Should investors still bet on housing finance stocks?

The focus on affordable housing has fuelled interest in housing finance stocks, which have gained 65% in a year

Published 6 years ago on Sep 27, 2017 1 minute Read

Harendra Kumar, managing director (institutional equities), Elara Capital

Investors see growth in housing finance companies (HFCs) and are betting on the compounding possibilities. While they are clearly expensive at current levels, from a longer term perspective, the return prospects are bright. Today the government has very few avenues to kick start growth and one of them is housing. The new incentive plan laid out in the budget is very attractive and if that plays out, Housing for All will be a structural growth story. PSU banks are not showing growth of any kind and private sector banks are priced to perfection. Leading HFCs posted a 21% growth in their loan book in Q1FY18 as against Q1FY17. Housing as a segment is still underpenetrated and once execution from the government picks up we will have a resumption in the rally. Yes, the valuations are a little expensive but then again growth doesn’t always come cheap.

Vinay Khattar, senior VP — head (research), Edelweiss Securities

I think the valuations of HFCs are quite expensive. Though there are tailwinds in the form of government focus on affordable housing, these valuations will sustain only if the companies are able to maintain their profitability. But the entry of newer players is resulting in cut-throat competition between HFCs which is making the business a lot more commoditised. So while you will continue to see loan growth driven by demand, it will be extremely challenging for HFCs to generate reasonable RoE while maintaining the quality of earnings. There is a perception in the market that there are limited sectors with growth opportunities, so the valuation premium is rich in these kind of sectors. But with most HFCs trading at 4x-6x P/B, one year forward and the asset quality at its best, it would be difficult to make money in these companies from the current levels.