LIC Housing Finance a stock to bet on.
>> Tuesday, January 6, 2009
LIC Housing Finance’s stock has outperformed the broader market. The company is the one of the best-managed non-banking finance companies (NBFCs) in the country and longterm investors can accumulate the stock at its current level.
LIC Housing Finance Limited is a housing finance company in
BUSINESS:
LIC Housing Finance provides housing loans mainly to individuals. It is the second-largest housing finance company in the country after Housing Development Finance Corp (HDFC). Its balance sheet size has nearly trebled in the five years from FY03-08.
During this period, it has been one of the fastest growing NBFCs. This is due to the strong economic growth seen in
This is commendable as much larger players like HDFC and commercial banks, which have a significant presence in housing loans, dominate this market. Since the beginning of the current financial year, the financial sector has been facing the brunt of rising interest rates and slow disbursements.
LIC Housing Finance has been able to weather the storm, which is visible from its growth in interest income. The company’s interest income grew by more than 30% year-on-year for the six months ended September ’08. In fact, even its disbursements were up 30% during this period, which is in line with its performance last year.
NBFCs typically face delinquency risks, which surface during times of a slowdown, when borrowers are not able to make the interest payments (EMIs) on their loans. LIC Housing Finance’s net non-performing assets (NPAs) stood at less than 1% of its net advances as of end-September ’08, compared to 1.65% a year ago. This shows that the company’s quality of loan book has improved tremendously in the past one year and it has been efficient in managing delinquency risks.
The company is also efficient in managing liquidity risks. This is evident as the proportion of assets maturing in one year is similar to the proportion of liabilities maturing within one year. This aspect is extremely vital as NBFCs which have financed long-term assets through short-term sources of finance face tremendous pressure in a scenario of tightening liquidity. Hence, it is clear that LIC Housing Finance has been able to efficiently manage all kinds of risks during testing times.
VALUATIONS:
The stock is trading at a price-to-earnings (P/E) multiple of 3.9 times. Hence, the stock appears to be cheap considering its high earnings growth, as its net profit in the past 12 months has grown by more than 40%.
Though it is a known fact that in the case of finance companies, the stock trades at a lesser multiple than earnings growth, we feel this is overdone in the case of LIC Housing Finance, as the P/E multiple is just a fraction of its earnings growth.
The market seems to have already factored in a worst-case scenario for all NBFCs, including LIC Housing Finance. The company’s current low valuations appear to be attractive for long term investors, as LIC Housing Finance’s stock price has fallen as much as that of other NBFCs, even though its fundamentals are much better than theirs.
Happy Investing!
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