A company growing at a steady pace on the back of its continued strong showing
Mores debt is good omen for this company
This is the kind of business undertaking where the higher the level of debt, the higher the brand equity of the company. (A look at the cash flow statement more than suffices to prove the point that I am making - but more on this aspect later on in the copy). As the name suggests it is in the business of lending monies to individuals and corporates for the express purpose of either putting a roof over their heads, or in helping companies with 'quickie' loans. The former is a repository of long term funding from the company, while the latter gets by on bridge financing. LIC Housing Finance generates quite some of its own funding needs from yet other lenders - such as from scheduled commercial banks. The lending banks contributed to 32% of outstanding loans. But the vast bulk - some 58% or so is garnered from the issue of non-convertible debentures - where the subscriber to the issue can be either at the retail level or at the wholesale level. The paid up equity capital contributes its share of resources in a very minimalistic manner, with depreciation and retained profits contributing a much larger chunk. But it is the borrowings, period, which brings in the bulk of the lendable resources. It is also quite obvious that the chief promoter is pretty tight fisted when it comes to loosening up the purse strings on the permanent capital front of its creation. It is also one topsy-turvy way of generating resources out there - as just about everybody could be a borrower and a lender at the same point of time, but that is the reality of the matter.
The company's chief promoter LIC is the numero uno by far in the life insurance business having been incorporated by an act of Parliament as long ago as 1955. If suffered no competition for decades on end which helped it become the monopoly that it is today. However it was never subject to the programs and vicissitudes of the erstwhile MRTP Act (Monopolies and Restrictive Trade Practices Act) given its PSU (public sector undertaking) status. We have strange laws and even more strange practices in India. During 2011-12, LIC Housing Finance disbursed loans aggregating Rs 200 bn. The main thrust continues to be on individual housing loans. During the year it disbursed 1,34,668 individual loans for Rs 191 bn. On a disaggregated basis that would amount to a per capita loan sanction of Rs 14.2 lakhs. It would seem to be a fairly large sum of money per individual per-se. The cumulative disbursements to date amounted to Rs 921 bn to some 13.3 lakh customers. For a 23 year old company that is definitely nice going, what? For the matter of record it is the second largest company revenue wise, in the housing finance sector, among the listed entities, published by Capital Market magazine.
The makeup of its capital base
Currently the LIC owns some 40.3% of the outstanding equity of Rs 1 bn (face value of Rs 2 each). Relative to its outstanding capital base the company boasts humungous total assets of Rs 644 bn at the latest year end. But even with the minimal permanent capital, the company is faring quite well thank you. For example the reserves and surplus of Rs 55.8 bn towers over that of the paid up capital. This anomaly is about as lopsided as the meaning of the word lopsided can get. What is interesting in this makeup of reserves is that the single biggest constituent is securities premium reserve at Rs 17 bn including Rs 8 bn credited during the last financial. During the year the company issued thirty million shares at a premium to the face value to its promoter LIC of India. Consequently, the company can be deemed to do panning out its long range financial planning with some finesse it would appear. As a matter of fact all the other constituents of reserves and surplus were created out of post tax profits - including the compulsory transfer of profits to reserves as mandated by the National Housing Bank Act. Such reserves alone amount to Rs 17.4 bn, and these reserves are of the captive variety and cannot be utilised in any manner. The other equally moot point about its shareholding pattern is that foreign institutional investors' hold 34.2% of the voting stock, and mutual funds and insurance companies another 9.3%. This may say something about the brand equity of the company.
The revenues and expenses
So what is the excitement all about? The revenue from operations grew 32% to Rs 61.1 bn during the year. Other income however went in the reverse direction recording a negative growth of 60% and was down to Rs 1 bn. Because of this drop in other income, or is it due to other factors, the pre-tax profit fell 5% to Rs 12.3 bn. Other income receipt took a dive as the company realised a much lower profit on the sale of investments. Income from this source fell to Rs 772 m from Rs 2.28 bn previously. The company attributes the fall in pre-tax profit to the fall in other income generation. At first glance one is tempted to say yes given the percentage contribution of other income in pre-tax profit in 2010-11. Other income after all amounted to 19.2% of pre-tax profit in that year against 8% in the latter year. But as stated earlier the income from operations also rose quite some bit during the year. And, besides, the accounting for provisions and write offs dropped 40% to Rs 1.5 bn from Rs 2.6 bn previously. What catches the eye is that this drop in provisioning is almost on par with the drop in the profit on the sale of investments. Have the two entries been timed to perfection by any chance? What is quite apparent however is that 'other income' constitutes a tricky bag of receipts for the company.
There are other material factors too contributing to the lower profit. The finance costs -which per-se is the largest single item of revenue expenditure and by a mile at that - rose 48% to Rs 45.9 bn. This percentage increase is sharply higher than the percentage increase in revenues. The hike in interest charges is on the back of a 26% hike in the year end debt (including short term duration debt) to Rs 561 bn from Rs 452 bn previously. This would also infer on a rough basis that the interest paid out rose to around 8.2% from 6.9% previously. There is another way of looking at it though. The company earned Rs 59.8 bn as interest on housing loans against Rs 44.6 bn in the preceding year. Separately it earned a net related income of Rs 1.3 bn -being processing charges etc. Correspondingly, the loans advanced to individuals /others rose by 23.5% to Rs 631 bn from Rs 511 bn previously. On a rough basis it earned an interest rate of 9.5% during the year against 8.7% previously. Thus the rate of growth in the interest that it received from borrowers at 0.7% was marginally lower than the rate of growth in the interest rate of 1.3% that it paid out. What exactly does this imply? That the incremental loans of Rs 109 bn that it had contracted were acquired at a much higher coupon rate, and which could not be immediately passed on to the borrower or some such? It is also interesting to note that while the scale of borrowing rose at a faster pace than the scale of lending-showing a slight mismatch in its ability to flip the money across.
Another issue worth pondering is how the company lends out more than it borrows. In this instance the numbers are substantial too - amounting to Rs 70 bn more in lendable resources in end 2011-12 than it borrowed. The answer lies in the fact that the company operates on the right side of the profit and loss account per-se, and it also conserves quite some bit of the profits that it generates. The difference between what it borrows and what it lends lies in the accumulated profits as represented by the reserves and surplus, or monies which have been invested in other assets like fixed assets, investments, cash and bank balances, trade receivables and such like.
Excellent working capital management
The company also sure knows what it is doing. This is quite evident from some of the more important yardsticks that one scans for in corporate outperformance. Take for example the current assets figure at year end of Rs 59 bn (including current loans) and match this figure against the current liabilities figure of Rs 116 bn. The mismatch is absurdly very acute, but completely in the company's favour - and that is the plus point. Only an organisation which has a firm grip of its wherewithal can achieve such contrasting figures. (But I may add here that such a ratio also accompanies a down and out company too). Needless to add the company gets to save quite some dosh on working capital interest costs as a result. Cut to another set of numbers. The trade receivables at year end at Rs 651 m is but a small fraction of the revenue from operations during the year-showing its hold over its borrowers. This is yet another game changer. The company has also pared the year-end cash balance to bare bones or some such, showing deft money management skills in the process. The year-end cash balance is however the product of netting off of a temporary book overdraft of Rs 13.2 bn-which for some quirky reason has been crossed against the cash balance. There was a similar set off in the preceding year too. Why so please?
The cash flow statement
As I had stated earlier on, the cash flow statement in respect of financing companies is exactly ulta of that of corporates on other spheres of commercial activity. In the instant case the company was out of pocket by a whopping Rs 118 bn in its 'cash flow from operating activities'. The principal 'culprit' in this respect being the increased splurging on housing loans by Rs 120 bn. The deficit in cash generation was however made good through a two pronged strategy. As stated earlier it issued further capital of 30 million shares on a preferential basis to its principal promoter at Rs 270 per share. The face value per share is Rs 2, and thus implying a premium of Rs 268 per share. (It may be noted here that the highest price that the company's shares recorded in the secondary market during the last financial year was Rs 281. Hence the issue of capital was made at around the highest price recorded-which again denotes good intent). This issue roped in Rs 8.1 bn before issue expenses - small change considering the overall requirement of cash. The balance moolah came in, in the form of additional loans that it garnered. Issuing shares at a premium is money for jam from the issuer's point of view. The dividend if any has to be paid only on the face value of the shares, and further, the percentage dividend paid tends to completely skew the overall picture of dividend actually paid out.
The company has three wholly owned siblings and one partially owned sibling-the largest of which in terms of paid up capital is LICHFL Asset Management Company. This undertaking in which the parent has a 94.6% stake, boasts a capital base of Rs 91.9 m. Next in line is LICHFL Care Homes Limited with a paid up capital of Rs 85.5 m. However, separately, there is another company going by the name of LIC Nomura Mutual Fund Asset Management Company Ltd. This venture fits in into the definition of Associate within the group. The brief financials of the siblings as required by law do not appear to have been appended with that of the parent. But another schedule informs that the largest of the siblings, from the paid up capital point of view, the asset management company, incurred a net loss of Rs 19.5 m and has accumulated losses of Rs 35 m. Such an accumulated loss is a trifle difficult to comprende unless the mutual fund venture with Nomura is also limping along. The two other relative biggies however have their individual bottom lines inked in blue. The parent received a dividend of Rs 3.5 m from the siblings on an investment outlay of Rs 230.4 m. It has a stake of Rs 22 m in its associate venture with Nomura. But these ventures of different hues are merely pin pricks yet in the overall scheme of things.
For the present, this is one housing finance company besides HDFC which appears to be on song.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.