in NPAs for

HFCs. Post the lockdown, the fear of NPAs in this segment increased manifold.

However, with the permission of one-time restructuring and the pick-up in sales

velocity for large developers, this is now abating.

Stage 2 and Stage 3 loans

for most HFCs have

increased over the past

three years.

Asset quality deterioration over the last two years – a key concern







Over the past few years, asset quality stress has built up in the system. Barring

AAVAS and to an extent Repco, we have observed worsening asset quality

across players.

Stage 2 loans for most players have increased 80-230bp over the past three

years. However, REPCO/AAVAS have witnessed sharp declines of

~1,300/220bp over the same time period.

At the same time, Stage 3 loans ratio for all HFCs, barring AAVAS, increased

140-250bp over FY17-20.

AAVAS witnessed modest reduction of 40bp in this

ratio over the same time period.

Exhibit 29: Stage 2 loans increased up to 230bp over FY17-20… Exhibit 30: …while Stage 3 loans increased up to 250bp

Stage 2 (%)

HDFC

LICHF

PNBHF

CANF

REPCO

AAVAS

FY17

3.6

3.7

1.3

15.6

3.3

FY18

4.5

3.8

1.7

4.4

15.5

2.3

FY19

4.3

4.4

3.3

4.8

12.2

1.6

FY20

5.5

4.6

3.7

6.0

2.3

1.0

Stage 3 (%)

HDFC

LICHF

PNBHF

CANF

REPCO

AAVAS

FY17

FY18

FY19

0.9

0.4

0.2

2.9

0.9

1.3

0.8

0.3

0.4

3.1

0.4

1.4

1.5

0.5

0.6

3.2

0.5

FY20

2.3

3.0

2.7

1.8

4.8

0.4

Source: MOFSL, Company

Source: MOFSL, Company

Non-retail segment led to rise in NPAs





Continued stagnation in RE segment, inability of developers to raise money

through few HFCs (struggling with capitalization, liquidity and corporate

governance issues) and change in repayment schedule (which were tagged as

NPAs) have led to a rise in NPAs for the non-retail segment at industry level.

Considering aggressive lending by a few NBFCs dealing in the RE segment,

regulators also adopted a tougher stance for the sector. We entered the COVID

situation with an already gloomy background and fear of NPAs in this segment

increasing sharply at the beginning of the year.

January 2021

16

Thematic: Housing Finance

Exhibit 31: Segment wise GNPL ratio – HDFC (%)

Retail

Corporate

2.7

2.9

2.9

7.8

0.7

0.7

0.8

1.0

0.9

0.8

0.4

0.8

0.8

0.9

1.1

4.7

4.1

4.2

Exhibit 32: Segment wise GNPL ratio – LICHF (%)

Retail GNPL

Non-retail GNPL

14.2

11.7

8.8

7.1

6.1

6.9

1.3

1.5

1.9

1.8

13.7

17.6

2.3

0.7

2.2

0.7

2.5

0.7

2.3

0.7

Source: MOFSL, Company

Source: MOFSL, Company

Share of sales of the top-

10 developers in the top-

6 cities up from 23% to

31% over the past four

years

Incremental events point toward relatively better outcome









With most sectors of the economy reviving close to pre-COVID levels, the fear

of job losses or salary cuts has abated. Most companies are confident of

restricting the stress pool in retail loans to less than 2-3% of the overall book.

Further, improvement in demand and ability of larger developers to raise

money and service their debts points toward better asset quality outcome.

Even regulators’ favorable stance toward RE is positive. Over the last six

months, the RBI allowed (a) an extension of DCCO for the RE space without

classifying it as NPA, (b) one-time restructuring in RE projects, and (c) reduction

in risk weights for housing loans.

Over the past four years, there has been a trend in consolidation of the large

developers in the top-6 cities while the share of the top-10 developers in total

housing sales has increased from 23% to 31% over 2016-20.

We expect this

consolidation trend to pick up further, which augurs well for asset quality and

growth of HFCs.

January 2021

17

Thematic: Housing Finance

Valuation and view

On the brink of a turnaround; Valuations attractive













Over the past five years, the real estate sector has faced several headwinds including

slowing sales, rising inventory levels and price stagnation. The implementation of

RERA and GST also hit the sector, especially the smaller players. Post IL&FS, some

NBFCs faced continued headwinds in accessing debt capital from markets. As a result,

large players with strong balance sheets gained market share.

Over the past few years, housing sales exceeded new home launches, resulting in a

decline in inventory overhang. Following the lockdown, sales suddenly plunged, but

have now started recovering.

The housing finance sector has witnessed two turbulent years post the IL&FS crisis,

resulting in loss of market share to banks. However, in these two years, we note of a

sharp gain in market share by the top-2 HFCs. Also, while disbursements were muted

in 1QFY21, they have largely normalized in 2QFY21. These players expect to deliver

YoY disbursement growth in 2HFY21.

Post the sharp cut in home loan rates by banks in Mar-Apr’20, investors were

skeptical of the trajectory in spreads. However, the incremental cost of funds has

declined sharply (between 75-200bp) for players with strong parentage. As a result,

we do not foresee any impact on spreads.

While there had been some asset quality deterioration pre-COVID, concerns on

significant deterioration post-COVID too have abated. The retail lending portfolios

would not see any meaningful asset quality issues as very few customers have lost

jobs or witnessed permanent cash flow disruption. At the same time, HFCs got some

relief on the corporate side post the allowance of one-time restructuring by the RBI.

We expect HFCs under our coverage to generate 12-17% RoE once the situation

normalizes in FY22. We believe the current risk-reward is favorable. HDFC remains

our top idea in the sector. In this report, we are also initiating coverage of AAVAS

with a Neutral rating and CANF with a Buy rating. We remain Neutral on PNBHF due

to concerns over its capitalization.

FY15

10.83

7.50

3.33

0.12

3.46

0.29

8.53

0.14

0.16

3.16

0.07

3.09

0.29

0.22

0.00

3.60

1.10

30.54

2.50

8.01

20.02

22.76

FY16

10.32

7.13

3.20

0.14

3.34

0.28

8.37

0.13

0.15

3.06

0.10

2.96

0.30

0.63

-0.17

3.72

1.11

29.83

2.61

8.01

20.90

20.66

FY17

9.87

6.69

3.19

0.11

3.30

0.27

8.12

0.12

0.14

3.03

0.14

2.89

0.29

0.34

-0.09

3.43

1.05

30.62

2.38

7.87

18.74

19.74

FY18

9.03

6.40

2.63

0.06

2.69

0.52

19.32

0.37

0.15

2.17

0.13

2.04

0.29

1.56

-0.45

3.45

0.61

17.62

2.84

6.75

19.18

12.57

FY19

9.16

6.49

2.67

0.07

2.74

0.35

12.65

0.17

0.18

2.39

0.12

2.27

0.26

0.42

-0.10

2.86

0.81

28.44

2.05

6.01

12.30

12.98

FY20

8.90

6.31

2.59

0.06

2.65

0.30

11.48

0.12

0.18

2.35

0.32

2.03

0.22

2.58

-0.88

3.94

0.53

13.32

3.42

6.01

20.55

13.13

FY21E

8.02

5.35

2.66

0.05

2.72

0.33

12.12

0.17

0.16

2.39

0.28

2.11

0.17

0.37

-0.16

2.48

0.48

19.56

1.99

5.84

11.30

12.48

FY22E

7.41

4.67

2.74

0.06

2.80

0.32

11.27

0.15

0.17

2.48

0.29

2.19

0.22

0.08

0.00

2.49

0.56

22.41

1.93

5.74

11.89

12.56

FY23E

7.28

4.60

2.69

0.06

2.74

0.28

10.19

0.11

0.17

2.46

0.29

2.17

0.23

0.08

0.00

2.48

0.56

22.47

1.92

6.01

12.41

12.88

Exhibit 33: DuPont Analysis – HDFC (%)

(%)

Interest Income

Interest Expended

Net Interest Income

Other core operating income

Core Income

Operating Expenses

Cost to Income Ratio (%)

Employee Expenses

Other Expenses

Core Operating Profits

Provisions/write offs

Core PBT

Dividend Income

Treasury and Other Income

One off provisions/Expenses

PBT

Tax

Tax Rate (%)

Reported PAT

Leverage (x)

RoE

Core RoE

January 2021

18

Thematic: Housing Finance

Exhibit 34: DuPont Analysis – LICHF (%)

Interest Income

Interest Expenses

Net Interest Income

Non interest Income

Net Income

Operating Expenses

Cost to income (%)

Employees

Others

Operating Profits

Provisions/write offs

PBT

Tax

Tax Rate (%)

PAT

Leverage (x)

RoE

FY15

10.88

8.57

2.31

0.26

2.57

0.39

15.24

0.13

0.26

2.18

0.01

2.17

0.74

34.05

1.43

12.63

17.54

FY16

10.92

8.29

2.62

0.21

2.83

0.42

14.74

0.13

0.28

2.42

0.13

2.28

0.80

35.22

1.48

13.23

19.58

FY17

10.26

7.56

2.69

0.15

2.85

0.45

15.89

0.18

0.27

2.39

0.21

2.18

0.76

34.67

1.43

12.65

18.06

FY18

9.12

6.93

2.19

0.11

2.30

0.27

11.89

0.14

0.13

2.03

0.31

1.72

0.47

27.59

1.25

12.33

15.36

FY19

9.24

6.94

2.30

0.11

2.41

0.26

10.63

0.13

0.12

2.15

0.33

1.82

0.51

28.07

1.31

12.53

16.40

FY20

9.33

7.08

2.24

0.10

2.34

0.30

12.62

0.14

0.15

2.05

0.48

1.57

0.42

26.53

1.15

12.42

14.30

FY21E

8.72

6.51

2.21

0.09

2.30

0.29

12.53

0.14

0.15

2.02

0.34

1.68

0.35

20.70

1.33

11.87

15.82

FY22E

8.11

5.85

2.26

0.09

2.36

0.29

12.39

0.15

0.14

2.06

0.38

1.68

0.34

20.50

1.34

11.32

15.14

FY23E

7.63

5.42

2.20

0.10

2.30

0.29

12.82

0.16

0.14

2.00

0.38

1.62

0.33

20.50

1.29

10.93

14.10

Source: MOFSL, Company

Exhibit 35: DuPont Analysis – PNBHF (%)

Interest Income

Interest Expended

Net Interest Income

Other Income

Fees

Others

Net Income

Operating Expenses

Cost to Income Ratio (%)

Employee Expenses

Other Expenses

Operating Profit

Provisions/write offs

PBT

Tax

Tax Rate (%)

Reported PAT

Leverage

RoE

2015

10.93

8.28

2.66

0.72

0.32

0.40

3.37

1.20

35.5

0.44

0.76

2.18

0.25

1.93

0.66

34.09

1.27

12.16

15.45

2016

10.46

7.64

2.82

0.63

0.35

0.28

3.45

1.04

30.0

0.31

0.73

2.41

0.34

2.07

0.73

35.05

1.35

13.07

17.58

2017

10.08

7.32

2.76

0.74

0.46

0.28

3.50

0.99

28.3

0.28

0.71

2.51

0.28

2.23

0.78

34.86

1.45

9.09

13.18

2018

9.56

6.70

2.86

0.84

0.55

0.28

3.70

0.84

22.6

0.27

0.56

2.86

0.52

2.34

0.74

31.87

1.59

8.54

13.60

2019

9.25

7.03

2.21

1.21

0.61

0.60

3.43

0.81

23.6

0.41

0.39

2.62

0.26

2.36

0.74

31.30

1.62

10.41

16.89

2020

9.45

7.22

2.23

0.98

0.37

0.62

3.21

0.68

21.1

0.29

0.39

2.53

1.54

1.00

0.20

20.32

0.79

10.47

8.32

2021E

9.35

6.80

2.56

0.56

0.16

0.41

3.12

0.62

19.9

0.30

0.32

2.50

0.93

1.57

0.35

22.00

1.23

9.34

11.45

2022E

9.08

6.45

2.63

0.79

0.27

0.52

3.42

0.68

20.0

0.34

0.35

2.74

0.93

1.81

0.40

22.00

1.41

8.65

12.19

2023E

8.92

6.34

2.59

0.87

0.33

0.54

3.46

0.70

20.2

0.35

0.35

2.76

0.51

2.24

0.49

22.00

1.75

8.41

14.71

Source: MOFSL, Company

January 2021

19

Thematic: Housing Finance

Exhibit 36: DuPont Analysis – CANF (%)

Interest Income

Interest Expended

Net Interest Income

Other Income

Net Income

Operating Expenses

Cost to Income Ratio (%)

Employee Expenses

Other Expenses

Operating Profit

Provisions/write offs

PBT

Tax

Tax Rate (%)

PAT

Leverage

RoE

2015

11.06

8.57

2.49

0.41

2.90

0.77

26.62

0.35

0.43

2.13

0.20

1.93

0.72

37.26

1.21

11.64

14.09

2016

10.94

7.79

3.15

0.41

3.56

0.70

19.64

0.35

0.35

2.86

0.20

2.66

1.01

38.11

1.65

11.57

19.05

2017

10.86

7.35

3.51

0.39

3.90

0.67

17.21

0.33

0.34

3.23

0.16

3.07

1.12

36.50

1.95

11.55

22.55

2018

10.27

6.76

3.51

0.22

3.73

0.60

16.23

0.31

0.30

3.12

0.15

2.97

1.00

33.61

1.97

10.78

21.27

2019

9.94

6.79

3.16

0.10

3.26

0.53

16.27

0.24

0.29

2.73

0.01

2.73

1.00

36.80

1.72

10.54

18.15

2020

10.15

6.76

3.39

0.06

3.45

0.54

15.69

0.27

0.27

2.91

0.30

2.61

0.71

27.43

1.89

10.11

19.13

2021E

9.71

6.01

3.70

0.04

3.74

0.49

13.03

0.27

0.22

3.25

0.53

2.72

0.68

25.00

2.04

9.19

18.74

2022E

9.31

5.83

3.47

0.05

3.52

0.51

14.58

0.28

0.24

3.01

0.28

2.73

0.68

25.00

2.05

8.30

16.98

2023E

9.22

5.77

3.44

0.05

3.49

0.52

14.77

0.28

0.24

2.98

0.18

2.79

0.70

25.00

2.09

7.80

16.34

Source: MOFSL, Company

Exhibit 37: DuPont Analysis – REPCO (%)

Interest Income

Interest Expended

Net Interest Income

Other Income

Net Income

Operating Expenses

Cost to Income Ratio (%)

Employee Expenses

Other Expenses

Operating Profit

Provisions/write offs

PBT

Tax

Tax Rate (%)

PAT

Leverage

RoE

2015

12.38

7.99

4.40

0.43

4.83

1.01

20.95

0.62

0.39

3.82

0.38

3.44

1.17

33.89

2.28

6.97

15.88

2016

12.31

7.92

4.39

0.43

4.82

0.93

19.28

0.59

0.34

3.89

0.57

3.33

1.16

34.77

2.17

7.83

16.99

2017

12.07

7.69

4.38

0.38

4.76

0.80

16.91

0.51

0.29

3.95

0.62

3.33

1.17

34.95

2.17

8.03

17.42

2018

11.56

6.91

4.65

0.27

4.91

0.84

17.12

0.53

0.31

4.07

0.80

3.27

1.13

34.60

2.14

7.68

16.44

2019

11.25

6.96

4.29

0.31

4.59

0.95

20.71

0.57

0.39

3.64

0.16

3.48

1.21

34.79

2.27

7.30

16.55

2020

11.48

7.19

4.29

0.29

4.58

0.93

20.24

0.58

0.35

3.66

0.52

3.14

0.70

22.17

2.44

6.92

16.92

2021E

11.14

6.77

4.37

0.16

4.53

0.86

19.04

0.57

0.29

3.67

0.52

3.14

0.79

25.20

2.35

6.44

15.15

2022E

10.55

6.35

4.20

0.21

4.41

0.88

19.95

0.59

0.29

3.53

0.42

3.11

0.78

25.20

2.33

6.03

14.03

2023E

10.56

6.30

4.26

0.22

4.48

0.88

19.74

0.59

0.29

3.60

0.44

3.16

0.80

25.20

2.36

5.78

13.67

Source: MOFSL, Company

January 2021

20

Thematic: Housing Finance

Exhibit 38: DuPont Analysis – AAVAS (%)

%

Interest Income

Interest Expended

Net Interest Income

Other Income

Net Income

Operating Expenses

Cost to Income Ratio (%)

Employee Expenses

Other Expenses

Operating Profit

Provisions

PBT

Tax

Tax Rate (%)

PAT

Leverage

RoE

2015

14.93

8.23

6.70

1.68

8.38

3.49

41.7

2.73

0.77

4.89

0.37

4.52

1.54

34.1

2.98

8.12

24.20

2016

13.41

7.53

5.88

1.90

7.78

3.62

46.5

2.64

0.98

4.16

0.36

3.80

1.30

34.4

2.49

8.45

21.06

2017

13.01

6.86

6.15

1.67

7.82

3.24

41.4

2.07

1.17

4.58

0.32

4.26

1.48

34.7

2.78

5.41

15.04

2018

12.10

5.95

6.15

3.14

9.29

5.07

54.6

3.44

1.63

4.22

0.08

4.14

1.27

30.7

2.87

3.70

10.60

2019

12.28

5.28

7.00

2.43

9.43

3.91

41.5

2.43

1.49

5.52

0.18

5.33

1.69

31.7

3.64

3.19

11.62

2020

11.84

5.36

6.48

1.76

8.24

3.46

42.0

2.21

1.24

4.78

0.23

4.55

0.80

17.5

3.75

3.38

12.66

2021E

11.63

5.61

6.02

1.18

7.19

3.06

42.5

2.06

1.00

4.13

0.55

3.58

0.79

22.0

2.79

3.80

10.61

2022E

11.56

5.53

6.03

1.52

7.54

3.06

40.6

2.08

0.97

4.48

0.31

4.18

0.92

22.0

3.26

3.94

12.84

2023E

11.80

5.55

6.24

1.65

7.90

2.99

37.9

2.06

0.93

4.91

0.27

4.64

1.02

22.0

3.62

4.00

14.47

Source: MOFSL, Company

January 2021

21

Thematic: Housing Finance

Key takeaways from business leaders

Mr. Deepak Parekh – Chairman, HDFC





“Property developers should be prepared for up to 20% fall in housing prices

and must create liquidity by selling their inventory at whatever prices they get.”

(Apr’20)

“Look at any number, whether it is e-bills, tolls and even housing sector (things

have recovered). We never expected that September and October would be

such fantastic new inflows of application compared to previous September-

October, which was pre-pandemic.”

(Dec’20)

“Strong AAA rated-NBFCs have no dearth of liquidity. Lower rated NBFCs/HFCs

have not been getting funding from banks due to risk aversion. Guarantee

should help these lenders. Expect the CLSS to be helpful for the housing finance

industry.”

(May’20)

“This is the best time to buy a house. Interest rates of sub-7% on housing loans

are the lowest in my career and the likelihood of a further rate cuts by RBI

seems relatively limited”

(Jan’21)

Mr. Keki Mistry – Vice-Chairman and CEO, HDFC





Mr. Siddhartha Mohanty – MD, LIC Housing Finance





“Recently launched home loans at 7.5% interest for customers with 800+ CIBIL

score. Taking advantage of reducing cost of funds. Expect demand revival for

the affordable housing segment after 2-3 quarters.”

(May’20)

“As far as realty sector is concerned, after September, we realized that a lot of

growth is happening in this sector, especially in every segment. Earlier, it was

restricted just to the affordable segment but in the last two months, we

realized the mid-segment, upper mid-segment and premium segment are also

growing significantly.”

(Jan’21)

“Real estate developers are unlikely to sell their inventory at a discount in a

hurry. Developers are likely to face high ready-reckoner rates/the minimum

price to calculate taxes, as an inability to sell at a discount.” (Jun’20).

“Governments are taking a proactive view in terms of intervention into real

estate. The Maharashtra government has brought down stamp duty rates by

60%, which is unprecedented. Stamp duty rates are just 2%, which many people

thought would never happen” (Dec’20).

“We are starting the year (2021) on a positive note. There were a lot of

concerns last year with COVID and the lockdown; those concerns passed us. We

had a good first half of the financial year from sales volume perspective. We

expect the second half to be much better and especially the Q4 where we have

large number of launches planned. We have four markets that are of prime

focus for us – Mumbai, Pune, National Capital Region (NCR) and Bengaluru and

we are seeing good traction here, reasonably equal sales across these 4

markets.” (Jan’21).

Mr. Niranjan Hiranandani – President, Naredco





Mr. Pirojsha Godrej – Executive Chairman, Godrej Properties



January 2021

22

HFC: A Home Run!

Well-placed to capture market share

Well diversified liability profile; Provisions >

GNPLs; Improving ROAs

Thematic: Housing Finance

Business turning around

Strong parentage aids debt capital at

competitive rates

Building a foundation for the long term

Rights Systems, Right Processes | RoA, asset

quality best-in-class

Pg24

Pg30

Pg35

Pg56

Pg71

Pg75

Pg79

Pg84

A balanced player

Healthy asset quality | Low CoF | 100% retail

loans

Preserving capital; Focus on retail loans

Asset quality a key monitorable

Prioritizing asset quality over growth

RoA/RoE to be healthy at 2.4%/14%

Pan-India affordable housing finance player

~50% CRAR; Healthy return ratios

A niche player

Focus on analytics | Healthy asset quality |

Strong growth

January 2021

23

Update

Thematic:

Financials

Finance

| Sector:

Housing

– NBFC

HDFC

BSE Sensex

49,584

S&P CNX

14,596

CMP: INR2,684

TP: INR3,250 (+21%)

Buy

Well-placed to capture market share

Stock info

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

HDFC IN

1,721

4832.3 / 65.8

2778 / 1473

9/12/-11

Well diversified liability profile; Provisions > GNPLs; Improving ROAs

Sharp fall in cost of funds

HDFC is the key beneficiary of continued excess liquidity at the system level and

the resultant plunge in borrowing cost (partially led by flight to safety).

It is

borrowing 3- to 5-year money at 5–5.5% and one-year CPs at less than 4.5%.

Even deposit rates have been down by 150bp+ since the start of the year.

The

75–100bp cut in MCLR by banks is also likely to help the company. Overall,

incremental cost of funds has declined 150–200bp to 5–5.5%, whereas

incremental lending rates in the retail portfolio stand at 7%+ – providing

significant comfort on spreads in a hyper-competitive environment. Reduction

in excess liquidity and the benefit of a capital raise are likely to aid margins.

Financial Snapshot (INR b)

Y/E March

2020 2021E

Core PPoP

140.3 164.2

Adj. PAT

96.2 107.4

Adj. EPS (INR)

49.2

54.4

EPS Gr. (%)

10.8

10.6

BV/Sh. (INR)

537.9 619.8

ABV/Sh. (INR)

399.0 485.2

Core RoA (%)

1.8

1.8

Core RoE (%)

13.1

12.5

Payout (%)

23.7

43.5

Valuation

AP/E (x)

33.6

28.5

P/BV (x)

5.0

4.3

AP/ABV (x)

4.1

3.2

Div. Yield (%)

0.8

0.9

Shareholding pattern (%)

As On

Sep-20 Jun-20

Promoter

0.0

0.0

DII

18.7

18.5

FII

70.0

70.2

Others

11.3

11.3

As On

Stock Performance (1-year)

2022E

184.9

128.3

63.8

17.3

665.3

530.7

1.9

12.6

43.5

21.6

4.0

2.6

1.0

Growth to remain healthy, led by consolidation in the sector

We are constructive on the Indian RE space, and HDFC being a leader with

~16% market share, is likely to be a key beneficiary of the same. HDFC is

expected to be a beneficiary of balance transfer cases at the system level as

some of the large HFCs face their own sets of issues.

Overall, we estimate a 12-

13% AUM CAGR in the individual and corporate segments over FY20–23E.

Asset quality best in class; Non-Individual segment to be a drag

Sep-19

0.0

16.7

72.5

10.8

HDFC has managed asset quality well across cycles, with the individual GNPA %

remaining below 1%. With stability returning at the economy level, the fear of

job loss or sharp salary cuts has reduced sharply. We expect the Individual

segment to remain resilient in the ensuing years. On the other hand, the Non-

Individual segment is likely to remain under pressure, in our view. The GNPA %

increased to 4%+ v/s sub 2% earlier.

However, we draw our comfort with

adequate ECL provisioning of 2.6% v/s sub 1% three years ago.

We expect

HDFC to continue to utilize any one-off gains to build provisions for potential

stress in the future; hence, higher provisioning may not impact core earnings.

Healthy core ROA of 1.8%; Valuations attractive

Stable-to-improving margins, a lean cost structure, and a well-provided balance

sheet would keep core RoA healthy at 1.8% over the medium term. Decline in

leverage (6–7x, v/s 9–10x earlier) due to the recent capital raise would restrict

ROE to ~13% in the near-to-medium term. Over the last 3–5 years, HDFC’s core

business (assuming a constant 20% Holdco discount) has seen de-rating, with

multiples contracting from 3x+ to 2x core BV due to headwinds faced by the

sector and falling ROA. RE sector tailwinds, coupled with improving profitability,

should now see multiple re-ratings. We use SOTP to arrive at a TP of INR3,250

(FY23E based).

January 2021

24

Thematic: Housing Finance

Story in charts

Exhibit 39: In last three quarters borrowing rates down by ~250bp across tenure

Instrument

NCD

NCD

NCD

NCD

NCD

NCD

NCD

NCD

NCD

NCD

NCD

Month of issue

Apr

Apr

May

May

Jun

Aug

Sep

Sep

Nov

Dec

Dec

Tenure of instrument

3YR

3YR

1.5YR

2YR

10YR

2YR

1YR

5YR

5YR

2YR

2YR

Interest rate (%)

7.20

6.95

7.06

7.00

7.25

5.40

4.95

6.43

5.78

4.50

4.23

Source: MOFSL, NSE

Exhibit 40:

Stable spreads (%)

Individual Loans

3.14

3.08

3.02

3.44

3.07

3.09

Non Individual Loans

3.26

3.14

3.14

3.16

Exhibit 41:

NII growth largely in-line with AUM growth

AUM growth

NII growth

1.91

1.91

1.85

1.97

1.91

1.95

1.93

1.89

1.92

1.90

Source: MOFSL, Company

Source: MOFSL, Company; 2QFY21 NII growth strong due to equity

raise

Exhibit 42: Individual loan growth remains healthy at ~15% YoY

Individual Loan Growth

17.8

17.1

10.4

16.8

16.7

Non-Individual Loan Growth

16.2

15.2

10.5

6.2

2.2

9MFY19

FY19

Q1FY20

3.5

6.1

9.1

13.9

13.9

8.1

1HFY20

9MFY20

FY20

Q1FY21

1HFY21

Source: MOFSL, Company

January 2021

25

Thematic: Housing Finance

Exhibit 43:

Non individual segment NPA% rising

Individual GNPA

Non-Individual GNPA

4.7

4.1

2.9

2.9

1.31

0.7

0.8

1.0

0.9

0.8

1.33

4.2

1.44

Exhibit 44:

HDFC prudently increasing provisioning

ECL Provisions (%)

2.25

1.55

1.72

2.44

2.64

2.60

2.2

0.7

2.5

0.7

2.3

0.7

2.7

0.7

Source: MOFSL, Company

Source: MOFSL, Company

Exhibit 45:

Consistently gaining share despite high

competition from banks

HDFC Overall MS (%)

14.5

15.2 15.4 15.3 15.0

14.8

15.7 15.5 15.9

Exhibit 46:

Sharp improvement in MS within HFCs in last

three years (MS, %)

HDFC

26

0

26

32

0

27

31

0

28

31

2

27

LICHF

30

2

27

31

3

26

PNBHF

32

4

25

40

33

4

23

39

Others

34

5

21

40

31

7

21

41

25

7

23

14.3 14.1

48

42

41

40

41

40

45

Source: MOFSL, Company, RBI

Source: MOFSL, Company

Exhibit 47: Share of key ventures in SOTP on the rise (%)

51

54

51

59

49

46

48

47

54

55

43

44

43

44

46

49

50

48

Source: MOFSL, Company

January 2021

26

Thematic: Housing Finance

Exhibit 48: DuPont Analysis

(%)

Interest Income

Interest Expended

Net Interest Income

Other core operating income

Core Income

Operating Expenses

Cost to Income Ratio (%)

Employee Expenses

Other Expenses

Core Operating Profits

Provisions/write offs

Core PBT

Dividend Income

Treasury and Other Income

One off provisions/Expenses

PBT

Tax

Tax Rate (%)

Reported PAT

Leverage (x)

RoE

Core RoE

FY15

10.83

7.50

3.33

0.12

3.46

0.29

8.53

0.14

0.16

3.16

0.07

3.09

0.29

0.22

0.00

3.60

1.10

30.54

2.50

8.01

20.02

22.76

FY16

10.32

7.13

3.20

0.14

3.34

0.28

8.37

0.13

0.15

3.06

0.10

2.96

0.30

0.63

-0.17

3.72

1.11

29.83

2.61

8.01

20.90

20.66

FY17

9.87

6.69

3.19

0.11

3.30

0.27

8.12

0.12

0.14

3.03

0.14

2.89

0.29

0.34

-0.09

3.43

1.05

30.62

2.38

7.87

18.74

19.74

FY18

9.03

6.40

2.63

0.06

2.69

0.52

19.32

0.37

0.15

2.17

0.13

2.04

0.29

1.56

-0.45

3.45

0.61

17.62

2.84

6.75

19.18

12.57

FY19

9.16

6.49

2.67

0.07

2.74

0.35

12.65

0.17

0.18

2.39

0.12

2.27

0.26

0.42

-0.10

2.86

0.81

28.44

2.05

6.01

12.30

12.98

FY20

8.90

6.31

2.59

0.06

2.65

0.30

11.48

0.12

0.18

2.35

0.32

2.03

0.22

2.58

-0.88

3.94

0.53

13.32

3.42

6.01

20.55

13.13

FY21E

8.02

5.35

2.66

0.05

2.72

0.33

12.12

0.17

0.16

2.39

0.28

2.11

0.17

0.37

-0.16

2.48

0.48

19.56

1.99

5.84

11.30

12.48

FY22E

FY23E

7.41

7.28

4.67

4.60

2.74

2.69

0.06

0.06

2.80

2.74

0.32

0.28

11.27

10.19

0.15

0.11

0.17

0.17

2.48

2.46

0.29

0.29

2.19

2.17

0.22

0.23

0.08

0.08

0.00

0.00

2.49

2.48

0.56

0.56

22.41

22.47

1.93

1.92

5.74

6.01

11.89

12.41

12.56

12.88

Source: MOFSL, Company

Exhibit 49: SOTP (FY23E based)

Particular

Core business

Key Ventures

HDFC Bank

HDFC Standard Life

HDFC AMC

HDFC ERGO GIC

Bandhan Bank

Credila

Other Invt

Total Value of Ventures

Less: 20% holding discount

Value of Key Ventures

SOTP

CMP

Upside - %

Stake

Value

(INR b)

3,114

1,968

681

422

120

81

82

17

3,372

674

2,697

5,811

Value

(USD b)

41.2

26.0

9.0

5.6

1.6

1.1

1.1

0.2

44.6

8.9

35.7

76.9

Value/Sh.

(INR)

1,741

1,102

381

236

67

45

46

10

1,887

377

1,510

3,250

2,684

21.0

Target

% of total Multiple (x) Rationale

53.6

3.0

PBV

33.9

11.7

7.3

2.1

1.4

1.4

0.3

58.1

11.6

46.4

100.0

3.6

4.0

45.0

7.0

3.0

1.0

PBV

PEV

PE

PBV

PBV

Last deal

Invested Capital

21.1

50.0

52.7

49.9

10.0

100.0

Source: MOFSL, Company

January 2021

27

Thematic: Housing Finance

Financials and valuation

Income statement

Y/E March

Interest Income

Interest Expended

Net Interest Income

Change (%)

Assignment income

NII (including assignment income)

Change (%)

Other core operating income

Core Income

Change (%)

Operating Expenses

Change (%)

% of core income

Core operating profits

Change (%)

Provisions/write offs

Core PBT

Change (%)

Profit on sale/MTM on Invt.

Dividend Income

One off exp/prov

Miscellanous Income

PBT

Tax

Tax Rate (%)

Reported PAT

Change (%)

PAT adjusted for EO*

Change (%)

Proposed Dividend

Other liabilities

Total Liabilities

Loans

Change (%)

Investments

Change (%)

Net Fixed Assets

Other assets

Total Assets

E: MOFSL Estimates

2016

281

194

87

8.8

0

87

8.8

4

91

9.5

8

7.4

8.4

83

9.7

7

76

2.5

16

8

-5

1

97

30

31.2

66

10.9

66

8.9

31

142

2,879

2,592

13.6

153

7.4

7

144

2,897

2017

309

209

100

14.5

0

100

14.5

3

103

13.5

8

10.3

8.1

95

13.8

7

88

15.3

10

9

-3

1

105

33

31.4

72

7.9

74

12.2

29

124

3,352

2,989

15.3

202

31.5

10

150

3,352

2018

331

235

96

-3.2

5

102

2.2

2

104

0.9

19

127.6

18.3

85

-10.3

21

64

-27.3

57

11

-17

0

115

22

19.3

93

29.8

68

-8.7

41

139

3,989

3,628

21.4

307

52.2

10

43

3,989

2019

393

278

114

18.7

9

123

21

3

126

21.4

15

-22

11.8

111

31.1

9

102

59.9

18

11

-4

0

127

35

27.4

92

-1

87

29

43

152

4,588

4,066

12.1

462

50.5

10

50

4,588

2020

437

310

127

11.4

10

137

11.5

3

140

11.1

15

0.8

10.7

125

12.5

59

66

-35.2

126

11

-43

0

160

26

16.1

135

46

96

10.5

44

188

5,241

4,509

10.9

649

40.4

22

60

5,241

2021E

445

297

148

15.8

8

156

13.4

3

159

13.1

18

21.9

11.5

140

12.1

25

116

75.2

20

9

-9

0

136

27

19.7

109

-18.7

107

11.6

44

207

5,852

5,062

12.3

682

5

25

84

5,852

2022E

459

289

170

15

10

180

15.9

4

184

15.9

20

6.9

10.6

164

17

18

146

26.4

5

14

0

0

165

35

21

130

19.2

128

19.5

49

228

6,544

5,679

12.2

750

10

27

88

6,544

(INR b)

2023E

510

322

188

10.9

12

200

11.2

4

204

11.3

20

0.3

9.6

185

12.6

21

164

12.3

5

16

0

0

186

39

21

147

12.8

145

12.8

55

251

7,471

6,531

15

825

10

30

85

7,471

January 2021

28