Developer financiers: Sailing with the tide
We have analyzed charges created by some developer financiers (HFCs/NBFCs) in order to understand their overall underwriting practices and to get an idea about the quality of the wholesale book, geographical concentration and ALM profile.
* Portfolio quality for most financiers improved significantly in Dec’20 compared to Sept’19 (post Altico crisis), with increasing share of BB+ wholesale loans: The available data highlighted that the overall exposure to projects rated ‘above BB’ improved significantly in Dec’20, with HDFC Ltd standing out with ~78% of exposure (Exhibits 2-3) followed by LIC Housing at ~65% (Exhibits 11-12) and LT Finance at ~61% (Exhibits 20- 21). This is far better compared to Sept’19 numbers (post Altico default) when the overall exposure to ‘above BB’ rated projects stood at ~50%. We expect that the recent consolidation in the developer book for most of these lenders led to an improvement in underwriting practices in Dec’20. Such a sharp improvement in the lending profile should ensure relatively fewer defaults and steady provisioning charges in coming quarters.
* Granularity in geographic exposure: In terms of geographical concentration, most financiers have diversified their exposure with the share of West and North regions declining and the share of southern developers increasing in the overall portfolio (Exhibits 4, 5, 13, 14, 22, 23, 31, and 32). Previously investors remained skeptical over the NCR region, while we were equally concerned about Mumbai Metropolitan Region (MMR) and Pune markets, considering relatively high inventory levels. However, the inventory level has been improving in the past few quarters, owing to strong residential demand.
* Maturity profile still remains stretched with elevated share of loans with tenure of more than 5 years; excess liquidity do provide comfort: As expected, the maturity profile for most of these financiers is relatively stretched with average ~40% of charges carry more than 5 years of maturity. However, considering excess liquidity currently in the system and the superior yet diversified borrowing profiles of lenders, the issue is less relevant now compared to few quarters back when HFCs/NBFCs were unable to raise long-tenure money. Here as well, HDFC remains balanced with ~47% of charges with less than 5 years of maturity (Exhibit 8). LICHF is also better placed with ~44% of charges with less than 5 years of maturity (Exhibit 17).
* LICHF’s inability to price risk is a major concern; HDFC remains better placed: LICHF with ~27% of charges created against ‘BB & below’ projects/developers has ~53% of charges priced up to ~12% yields, whereas HDFC with merely ~3% of charges against ‘BB & below’ book still manages to maintain ~49% of book up to ~12% yields.
* Reiterate Buy on HDFC and Hold on LICHF; LTFH remains dark horse: Due to its superior asset/liability mix and healthy provision coverage, we maintain Buy (OW in NBFC EAP) on HDFC with a TP of Rs3020, corresponding to ~2.1x FY23E P/standalone book. On the other hand, we believe that LICHF’s spreads are more sensitive toward rate cuts, hence we remain a bit skeptical due to its lack of pricing power. We retain Hold on LICHF with a TP of Rs432, corresponding to 1x FY23E P/ adj. book. On LTFH, we have a Hold rating, corresponding to 1.2x FY23E P/B. Upside risks to our estimates for LTFH include recoveries and improving opportunities in infra financing. We have been highlighting our concerns on the developer lending segment for the past eight quarters (Exhibit 5). However, with strong demand in housing and low interest rates, we believe that developer financing could be on the cusp of a turnaround and may see strong growth momentum.
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