Strong growth, fall in policy rates, reforms will boost FDI: Kapil Wadhawan7 min read . Updated: 06 Jan 2017, 01:23 AM IST
The chairman and managing director of Dewan Housing Finance Corp on demonetisation, IPOs in the housing finance sector and FDI inflows
Singapore: Healthy economic growth, a decline in policy rates and a reform-oriented stance will boost India’s quest to attract foreign direct investment (FDI), and the country will remain a favourite investment destination despite buoyancy in the US economy, Kapil Wadhawan, chairman and managing director, Dewan Housing Finance Corp. Ltd (DHFL), says.
Edited excerpts from an interview:
One of your competitors—PNB Housing Finance—saw a good initial public offering (IPO) just a couple of months ago. What does that say about the sector overall?
The past year has been fairly good for IPOs, indicating a build-up of investor confidence. The housing finance sector is also witnessing strong focus due to the central government’s vision of housing for all by 2022, which has lent an impetus to the low- and middle-income housing segment.
This has strengthened the outlook for companies such as DHFL that has a strong presence in tier-II and tier-III towns and cities which form the bedrock of available potential. Largely, the retail housing market is expected to demonstrate good fundamentals with the affordable housing category set to continue to lead the momentum.
With several supportive growth drivers, the housing finance sector has the potential to witness more successful IPOs and play a key role in the government’s efforts to achieve its affordable housing ambitions and targets.
How do you see demonetisation impacting housing finance companies; the element of cash will reduce and formal credit demand will increase…is that good or bad?
The decision to demonetise Rs500 and Rs1,000 bank notes augers well for formal credit, which will persist over the mid-term. On a growth rate of close to 15-20% presently clocked by the retail home loan segment, the market sentiments expect the medium- to long-term potential to see an upside of another 5-10%. With cash operations getting limited, the higher eligible loan component will boost loan ticket size and also pave way for higher loan-to-value ratio.
But demonetisation appears to have disrupted the real estate sector that was already facing a slump? Will re-sale prices in the secondary market be impacted greatly?
One must understand that different product categories and segments of the real estate market are facing different impacts. The focus of LMI (lower and middle income) segment of people in tier-II and tier-III towns and cities have not been impacted as a majority of them buy a house for their own use. Though, currently, people are in the process of aligning themselves to a new regime leading to a brief period of wait-and-watch, the affordable housing sector will not see any major impact. As for the other segments, there will be a phase of rediscovery of price to demand, till it reaches a new normal.
There has been a lot of debate on the merits and demerits of demonetisation and whether it has really addressed the issue of black and counterfeit money, and also on its short- and long-term impact. But, big picture, how has society been transformed?
Firstly, in looking for lasting impact, demonetisation alone does not hold all the keys. The need for transformation towards digital economy needs to go beyond financial transaction across a range of services for the common man like registration, tolls and taxes, fees and licences. This will eliminate physical interface and take out rent seekers. That said, the demonetisation will necessarily bring a greater share of financial transactions to the formal system, making the financial system stronger, credit growth robust and financial inclusion broad-based.
If society can adapt to digital transaction as the most preferred system of payment and settlement, India could emerge as the world’s largest entity in the digital economy.
This can create huge opportunities for growth and employment in a far more dispersed and wide-spread manner than a traditional system.
Demonetisation has opened up a possibility to leapfrog into the future. Of equal importance is the follow-through of the demonetisation initiative with other key policy measures on tax incentives, banking reforms and ease of doing business to get the maximum out of this bold move.
Many investors from abroad share the view that valuations in India are stretched. What is your take?
India has remained a sweet spot among EMs (emerging markets) for a long spell amid uncertainties and a slowdown in major parts of advanced economies.
That may have made valuations look stretched; but if one looks at the growth potential in our economy with GDP (gross domestic product) growth at +7%, far ahead of any comparable economy, there is still a large head room for value creation.
Even if a few of the policy pronouncements take off on ground in quick succession, the impact will be large.
Housing finance holds huge opportunities for growth and its valuation will remain attractive for a long time. Some of the initiatives like the Real Estate Regulatory Authority, programme-based approach to promoting affordable homes and with interest rates getting more and more consumer-friendly, it will collectively provide strong growth momentum for HFCs (housing finance companies) with focused market segment and leveraging capability.
Net FDI (foreign direct investment) inflows have fallen this year because of equity divestments by foreign investors. Going forward, will India be able to sustain the dream run it has been having over the past two years, in terms of FDI inflows?
Good economic growth, a decline in policy rates and a reform-oriented stance will boost India’s quest to attract FDI.
India will continue to remain a favourite investment destination despite buoyancy in the US economy.
Our core infrastructure sectors which can attract and retain large FDI—such as ports, highways, power generation—however, have to become more profitable and time-bound in project execution.
It is also to be appreciated that the domestic investment appetite, particularly from retail investors, both for equity and debt, has ensured sustained support to genuine investment needs.
Our own NCD (non-convertible debenture) issue and its overwhelming response from retail segment is a case in point.
Housing for all by 2022 is an important policy initiative but how do you see this playing out? We don’t have much detail on execution/implementation.
While housing has been engaging attention of policymakers and planners for long, the departure this time is an articulated vision document towards ‘Housing For All by 2022’. Its impact is likely to be felt over the long term. On implementation and to spur the demand side, the government has already taken some major policy initiatives.
One such initiative is the Real Estate Act, which is expected to streamline business practices in the sector, fostering a customer-friendly approach and resultant positive impact on demand.
The decision to launch the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Smart Cities mission to promote “bottom up" planning in the country will also complement the vision of ‘Housing for All by 2022’.
There are mega projects worth over Rs4 lakh crore (Rs4 trillion) for developing smart cities, towns and providing housing for all in the next seven years. Under this, notable progress has also been made by states like Gujarat, Karnataka, Rajasthan, Maharashtra, West Bengal and Tamil Nadu, in terms of the number of approvals and construction of houses. On the whole, much ground work and continuous dialogues are underway, indicating that the set targets are taken up with commitment.
Does a weak global economy constrain India’s growth?
India has its own captive consumption base, which puts it at an advantageous position. India’s strong economic performance is largely driven by domestic factors such as investment and consumption rather than external factors. It has been evident that India’s reliance on external factors for growth during the five-year period from FY04-08 was negative—GDP grew 8.8% per annum.
For investors, how big an opportunity is it if they were to look at India’s small- and mid-caps, when compared with large-caps? Don’t you think that this is a space that investors have not discovered yet? Most companies in the mid- and small-caps space are in sectors that are witnessing rapid growth, or in sectors that will benefit as the country’s economy bounces back.
Surely the small- and mid-caps have great growth potential and many aspects we spoke about earlier indicates potential to make growth broad-based and inclusive, meaning thereby a major role for SMEs (small and medium enterprises).
The market has recognized this potential and small- and mid-caps continue to enjoy a favourable valuation and huge response to IPOs from this segment. We will continue to enjoy new potential emerging from this segment to sustain growth.
One of the key challenges for this government is creating jobs; and there is not much to show here. In fact, job creation appears to be suffering under the current government. Jobless growth does not help anyone. Is this not an area of serious concern?
In India, opportunities are coming up in large numbers in the new areas. Several sectors have demonstrated great human resource absorption capacity such as e-commerce, financial services and financial technology sectors. We are witnessing significant initiatives to ensure greater employment opportunities and employability through skills enhancement. Make in India and Skill India are clearly timely interventions to create a skilled workforce for strong, sustainable and balanced growth.