GIC Housing Finance - Homeward Bound

Many of our readers will be surprised to see a housing finance company being recommended at a time when the interest rates are rising and the realty sector is also witnessing a lull. However, we have enough reasons to recommend GIC Housing Finance (GICHFL) to our readers. The first and the foremost factor is the PSU status of the company and its consistent dividend payment history. The company recently announced a dividend of Rs 5.50 per share (inclusive of Rs 1 paid as special dividend). The scrip at present is quoting at Rs 110, offering a cum dividend yield of 5 per cent.

The other compelling factors include strong disbursement growth, improving asset quality, better capital adequacy, focus on the Tier II and III cities where the realty market is still buoyant and last but not the least, the ability of the company to sustain its net interest margins. On the valuation front also the scrip is well-placed with its FY11 earnings discounting its CMP of Rs 110 by 5.21x and the price to adjusted book value ratio standing at a comfortable 1.24x. This is much better than the P/E of 10.21x commanded by LIC Housing Finance.

One noticeable factor in GICHFL is that despite a bit of stagnancy in some of the realty markets it has witnessed strong growth in terms of disbursements. In FY11 the disbursements were up by 44 per cent and stood at Rs 968.95 crore as against Rs 672.80 crore in FY10. A simple reason behind robust growth is its clear focus on the Tier II and Tier III cities that hardly witnessed a slowdown in the realty market. Going ahead the company is planning to expand its reach by increasing its presence to 47 cities by FY12 from the current level of 30. The company will continue to focus on Tier II and Tier III cities for further expansion.

And while there has been good growth on the disbursement front the company has also managed to improve its asset quality. Its net non-performing assets stood at just 0.41 per cent as compared to 1.47 per cent last year. Going ahead the management is confident of a better asset quality as the company offers its loans mainly to the salaried class where the probability of default is minimal. Meanwhile, there has been some impact on the net interest margins which in FY11 as a whole have declined to 2.67 per cent from the earlier level of 3.30 per cent. But here too the management has confidently stated that it can return to the earlier levels.

Some of the loans given in Q3 and Q4 of FY10 and in Q1 of FY11 were at a fixed rate, comparable with State Bank of India. The interest rates are fixed for the first year and the same will get re-priced later to be benchmarked at the prime lending rate. Hence, some of these loans are slightly getting revised upwardly from Q1FY12 onwards. This is why, going ahead, there is a possibility of positive bias on the margin front. Regarding the other operational figures, the bank is adequately capitalised with its CAR of 16 per cent which is well ahead of the stipulated 12 per cent mark.

On the financial front, despite a decline in profitability for Q4FY11 it has posted strong results in FY11 as a whole. For FY11 its bottomline stood at Rs 113.76 crore as against Rs 67.09 crore. Considering the improvement on the margins front, we expect better profitability going ahead and our recommendation to you is to buy the scrip at its current levels with a target price of Rs 135 in the next one year.