Broking firm, Motilal Oswal is optimistic on the housing finance sector and has recommended select housing finance stocks for good gains.
"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 Real Estate (RE) sector, and in turn, for HFCs," the Motilal Oswal report has stated.
HDFC Shares – A 21% Upside Target
Shares in HDFC have an upside target of 21 per cent from current levels, according to the report. "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 target price of Rs 3,250 (FY23E based)," the broking firm has stated.
LIC Housing Finance – A 18% Upside Target
According to Motilal Oswal report, LIC Housing Finance has an upside target price of 18% from the current levels to Rs 510. The firm sees the business turning around, a focused approach on growth, comfort emerging on spreads, while asset quality remains a key monitorable.
"We are constructive on the RE space and LICHF with its strong parentage is likely to be a key beneficiary of the same. We expect spreads and core Retail Housing segment growth to improve in the ensuing quarters. However, asset quality remains a key monitorable. In our view, valuations at 0.8x PBV FY22 largely factor in concerns over capitalization and asset quality. We maintain Buy, with target price of Rs 510 (1x FY23E BVPS)," the broking firm has stated.
AAVAS Financiers – Target Price of Rs 2,000
"Being a niche product, only a few companies have been able to scale up in lowticket affordable housing finance. This business is very geography specific - there is no large pan-India player in this segment yet. We believe AAVAS has built a sustainable business model to scale up profitably across geographies over the long term. Its technology adoption and relentless focus on asset quality has made it stand out vs peers. The management team is young and well-incentivized. While the company has best-in-class RoA of 3.5%+, its RoE is modest at 12-14% due to low leverage. While this is unlikely to meaningfully improve over the next two years, one can expect 16-18% RoE structurally over the long term. AAVAS could deliver 20-25% EPS CAGR over the medium-to-long term without any dilution. However, as valuations are rich, we initiate coverage on AAVAS with a Neutral rating and a target price of Rs 2,000 (5.0x FY23E BVPS)," Motilal Oswal has said in its report.