Stock pick from the finance sector

Not many will be in favour of recommending a housing finance company in a scenario of rising interest rates and with the realty sector going through a lull. However, we have enough reasons to recommend GIC Housing Finance (GICHFL) to our investors. 

Key factors that tilt the balance towards this scrip is the company's PSU status and its consistent dividend payment history. The latest dividend of Rs 5.50 per share results in a strong yield of 6.50 per cent (ex-dividend) for the stock. Other compelling factors include its strong disbursement growth, improving asset quality, better capital adequacy, the focus on Tier II and III cities where the realty market is still buoyant, and last but not the least, its ability to sustain the net interest margins. 

The scrip is well placed on the valuations front too, with the trailing four-quarter earnings discounting its CMP of Rs 84 by 3.50x and the price to adjusted book value ratio standing at a comfortable 1x. This is much better than the ratios for LIC Housing Finance, at 11.70x and 2.72x respectively. One noticeable factor in GICHFL’s case is that despite a bit of stagnancy in some of the realty markets, it has witnessed good growth in terms of disbursements. In H1 FY12, the disbursements were marginally up at Rs 469 crore. With the interest rate cycle peaking out, the management is targeting Rs 1000 crore of disbursements in FY12 as a whole. The simple reason behind this growth has been its focus on Tier II and Tier III cities that hardly witnessed a slowdown in the realty market. 

Going forward, the company is planning to expand its reach by taking the total number of locations it services to 47 by the end of FY12 from the current number of 30. While expanding its reach, the focus will also be on the Tier II and Tier III cities. While there has been good growth on the disbursements front, the company has managed to improve the asset quality as well. The net non-performing assets stood at just 1.70 per cent. Further, the management is confident of better asset quality going ahead, as its loan portfolio is increasing. More customers from the salaried class are coming in, where the default ratio is negligible.

The average loan size has also increased to Rs 12 lakh from the earlier level of Rs 7 lakh. There has been some impact, as the net spreads as a whole have declined to 1.60 per cent from the earlier level of 2 per cent. Here too, the management has stated that the company can come back to its earlier NIM levels. This expectation stems from the fact that some of the loans given earlier were at a fixed rate, comparable with that of SBI. The interest rates in those cases are fixed for the first year and the same will get re-priced later to the benchmark prime lending rate. Some of these loans have started getting revised upwards. Going forward, there is the possibility of a positive bias on the margins front due to this factor. 

As far as the other operational numbers are concerned, the company is adequately capitalised with a CAR of 15.34 per cent, which is well ahead of the stipulated 12 per cent mark. On the financial front, it posted strong results for H1 FY12, with the bottomline at Rs 26.86 crore as against a loss of Rs 14.55 crore (adjusted for the extraordinary income of Rs 88.48 crore). Considering the improvement on the margins front, we expect better profitability going ahead and recommend buying the scrip at its current levels, with a target price of Rs 100 in the next one year.