Indiabulls Housing Finance, Gruh Finance & HDFC, which NBFC is trading at cheap price?

It is always good to cross check your investment business key numbers with its competitor in the sector. HDFC is the oldest and biggest business in the India to issue loans for the homes.

HDFC brand is reputable as this has changed into big conglomerate in the Indian business history. The biggest private sector bank, HDFC Bank and also the biggest small ticket home lender, Gruh Finance belongs to this conglomerate. Both the brands have changed into multibagger for many investors in the last 2 decades. There will be very few number of investors who lost money investing in this brand.

HDFC also runs its insurance business and is in process to split that business as new entity and list it into the stock market by creating more value for its shareholders. This is one of the many reasons its stock price today is trading at premium price to its values and if you click at the above link HDFC we have written about it earlier on this blog. All these NBFC’s business model is to source money from the capital market and then lend that money to home buyers. They also are in the business of selling those outstanding loans to the third party as bonds. A good mix of the source of funds gives advantage to them to sell their products to the client at competitive interest rates.

Cost of fund is very crucial in this business model. If your cost of funds is too high then your margins squeezes impacting your business profitability.

Key difference

Let us understand the key metrics of all the three business.

Year end 2017 HDFC Gruh Finance Indiabulls Housing
Cost of Fund/Revenue 0.63 0.62 0.62
EPS 68.87 8.15 68.80
Book value 378.90 30.53 286.03
PE Ratio (4th May 17) 22.62 times 50.92 times 15.62 times

 

Clearly looking at the above table it is clear that cost of fund for all the three business is pretty same. By average for every rupees 100 generated as interest income, it costs them rupees sixty two to source that fund.

The return on equity for all the three companies are at healthy rates (more than 20%) but there is a big variance in their PE ratios.

It is also better to compare Gruh Finance with Indiabulls Housing Finance here as HDFC also have interest in other business then finance. We have been educating our readers on this blog regularly about the variance in valuations of both business.

So what could be the reason for such big variance?

Is it because of Indiabulls Housing Finance have business connection with its parent in London and Gruh Finance having its business connection in India with its sibling bank HDFC Bank, biggest private bank?

From the business operations perspective, I don’t see any difference between Gruh Finance and Indiabulls Housing.

One of the biggest positives we see within the Indiabulls Housing is its cost of fund is similar to Gruh Finance even though they do not have backup local bank like HDFC Bank for Gruh Finance. Could be this one of the reason market is selling Gruh Finance at premium price?

So far we could not understand the anchor behind such high valuation for Gruh Finance. Gruh Finance is still one third of Indiabulls Housing Finance market capital and have given a returns of 70% in the past 2 years. Whereas Indiabulls Housing Finance had given returns of 88% in the past two years.

Gruh Finance is still a small company in compare to Indiabulls Housing and that gives advantage to them. Similarly Indiabulls Housing also have tie-ups with its sister real estate Indiabulls real estate business which gives them edge over Gruh Finance.

We still don’t know the exact answer about this variance. But our method of valuation claims that Indiabulls Housing is still trading within 2018 valuation band and also it is trading today close to its lower end valuation. On the other side Gruh Finance is trading at premium of 2019 valuations!

We know market can sometime give irrational valuation to certain company. But we also believe that in the long run prices converge with the performance of underlying assets. Our belief is still intact that because of this difference in valuations, your returns will exceed from Gruh Finance if you invest in the Indiabulls Housing Finance.

Remember that doesn’t mean Gruh Finance is not quality business. They both are quality business but on valuations perspective Indiabulls Housing looks more attractive than Gruh Finance to give better returns.