Not a good time to bottom-fish HFCS

New tax regime may worsen their growth pangs; shares didn’t recover from post-budget correction

At a time when housing finance companies (HFCS) are already grappling with weak demand and weak asset quality, particularly on the developer loan book front, the recently concluded Union Budget seems to have delivered another blow to the sector. The finance minister has introduced a new tax regime, which reduces the tax burden for individuals willing to let go tax benefits/exemptions. However, but it works against the developers and housing finance sectors, as one of main motivations to purchase property is for lucrative tax benefits – up to ~1.5 lakh for principal payment under Section 80 C and ~2 lakh interest benefit under Section 24.

Since industry is largely motivated by tax incentives, especially for the retail segment. “If this incentive were to completely go away, we are probably looking at fewer people buying houses. Moreover, those investors who have ready liquidity to buy a new house but still choose to take a home loan (for tax benefits) will be disincentivised from taking a home loan,” says Abhijit Tibrewal of ICICI Securities. Even as a majority of analysts feel that most taxpayers may not move to the new tax regime just yet, the finance minister’s commentary on eventually doing away with exemptions is viewed as a negative for the housing sector and lenders participating in the sector.

That a decision of this sort comes when lenders are already grappling with weak demand for loans adds to the stress. Whether LIC Housing, HDFC or PNB Housing, which are among the major lenders to publish their December quarter (Q3) results, the common thread was that of weak loan growth.

At 13.4 per cent and 12 per cent year-on

year (YOY) growth in Q3 for HDFC and LIC Housing, respectively, the number came significantly lower than the year-ago run rate. At these levels, they lagged even the September quarter’s growth rate, indicating that there probably are no signs of revival for housing finance companies. Even if one attributes this sluggishness to moderating growth in the developer loan segment, loans to individuals, too, didn’t expand in the proportion seen earlier. At 6–16 growth YOY in Q3, it reiterates the weakness in the housing sector.

What’s more, the quarter witnessed a noticeable deterioration in asset quality. HDFC’S provisioning cost increased to ~2,865 crore on account of prudential provisioning in Q3. Yet, analysts, while drawing attention to its wholesale gross non-performing assets (NPA) ratio increasing to 2.9 per cent in Q3 – a level never seen before for the company -- say investors should be cautious on this segment, which accounts for 28 per cent HDFC’S loan book.

Developer loans were equally trouble for LIC Housing and PNB Housing, which witnessed a 130–150 basis points (bps) increase in their gross NPA ratios to 2.73 per cent and 1.75 per cent, respectively, in Q3. The fact that stress wasn’t just contained to wholesale loans, but permeated into the retail segment explains why LIC Housing’s stock price, in particular, has corrected by over 10 per cent since its Q3 results. For LIC Housing, at the 1.9 per cent retail gross NPA ratio (up 100 bps YOY), the number warrants for caution, considering that nearly 80 per cent of its retail loans are towards the salaried class.

With the gone by quarter spelling enough troubles for the sector, analysts believe a probable revival in loan growth could be further delayed with the Union Budget introducing a new tax regime. “Now isn’t a good time to bottom-fish HFC stocks,” says a fund manager.