Why We Need To Grab A Chunk Of Housing Finance Stocks Soon

First, you must understand that the savvy investors are already gung-ho about housing finance stocks. Rakesh Jhunjhunwala, as usual, was ahead of everyone else. He grabbed a big chunk of Dewan Housing in October 2013 when it was languishing at Rs. 147. At the CMP of Rs. 300+, the Badshah has already doubled his investment. In all his interviews, the Badshah sends subtle hints to his disciples to buy Dewan Housing. You can see that in his December 2013 interview where he pointed out that the housing finance market size is “at least 500 times” what it is today and that Dewan Housing is an “undervalued” stock. He repeated this in his interview to the lovely Menaka Doshi where he asserted that he was “very bullish” about Dewan.

Basant Maheshwari, our friendly neighbourhood stock wizard, was not far behind in latching on to HFCs. He picked Repco and wrote a glowing report on why the stock deserved to have pride of place in your portfolio. Basant also gave an inspiring talk in which he talked at length about the prospects of Repco and Gruh in NAMO’s regime. Basant also emphasized that the size of opportunity is huge. You should listen in, if you haven’t already.

Daljeet Kohli of IndiaNivesh is yet another smart investor who has understood the potential of HFCs. He has come out with all guns blazing in favour of LIC Housing Finance and recommended a buy (pdf). Daljeet has also put LICHF in his Model Portfolio.

You can also see from the stock prices that the savvy investors have started cornering HFC stocks. On a YOY basis, Can Fin Homes is up 132%, Repco is up 89%, Dewan Housing is up 80%, Gruh Finance is up 53% and LIC Housing is up 17%.

On the question of which stock to invest in, you are really spoilt for choice. On the one hand, you have the blue chip behemoth HDFC with a market cap of Rs. 1.36L crore. On the other hand, you have small cap minnows like GIC Housing and Can Fin Homes with market cap between 700 to 800 crore. In the middle, you have Dewan Housing and Repco Home with a market cap between Rs. 2500 crore to Rs. 4,000 crore.

The best way to understand the nuances of each HFC is to read the comprehensive research report (pdf) by Santanu Chakrabarti & his team at ICICI Securities. Though the report is a year old, not much has changed on the business front (though the stock prices have zoomed). The report also explains in detail why the entire Industry will thrive.

On Dewan Housing Finance, there is a good report (pdf) by Motilal Oswal. Though this report is also a year old, not much has changed from the business front. The report rightly says that DHFL is “getting into the big league”. It recommends a buy on the basis that DHFL has “strong growth visibility and compelling valuations”.

Also, DHFL president, Rakesh Makkar, came on record a few days ago to state that the company was in the process of opening 100 branches across the Country. He added that the focus areas would be Tamil Nadu and Kerala. He pointed out that Tamil Nadu accounted for 10% of their home loan portfolio and plans were to raise it to 22-25% by targeting the exponential growth in technology and allied industries that had sizeable number of working women population.

You can also view an interview of Kapil Wadhawan, DHFL’s CMD, where he explains the scope for the company. He made it clear that NAMO’s focus on low cost homes offered “tremendous opportunity” for DHFL (and the other finance companies).

Incidentally, DHFL happens to be a core stock in HBJ Capital’s “The Millionaire Portfolio” (I downloaded it when they were offering it free). HBJ’s mastermind P. Gokul Raj explained the merits of DHFL in businesstoday: “Dewan Housing’s return on equity, or RoE, has been 20% a year for the last 10 years. Its earnings are also not volatile, with lowest RoE in the last 10 years being 15.2% (in 2006-07). For a company that has a huge market to serve, strong moats, long operating history and rising business profile, it is available at a very low valuation of 0.8 times book value and around five times 2013-14 earnings.”

Speaking for myself, I already have a chunk of Repco Home Finance in my portfolio, which I bought on Basant Maheshwari’s recommendation. I am now tempted to tuck into Dewan Housing Finance as well. After all, we can’t ignore Rakesh Jhunjhunwala’s hints to us, can we.