Value Pick - GIC Housing Finance - ROI @ 52% in 5 Months

Dear Reader,

We are pleased to inform you that our Value Pick stock of Oct 2016 - GIC Housing Finance Ltd (BSE Code: 511676, NSE Code: GICHSGFIN) which was released on 14th Nov'16 is giving as on date returns of 52% to our Value Picks members in period of 5 months. Our team suggested Buy on GIC Housing at price of Rs. 291.45 on 14 Nov'16 with a target price of Rs. 425.

GIC Housing Finance has already achieved our target price, we suggest our members to continue to hold it. Stock made its 52 week high of Rs. 450.90 today and closed at Rs. 442.15 giving absolute returns of 52% to our Value Picks members in period of 5 months.

In Dec quarter, net profit of GIC Housing Finance rose 12.55% to Rs 34.43 crore  as against Rs 30.59 crore during the previous quarter ended December 2015. Sales rose 13.87% to Rs 252.87 crore in the quarter ended December 2016 as against Rs 222.06 crore during the previous quarter ended December 2015.

Below is the summary of GIC Housing Finance Ltd shared by our team under Value Pick stock of Oct'16 released on 14th Nov 2016.

Note: This report is shared only for the purpose of information and not an investment advice. Kindly carry out your own due diligence in case of investment in GIC Housing Finance Ltd.

1. Company Background:

GIC Housing Finance Ltd was incorporated as 'GIC Grih Vitta Limited' on 12th December 1989. The name was changed to GIC HousingFinance with a Certificate of Incorporation issued on 16th November 1993. The Company was formed with the objective of entering into the field of direct lending to individuals and other corporate to accelerate the housing activities in India. The primary business of GIC HousingFinance is granting housing loans to individuals and to persons/entities engaged in construction of houses/flats for residential purposes. The company carried a vision for the future of Housing in India.

The company was promoted by General Insurance Corporation of India and its erstwhile subsidiaries namely, National Insurance Company Limited, The New India Assurance Company Limited, The Oriental Insurance Company Limited and United India Insurance Company Limited together with UTI, ICICI, IFCI, HDFC and SBI, all of them contributing to the initial share capital.

GIC Housing Finance has presence in 27 locations with 63 branches across the country for business. The company has got a strong marketing team, which is further assisted by sales associates (SAs). It has tie-ups with builders to provide finance to individual borrowers and also with corporates for various housing finance needs.

GIC Housing Finance is a small player in the Indian housing finance industry, with less than 1% market share, and a loan book of Rs 7,910 crores as on March 31, 2016 (Rs 6600 crores as on March. 31, 2015). As per the report by CRISIL, its advances are largely concentrated in 4-5 states, with Maharashtra accounting for 59% of its loan portfolio as on March 31, 2016.

GIC Housing Finance portfolio is skewed towards the salaried customers with average ticket size of around 15 lakhs, though in recent years the share of salaried customers is trending down on account of increasing proportion of Loans against Property (LAP) given to the self-employed borrower category in the portfolio. The company is doing so to improve the average yield on advances as the margins are high compared to the loans for purchase of homes.  However, the portfolio continues to remain dominated by the Home loans (about 84% of the portfolio as on March 2016) with LAP product constituting about 16% of the total portfolio as on March 2016.

2. Financial Performance:

​GIC Housing Finance standalone net profit rises 15.37% in the September 2016 quarter

Net profit of GIC Housing Finance rose 15.37% to Rs 34.37 crore in the quarter ended September 2016 as against Rs 29.79 crore during the previous quarter ended September 2015. Sales rose 14.66% to Rs 246.96 crore in the quarter ended September 2016 as against Rs 215.38 crore during the previous quarter ended September 2015

GIC Housing Finance standalone net profit rises 14.41% in the June 2016 quarter

Net profit of GIC Housing Finance rose 14.41% to Rs 32.32 crore in the quarter ended June 2016 as against Rs 28.25 crore during the previous quarter ended June 2015. Sales rose 14.94% to Rs 234.36 crore in the quarter ended June 2016 as against Rs 203.90 crore during the previous quarter ended June 2015​

3. Investment Rationale:

i) Government initiatives like Housing-For-All by 2022 scheme in 2015 for the rehabilitation of slum-dwellers and promotion of affordablehousing for the urban poor. The target is to provide nearly 20 million houses over seven years. This initiative gave a much needed boost to the real estate and housing finance industry by creating an enabling and supportive environment for expanding credit flow and increasing home ownership. Under this urban housing mission, the Indian government would provide assistance ranging Rs 1 to 2.30 lakh per house under different components of the scheme including rehabilitation of slum dwellers using land as a resource, promotion of affordable housingin public-private partnership, credit linked subsidy for weaker sections and subsidy for beneficiary led individual house construction.

ii) Despite the double digit growth and the recent move by government to address key policy bottlenecks, the housing finance industry in India remains under-developed by global standards. The next couple of quarters are expected to remain under pressure for real estate and can impact housing finance sector in India on the back of major reform like Demonetization. However, we firmly believe that it will give significant push to create conducive environment for business in medium to long term. Moreover, housing finance companies are likely to witness significant progress in coming years considering Housing for All by 2022 scheme and Smart Cities Project.

iii) Increasing urban population, lower mortgage penetration levels, increasing affordability and moderation in the interest rates will enable HFCs to maintain their growth momentum in loan disbursements. With the government's focus on providing housing for all, GIC HousingFinance is well poised to benefit from these regulatory announcements. Interest rate cut and strong growth potential is expected to keep the company’s RoE and RoA firm in coming quarters. Positive developments like allocating funds for low cost housings, increasing rebate onhousing loan for self-occupied property tend to benefit HFCs including GIC Housing Finance going forward.

iv) Till FY12, GIC Housing Finance business growth was relatively slow compared to other housing finance companies. Loan book grew by modest 13% CAGR in FY05‐12 with 31 branches. However the company started to achieve higher growth from FY12 by taking some of important measures. Since FY12 the company has doubled its branches (total branches now stands at 63) and its net interest margins have expanded from lows of 2.9% to current NIMs of 3.50-3.6%. As a result the net interest income of the company has recorded 23% CAGR since FY12.

v) Asset quality for all housing finance companies is best in financial space as housing finance companies provide financing largely to salaried class people (baring few players like Repco which focus on non salaried class). Strong domain knowledge and expertise in various business segments, coupled with a proactive approach in credit selection and stress testing have enabled GIC Housing Finance to have the best-in-class asset quality.

vi) GIC Housing Finance has shown significant improvement in its asset quality in last 5 years, the asset quality of the company has improved with Gross NPA reducing to 1.76% at the end of Mar’16 from 2.78% at the end of Mar’11. The Net NPA is NIL. Moreover to minimize the risk, GIC Housing Finance has made it compulsory for all the borrowers to opt for personal accident Insurance and mortgaged property insurance. The Capital Adequacy Ratio of the Company as at 31st March, 2016 is 17.40% (Tier 1 Capital) as against 15.36% as at 31st March, 2015.

vii) During last 3 years, the company has been focusing on reducing proportion of higher cost bank borrowings. Bank borrowings of GICHousing Finance have come down from 72% in FY14 to around 65% currently. NHB Borrowings have increased to 25% Vs 15% in FY15. Also, as per the management the company will consider tapping bond markets and consider CPs (commercial paper) and NCDs (non-convertible debentures). We believe that lower exposure to bank borrowings and higher bond market penetration to further reduce its cost of funds will augur well for the company, which in turn lead to higher margin growth.

viii) Government thrust towards affordable housing and lower interest rate cycle will benefit the company like GIC Housing Finance in medium to long term. GIC Housing Finance continues to perform well on growth, margins as well as on asset quality. The company aims to increase the disbursements to low cost housing loans going forward, which is likely to keep the margins firm. Moreover, the company has been expanding its branches and has been sustaining 20% growth year on year. The management intends to continue its expansion by opening new branches in northern parts of India.

ix) GIC Housing Finance has paid steady and consistent dividend to its shareholders since last 10 years. At CMP of Rs. 2​91.45​, the dividend yield is 1.7%. The company has been consistently paying out more than 20% of its earnings in the form of dividends.

x) At around current price of 291.45, GIC Housing Finance is quoting at 2 times book value and 11.8 times trailing twelve months earnings. The valuation of the company looks attractive on both absolute and relative basis. The other listed housing finance companies though with better growth rates are trading in the range of 3 to 5 times book value.

​4. Key Concerns & Risks:​

i) Housing finance is a regulated industry and in case of adverse change in provisioning or capital adequacy requirements, the profitability of the company can get negatively impacted.

ii) Real estate prices are key factor in housing finance business as loan growth depends on property market. Any significant correction in real estate prices can impact asset quality of the company.

5​. Saral Gyan Recommendation​:

As per our estimates, GIC Housing Finance can deliver PAT of 172 crores for full financial year 2017-18, annualized EPS of Rs. 31.9 with forward P/E ratio of 9.1X for FY17-18 which makes it attractively valued with dividend yield of 1.7% at current market price.

Considering Government thrust towards affordable housing with rollout of initiatives like Housing for All by 2022 scheme and Smart Cities Project, expected improvement in the ROE of the company with healthy earnings and improving leverage and increased thrust of management in growing loan book led by branch expansion, Saral Gyan team recommends “Buy” on GIC Housing Finance Ltd at current market price of Rs. 291.45 for target of 425 over a period of 12 to 24 months.

Buying Strategy:

• 60% at current market price of 291.45
• 40% at price range of 240-265 (in case of correction in stock price in near term)

Portfolio Allocation: 3% of your equity portfolio.

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Regards, 

Team - Saral Gyan