Morgan Stanley lowers price targets on NBFCs with real estate exposure

Morgan Stanley has cut its price targets on shares of lenders with real estate exposure including Edelweiss, Indiabulls Housing, LIC Housing and PNB Housing by 15-50% citing higher credit costs, slowing economy and shrinking profitability. “The credit crunch faced by real estate lenders has lasted a year, with no solution in sight,” said the brokerage’s analysts in a client note. “The economy is slowing, which will likely hurt housing demand. Risk of multi-year woes for these NBFCs is mounting.”

Morgan Stanley said it expects a prolonged slowdown with shrinking Return on Equity (ROE). “…most of them will struggle to get funding to scale up the more profitable developer financing business and will have to both de-risk and de-lever from current high leverage levels to give fixed income investors comfort,” the note said. The brokerage retained its ratings on LIC, PNB and Indiabulls, while cutting Edelweiss to ‘equalweight’ from ‘overweight’.



Edelweiss

Current Target Price: Rs 120; Previous Target Price: Rs 235 CMP: Rs 106.10

Morgan Stanley said Edelweiss has meaningful real estate and structured finance exposures, which are high-yielding and have high risks. “Asset quality is highly susceptible to the state of the real estate and equity markets,” the brokerage said, downgrading its rating on the stock to equalweight from overweight. “With the economy slowing and real estate issues likely increasing at the margin, risks have increased.”

LIC Housing Fin

Current Target Price: Rs 425 Previous Target Price: Rs 500 CMP: Rs 399.10

The stock is trading at 1.1 times FY20 estimated Price to Book Value (P/BV) but Morgan Stanley has still not assigned a ‘buy’ citing structural issues specific to the firm. The brokerage said LIC Housing has been progressively losing home loan market share in recent years. The firm has seen an increase in both retail and developer bad loans, it said. “Investors are unlikely to attribute high multiples unless they demonstrate recoveries from bad loans or are able to manage down the bad loans in the developer finance book.”

Indiabulls Housing Fin

Current Target Price: Rs 410 Previous Target Price: Rs 600 CMP: Rs 424.25

Morgan Stanley said the company’s Return on Equity (ROE) could fall to low doubledigits from over 25% in recent years. “In order to be able to get growth funding from the markets (IHFL has been shrinking its balance sheet), it will have to meaningfully de-risk the loan book and also manage down leverage which will have implications for profitability,” the brokerage said. Such concerns will remain even if it is merged with Lakshmi Vilas Bank. “If IHFL were to convert in to a bank, there will be additional regulatory and operating costs (to build retail liabilities) as a bank,” it said.

PNB Housing Fin

Current Target Price: Rs 550 Previous Target Price: Rs 775 CMP: Rs 640.90

The brokerage said the economic slowdown could impact PNB Housing, which has high exposure to the selfemployed segment. “PNBHF’s profitability has been lowest among large HFCs despite running a relatively higher proportion of non-housing loans; and even within housing loans, a higher proportion of loans to the self-employed segment,” said Morgan Stanley. “This can come under further pressure as PNBHF scales down the share of non-housing loans like other HFCs.”