GIC Housing Finance - Risk return favorable - Edelweiss

GIC Housing Finance Limited (GIC) is a housing finance company promoted by General Insurance Corporation of India Limited and its erstwhile subsidiaries. The company lends exclusively to Individuals with focus on salaried class segment. Currently, the company has a loan book of INR 4,182 crores. The dividend payout ratio of 40-45%, which translates into a yield of 4% (caps downside risk from current levels).

Loan growth momentum picking up

During H1FY13, housing loans increased by 15% from INR 3,631 crs to INR 4,182 crs. The whole book is towards individual loans and that too towards the residential segment. 95% of loans are given to salaried customers. The West Zone, mainly Maharashtra and Goa, contributes 55% of the total loan book. The South Zone accounts for 35% of the loan book. The company aims to grow the loan book by ~25% during FY13. The average ticket size is ~INR 12 lakhs, while incremental ticket size is INR 16-17 lakhs. The company has a pan-India network of 35 branches.

Return ratios to improve

RoE is expected to improve from 12.3% in FY12 to ~17% in FY13. The company currently has borrowings of ~INR 3,300 crores. The major chunk of the book is on floating rate. With the expectation of interest rates peaking out, the margins are expected to improve marginally. We are already seeing some softening in rates by banks. A recent RBI circular stipulates that housing loans of smaller ticket sizes should be classified under the priority sector lending. The company does not see much benefit in its cost of funds from this RBI move because banks can't lend below the Base Rate in case of priority sector funding.

Asset quality

There has been significant improvement in asset quality over last few years. The gross NPA ratio has come down from 5.9% in FY05 to 2.1% currently. The net NPA ratio has decreased from 1.6% in FY10 to nil. The company so far has not written off any NPA. In addition, the current loan to value ratio is conservative at 60-65%.

Dividend Yield

Though there is no stated policy, but the company has paid 40-45% of profits as dividend. The stock trades at an attractive dividend yield of 4%. The dividend yield provides a cap on the downside from the current price level.

Well Capitalized

With current capital adequacy ratio of 14.7% and Tier-II ratio of NIL, the company is well capitalized for the current fiscal year. Also, the company has historically not been too dependent on Tier II capital for maintaining its capital adequacy ratio.

Valuations

With expectation of 25% growth in FY13, RoE of ~17% and dividend yield of more than 4%, we see risk return favorable at current levels. At the current market price of INR 121, the stock is trading at 1.1x FY13E P/BV. Given the stable business model, we see limited downside from current levels.

Source : Equity Bulls

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