May 16, 2005|
LICHF: A shift of focus…
The mortgage to GDP ratio (ratio of outstanding home loans to GDP) in India has notched a percentage gain and has risen to 3% in FY05 as against 2% in FY04. In Pakistan, it is less than 0.5% and in other countries of South Asia, mortgages as a percentage to GDP are almost insignificant. As against this, this ratio for the US stands at over 51%. Nevertheless, even if one were to benchmark with more comparable counterparts, the ratio ranges between 15%-20% for South East Asian countries. The penetration level of mortgages in the country is miniscule when compared with the shortage of housing units. The point that we are trying to drive here is that there is considerable room for growth for Indian housing finance companies (HFCs). This is notwithstanding the fact that banks are also tapping a major chunk of this 'potential market'.
LIC Housing Finance is the second largest housing finance company in India with 8% market share. It was promoted in 1989 by LIC (which has 38% stake in the company) and floated its maiden GDR issue in September 2004. Although competition in the mortgage financing sector has been increasing, LICHF has shown strong 24% CAGR in its loan book over the past half a decade. LICHF markets its products largely to retail clients through a network of 113 outlets.
The HFC has over the last few years exhibited a clear shift of focus from retail to corporate clients. While the share of retail advances has reduced to 93% of total advances as against 96% in FY01, that of corporate advances (corporate and housing societies) has notched up to 7%. Also, while the YoY growth rate in the retail segment remains stagnant at 23%, the corporate segment is catapulting at over 100% over the last 2 years.
This paradigm shift is primarily because project (corporate) loans are typically for a shorter duration and garner better yields as compared to retail loans. Also, with the mounting pressure on yields and volume constraints due to competitive pressures from banks, LICHF is targeting this new market segment to sustain its topline growth. However, given the declining disbursement to sanction ratio (from 92% in FY01 to 87% in FY05), whether LICHF will be able to fruitfully capitalise on the buoyant hosing finance market is a matter of concern.
LICHF has also exhibited some proactiveness in containing its operating costs by reducing the reliance on high cost LIC borrowings and obtaining funds from other lower cost sources such as ECBs. The share of borrowings from LIC has reduced from 69% of term loans in FY01 to 42% in FY04. The recent GDR issue was also aimed at improving the capital adequacy ratio without resorting to higher cost Tier II borrowing.
Despite all the facts stated above, our discomfort lies with the fact that while LICHFs contemporary HDFC has outperformed the industry growth rate of 25% over the last few years, that of LIC is languishing at 22%, with no signs of improvement. Also competition from banks continues to be a threat to the HFC's market share.
At the current price of Rs 250 the stock is trading 11 times its annualised FY05 expected earnings. The company has launched convertible fixed interest products (convertible into floating after 5 years) in the last quarter. In the event of hardening of interest rates in the coming quarters, (which is quite likely) the company will stand to lose out on better margins on these products. Also, competition from HDFC and banking entities continues to pose threat to the company's market share despite there being considerable growth opportunities in the sector. Although the company is undervalued as compared to its competitor HDFC, inability to boost its topline and sustain its market share in the coming quarters may further dampen its valuations.
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