Find out why Kotak Institutional is bullish on housing fin cos

Housing finance companies are going to be the biggest beneficiaries of the decline in bond rates, said Nischint Chawathe of Kotak Institutional Equities. "Housing finance companies have a relatively lower spread when compared with niche auto finance companies," he added.In an interview to CNBC-TV18, he mentioned some of his picks. He likes LIC Housing Finance at a target price Rs 590.On IIFL, he said the company is a good franchise and with capitalisation done; growth prospects tend to be very strong. Chawathe doesn't find a significant upside in IIFL from current levels. Calling Bajaj Finance an extremely good brand, he recommends waiting for a 15 percent decline in the stock to buy. Below is the transcript of Nischint Chawathe’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.Latha: We have seen some extraordinary rallies in the likes of Bajaj Finance, Capital First, even IIFL holding up 10 percent. Is there still value left or is there a fresh reason to buy because of the fall in wholesale yields?A: Stocks have run up a lot. Over the last few days we would have downgraded 10 stocks under our coverage. This is purely on the basis of valuations. The stocks that I would look at now are the ones, as you rightly said, the ones which would be the biggest beneficiaries of decline in wholesale rates. So, we have seen a rally in the tenure which will essentially mean that this will be followed by a rally for the corporate bonds as well and which is where we would now want to look at housing finance companies once again. Housing finance companies have a relatively lower spread as compared to some of the niche auto finance companies, etc. so what that essentially means is that when your borrowing cost comes down, then your marginal spreads increase very sharply. So which is where we are saying that someone like an LIC Housing Finance which has a very high dependence on bond borrowings will tend to benefit the most in this environment.Anuj: Do you have some of these stocks like Edelweiss and IIFL under your coverage because these stocks have run up a lot and here price to book may still be offering you some value compared to others.A: We have a coverage on IIFL. We have a price target of Rs 310. Yes, it is a very good franchise. With the capitalisation that they have done, it will mean that their growth prospects will tend to be very strong. Capitalisation was one issue which they had to sort out and they have sorted it out pretty well. So, we are positive on this, but yes, after the rally, we do not really find very significant upside from these levels.Latha: Let me come back to LIC Housing. Yesterday, Dewan Housing Finance Limited (DHFL) told us that they raised Rs 4,000 crore at 9.1 percent and they said that this year, their borrowing costs could fall. The cost of funds could fall by a full 100 basis points. So, what are you looking at in terms of a price you can offer, DHFL if you have a coverage, LIC Housing, Repco Home Finance?A: We do have a coverage on DHFL. And clearly, the response for DHFL’s issuance has been quite positive. I am not very sure what is the extent of decline that would come in because this is end of the day just a marginal borrowing cost that comes down. But yes, from a directional point of view, it is positive and after this issuance you will see a couple of more companies which will want to come up with these kind of issuances.Anuj: The two most expensive ones, Bajaj Finance and Bharat Financial Inclusion or SKS Microfinance. At what levels would they be buys again?A: As far as Bajaj Finance is concerned, we do not have a direct coverage on it. It trades at a very expensive valuation and for Bajaj Finserv, we have a price target of around Rs 2,440. So, 15 percent decline from there is where we will looking at buying the stock. Having said that, we should say that Bajaj Finance is an extremely good franchise, but it is just the valuations that are really holding us back at this point of time.Latha: LIC Housing, your price target?A: LIC Housing, price target is Rs 590.Latha: Have I left out anything else which you find attractive in this space even now?A: Broadly, we have covered it. Maybe an IDFC is the one which still has a holding company discount and that is the one to really watch out for. I guess, the holding company discount, the entity is not folding into the bank very shortly, but there is still some time for it go, but that is the one that should be watching out for.