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This article is more than 1 year old.

HFCs well placed to counter COVID disruptions, says Centrum Institutional Equities

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The novel coronavirus or COVID-19 induced lockdown has led to a massive economic disruption affecting domestic demand and cash flows of various sectors. However, the housing finance sector has proved its resilience by firmly holding its ground and withstanding the tough challenges.

HFCs well placed to counter COVID disruptions, says Centrum Institutional Equities
The novel coronavirus or COVID-19 induced lockdown has led to a massive economic disruption affecting domestic demand and cash flows of various sectors. However, the housing finance sector has proved its resilience by firmly holding its ground and withstanding the tough challenges.
The segment’s best-in-class asset quality and lower amount of loans under the moratorium, the Housing Finance Companies (HFC) are well placed to counter the asset quality stress, a report by Centrum Institutional Research said.
The COVID-19 scenario posses lesser challenges for the sector, it added.
During the pandemic led disruption, corporate and housing segments have claimed the least moratorium, around 20-25 percent, while a higher proportion of developers, SME and vehicle loans (60-75 percent) are under asset quality standstill.
“The asset quality for housing loans has been the best with Gross Non-performing Assets (GNPA) under 2 percent. Once the moratorium ends in August 2020, HFC would be the best placed to counter the stress that could emanate since home loans have the highest payment priority, as per CIBIL,” the report said.
The brokerage expects housing demand may be weak in FY21 due to a reduction in affordability given stretched customer cash flows, however, the affordable housing segment could see some demand.
Further, India’s mortgage-to-GDP ratio at 10 percent is the lowest among peers and this is expected to improve to 12 percent by FY22, the brokerage noted.
As per McKinsey, 40 percent of Indian population will be living in cities by 2030 versus 34 percent currently. Nuclearisation is also rising with household size falling from 5.5 in 1991 to 4.8 in 2011.
“All these factors might lead to a spur in housing demand in India. Incremental demand of Rs 50-60 lakh crore suggests significant growth given outstanding home loans of Rs 20 lakh crore in FY19. Barring COVID-19 impact, total home loans were expected to reach Rs 35 lakh crore by FY22E showing a CAGR of 21 percent over FY19-22E,” Centrum Institutional Equities said.
Meanwhile, under the Pradhan Mantri Awaas Yojna (Urban), till December 27, 2019, sanctions were received for 1.03 crore houses, of which 32 lakh were completed. Total subsidy released was Rs 64,000 crore, while the utilised amount was Rs 49,700 crore. By FY20, total home loans have probably reached around Rs 23 lakh crore, of which share of banks/HFC would be 59 percent/41 percent.
In FY19, HFCs had a total of Rs 41,400 crore loans under affordable housing. NPA levels have been higher under affordable, mainly led by the more than Rs 5 lakh category, while in terms of overall housing, the Rs 10-25 lakh bracket is the best in terms of asset quality. Delinquency level in HFC is second best to private banks, at 1.8 percent/2.6 percent in home loans/LAP, the report noted.
Among companies, the brokerage prefers players focused on salaried home loans in the affordable segment with lesser reliance on developer loans.
It has initiated coverage on LIC Housing Finance and Can Fin Homes with a Buy rating and target prices of Rs 500 and Rs 437 per share respectively.
For LIC HFL, the brokerage said that the sovereign holding and salaried share at 80 percent plus has led to the highest credit rating of CRISIL AAA leading to lower funding cost.
“Developer/LAP loans are slowing down and credit flow is shifting to housing. Share of affordable in individual disbursements for FY20 improved to 31 percent from 20 percent a year ago,” the brokerage noted.
Meanwhile, Can Fin Homes has consistently maintained housing share at 90 percent and a lower ticket size with stringent income assessment has led to best-in-class asset quality (GNPA 0.8 percent), the report noted.
Sovereign holding, salaried share at 70 percent, affordable housing focus and reducing leverage has led to lowest funding cost at 7.8 percent, it said.
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