LIC Housing holds its own in downturn

LIC Housing Finance, which outperformed the benchmark Sensex and bigger rival Housing Development Finance Corporation (HDFC) last year, may still be a good investment bet at dips, after it fortified its financials with a recent Rs 658-crore share sale to institutional investors and signs of revival in housing demand.

India’s second-largest, but less fancied mortgage player, might have run ahead of financials in the past few weeks before the fund raising, to trade near its life-time high. The company raised funds through a qualified institutional placement (QIP) last week increasing its capital adequacy ratio (CAR) to 16%, from 12.9%.

Regulations mandate a minimum CAR of 12% for housing finance companies. The fund-raising should bolster the company’s growth plans. Prior to QIP, the return on equity (RoE) was 23.6%, but with the expansion in capital base, the ROE has slipped to 20%.

“We need to grow our profit by 30% this year to maintain earlier RoE of 23.6%. In the first five months of current fiscal, disbursements have grown by 70% and loan book by 31%,” RR Nair, director & chief executive of LIC Housing Finance, said. He is hopeful that the company would be able to maintain its earlier RoE.

Over the past few years, LIC Housing Finance has transformed itself into one of the best non-banking finance companies (NBFC) in India. On certain parameters, its performance is only a shade below that of market leader HDFC. For instance, its return on assets (RoA) was 2.1% in FY09, against 2.4% for HDFC.

Last fiscal, when interest rates rose after a liquidity squeeze, many finance companies had decided to go slow on disbursements and to protect asset quality. Despite the challenging environment, the company’s profit rose 37%, while its assets grew by 25% in FY09. The LIC Housing Finance stock was buzzing last week. On the day of QIP on September 24, the stock surged 7%.

After the capital infusion, the company’s net worth will be close to Rs 3,000 crore. The book value works out to be Rs 341 per share. At a market price of Rs 814.3 per share, the stock is trading at a price to book value (P/BV) ratio of 2.4 times.

In the past decade, the maximum P/BV that the stock touched was 1.6 in FY04. Hence, at current valuations, the stock is richly valued. Nonetheless, it is fundamentally strong, and investors can accumulate it on dips.