Short note on Q3 Results of Housing Finance Companies. Will they stage a comeback in 2019?

Q3 results suggest a bottom is in place for Housing Finance cos. Are they set for a comeback?

With 2021 DHFL bonds at 24% YTM, market is pricing a default. It was not a lack of business that crashed the stock price of the leading mortgage provider (450+ to 120) but issues with governance & worries about raising funding and viability as a going concern.

Q3 results of its close private sector competitor – Indiabulls housing also show slowdown in disbursement, once again, not from a lack of demand for mortgage loans – but concerns over ALM.

Sentiment may be bad but the true measure of housing loan demand is from a government financing company that does not have to worry about its failure to raise funds. Q3 results of LIC Housing Finance show a spectacular increase in mortgage AUM and a maintained yoy financial margin of 19%.

Possible Bottom

Further the sell-down of mortgage portfolios to public banks and securitization have helped private players de-risk and raise funds for the post-RERA leg of growth via affordable housing. With the Cobrapost sting, all bad news is in public. Good news is being ignored. Further, there is no palpable distress on the liability side (CP market) as seen in earnings presentations. These signs indicate a possible bottom.

The real estate cycle is said to be of 11-13 years. The property bubble peaked in 2012 but the bottom may be closer than we imagine. Think of affordable housing like small cap and leading indicators that will rally way before home inventories in the main cities start getting back-filled in 2024. We are already in 2019.

At less than 2 forward price to book, the market seems to think mortgage disbursement will keep slowing into the future and loan yields will not rise as fast as bond yields. For the investor these misunderstandings and cyclically depressed valuations may spell opportunity.

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