Stock Pick From The Housing Finance Sector

With a 50 basis points cut in interest rates already in place and another cut expected in the current fiscal, the housing finance companies are definitely at an advantage. As lower interest rates will enhance affordability for home buyers, it will positively impact the demand for housing loans. The rise in demand for mortgage finance is definitely going to help HDFC - the leader in the sector with a market share of 17 per cent.

HDFC has 4.3 million satisfied customers on a cumulative basis as also its shareholders are well rewarded. For the ten years ending April 2013, the shares of the company have given a CAGR of 33 per cent after adjusting for splits and bonus against a return of 23 per cent given by the BSE Sensex in the same period.

Shareholders of the company are rewarded through capital appreciation as also by paying good dividends. It has a track record of paying uninterrupted dividends since 1989 and has consistently increased its dividend per cent since FY03.

Among the factors that have helped HDFC maintain such an enviable performance is the better loan growth without compromising on the asset quality. In the last five years, mortgage loans have been increasing at an average rate of 22 per cent annually and the outstanding loan book at the end of December 31, 2012 stood at Rs 1.61 lakh crore. Despite such growth in its loan book, HDFC has maintained its healthy trend in asset quality with its net NPA standing at nil. The gross NPA for Q3FY13 stands at 0.75 per cent and is the 32nd consecutive quarter wherein the percentage of GNPA has been lower than the corresponding quarter of the previous fiscal.

One of the reasons for such a rock solid asset quality lies in the lower average loan to value (LTV), which stands at 65 per cent against the industry average of around 75 per cent. Besides loan growth and asset quality, HDFC has been able to maintain stable net interest margins, which has consistently remained above 3.5 per cent and stood at 3.66 per cent for Q3FY13. It is likely to improve further as the company is bringing down the amount of its term loans from banks and raising funds through bonds and debentures. The portion of funds raised through bonds and debentures has consistently increased from 45 per cent at the end of Q4FY12 to 58 per cent at the end of Q3FY13. As the base rates of banks are higher than the rates offered in bonds and debentures, this move will definitely help the company to improve its margins.

In addition to this, HDFC is a must for every portfolio considering its investment in different companies. Started as a specialised mortgage company 35 years ago, HDFC has now become a financial conglomerate spreading its wings beyond mortgages. It holds a 23 per cent stake in the HDFC Bank. The company has two insurance subsidiaries where it holds more than 70 per cent stake, an asset management company and another listed mortgage company GRUH Finance where it holds around 60 per cent stake each. The book value of these investments stands at a little more than Rs 250 per share and along with the book value of HDFC of Rs 167 per share the total adjusted book value comes to around Rs 417. Therefore, the current price to book value of HDFC stands at 2.03x. This looks attractive considering the healthy return ratio (ROA = 2.8 per cent and ROE = 22.7 per cent) of the company at the end of Q3FY13.