Mumbai:

Riding on the back of the robust growth in housing loan demand, local housing finance companies, or HFCs, have offered smart returns to investors in the past few months. Stocks of most of the HFCs led by HDFC and LIC Housing Finance have outperformed the market to scale their peaks in recent weeks.

According to analysts, investors are anticipating better returns from these companies, given the huge potential for growth in the housing sector on which their prospects hinge. The returns, however, will be vulnerable to fluctuations in demand for housing and change in interest rates, they said.

Despite high volatility market conditions, shares of HFCs have steadily been on a rise, with industry leader HDFC gaining 17% against the rise of 9% in the Sensex in the past three months. The stock, in fact, scaled its 52-week high in the last week of April, though some selling pressure pulled down the price subsequently. It, however, spurted 2.3% to Rs. 2,792 amid a smart recovery in the market on May 10, 2010. HDFC’s housing loan disbursements rose 27% in FY10.

LIC Housing Finance also stands out having emerged as the top gainer in the HFC segment. Up 5.1%, the stock climbed 29% in the past three months. The company is better placed to gain from the growth in the housing finance sector because of a few advantages it enjoys over its peers, according to some analysts. Factors such as huge demographic reach, good risk management system and lower interest rates will favour the company, according to them. “The margin of safety is high, as LIC Housing Finance lends to the extent of only 55-60% of the property value, while the remaining is to be contributed by the borrower. This minimises the risk of default,” said Emkay Global Financial Services head of research (institutional equity) Ajay Parmar.

The housing finance sector generally is poised for a better growth due to many factors such as growing disposable income and steps taken by the government to promote the housing sector. HFCs always have some advantages over banks while disbursing home loans, as there is no compulsion to maintain cash reserve ratio or CRR level at a particular level. That means HFCs can deploy more money than banks in the housing finance market, said Mr Parmar.

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