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Monday, June 23, 2008

Take A Safe Ride Home- LIC Housing Finance

Low valuation multiples and an above-average dividend yield make LIC Housing Finance an interesting bet for long-term investors

LIC HOUSING Finance is the secondlargest housing finance company in India. Most of its business comes from giving loans to individuals. The company also provides project loans to builders and developers. It is one of the oldest companies in the home loans market along with HDFC. And this shows that it has weathered ups and downs of economic cycle and has developed expertise and network necessary for the industry. It increased its share in home loans market to 7% in FY08 from more than 5% in a year earlier. This was due to an increased focus on promotional activities. The portion of floating rates loan increased last year to the extent that most of the loans are offered on a floating rate basis. This led to improvement in net interest margins (NIMs). The long-term prospects of the business are positive, as India is seeing the fastest pace of urbanisation in its recent history. More and more young people are buying houses, thanks to rising disposable incomes.

The interest rates are rising due to inflationary pressure and these are testing times for housing finance companies. The recent RBI decision to hike the repo rate by 25 bps has made bankers rethink about their lending rates. HDFC, India’s largest home loan provider, has said that it will take a decision on hiking its lending rate by end-June. If it does hike the rate, it could trigger an across-the-board increase in interest rates on home loans in the industry.
However, it is important to realise that disposable income, which creates demand for home loan credit, is not expected to be hit that badly by rising inflation. Besides, young professionals are expected to continue buying homes to save taxes, as both principal and interest payments are tax deductible. Also, the demand for home loans is less elastic as compared to other loans, which provides a cushion to companies in this business in times of rising interest rates.

The company has been on a high growth track in the past five years, as the balance sheet was expanding at a compound annual growth rate (CAGR) of more than 20%. The performance got a boost in FY08 due to widening NIMs. The impact was visible as the net profit grew by more than 40%, while the balance sheet size expanded by only 24%. This was due to a 40-basis point improvement in net interest margin, which grew to 2.85% in FY08. The company aims to maintain NIMs, as most of the loans are on a floating rate basis and it can pass on the rise in interest to the borrowers. It also expects an approximately 25% growth in business, which will translate into an equivalent growth in the bottomline, if margins remain stable. The company has a capital adequacy ratio (CAR) of 14% vis-à-vis the minimum required 12%. This provides headroom for further expansion in the loan book.
Its return on assets (RoA) was at 1.8% in FY08. This is on the lower side as compared to HDFC’s RoA of 2.4%. However, HDFC’s stock trades at more than five times its book value, while LIC Housing Finance’s stock trades at just 1.3 times its book value, which shows that the stock market has more than factored in the gap in the operational performance of the two mortgage players.

The stock trades at a price to book value multiple of 1.3. Like LIC Housing Finance, the stocks of smaller players in the housing finance sector like Dewan Housing Finance and GIC Housing Finance also trade at low multiples. However, LIC Housing Finance is larger in scale as compared to these companies and has a better reach, which provides it better avenues of growth. The stock trades at P/E of 6.4, which seems too low considering the 25% expected growth rate in earnings in FY09. The dividend yield at current prices is 3.6%, which makes the stock an interesting bet for even conservative investors.
Source: ETIG (economic times)

1 comment:

  1. There is good news for all the homebuyers who intend to own a house of their own. As Reserve Bank, relaxed the risk provisioning norm for housing loan up to Rs 3 million on May 15th.This inturn would make it easier for banks to provide loans for purchase of residential properties. This move is expected to reduce the cost funds of housing loans up to Rs. 30 lakh.
    The central bank issued notification in pursuance of the annual credit policy announcement made by the Reserve bank Governor Y V Reddy on April 29. The RBI has modified the provisioning limit for housing loan to take care of the growing property rates mainly in the urban centers. As per the Basel II norms, banks are required to keep 9% of the specified portion of the loan amount as capital.
    For up to Rs 3 million housing loan the risk provisioning norm would apply for the 50% of the loan value. Earlier the specified amount was 75% of the loan value between Rs 2-3 million. For loans exceeding Rs 3 million for purchase of residential property, the banks would have to make a risk provision on 75% of the loan amount.
    The move would provide the bank additional capital for lending more to housing sector. However, it may not result in immediate softening of interest rate for the housing sector.For more view-


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