GIC Housing Finance - Management Interaction Note - HDFC Securities

Increasing urban population, lower mortgage penetration levels, increasing affordability leaves immense scope for Housing Finance industry to grow. The moderation in the interest rates is likely to increase demand for fresh loans and enable HFCs to maintain their growth momentum in loan disbursements. Recent positive developments like Priority Sector Lending status being restored (though capped at 5% of total PSL) for lending to HFCs, increase in limits of funding available from mutual funds & including the NHB and HFCs in the list of eligible borrowers for financing low cost housing projects could benefit HFCs including GICHFL going forward.

- Expected moderation in the interest rates could help GICHFL to improve its NII growth, NIMs, interest spreads & return ratios over the next two years. We expect NII to grow by 21.8% over FY12-14.

- GICHFL's plans to expand the branch network faster than in the past over the next two years and bright industry prospects could enable the company to maintain / improve its growth momentum in loan book and disbursements. We expect the company's loan book to grow at a CAGR of 15.5% over FY12-14. The management has targeted disbursements growth of 25%, which we feel is achievable. 98-99% of lending & borrowing portfolio on floating basis keeps the existing loan portfolio insulated from sharp fluctuations in interest rates.

- GICHFL has the highest dividend payout ratio & dividend yield among its peers like LIC Housing, Dewan Housing, Can Fin Homes & Gruh Finance. The company enjoys healthy return ratios & has NIL Net NPAs.

Valuation & Recommendation

While GICHFL could continue to trade at a discount to players like LICHFL (due to larger business size of LIC Housing) & Gruh Finance (due to parental support and rub-off), it deserves better valuations than what it currently commands due to its high dividend payouts & dividend yield, improving asset quality, declining cost to income ratio & improvement expected in its NIMs and return ratios. Valuing the stock at 1.3xFY14E P/ABV, we arrive at a price target of Rs. 148. Investors can buy this stock at current levels & average it on dips in the price band of Rs. 108-114 for our price target over the next 1-2 quarters.

Source : Equity Bulls

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