Indiabulls HF: Outperformance versus HDFC, LIC HF unlikely to sustain

Current valuations capture the positives and will keep stock price in check, while larger peers have equally attractive prospects and are trading cheaper: Analysts

Indiabulls Housing Finance's scrip has surged 88 per cent in the past year and seen significant re-rating. It has outperformed all its peers — HDFC, LIC Housing Finance (LIC HF) and DHFL have risen by 12 to 38 per cent in this period.

So, its valuation discount versus these peers has reduced significantly. As against a historical valuation discount of 66 per cent to HDFC (on a one-year forward price to book basis), the stock now trades at a 26 per cent discount if one takes the consensus book value estimate for FY17. In fact, Credit Suisse assigns a higher FY17 book value to HDFC of Rs 345 a share and this discount is only eight per cent. Similarly with LIC HF,which now trades at a discount to Indiabulls HF, against a historical premium of 27 per cent (see table).

Strong annual growth in assets under management (AUM) of 38 per cent over the past five years is one reason for the rally. Indiabulls HF is now the third largest housing finance company (in AUM), with DHFL a close fourth. Healthy return ratios and rating upgrades by agencies in the past couple of years are other factors fuelling the stock price. The prospects also appear healthy. The current valuations, though, seem to capture the positives adequately, believe analysts.

“Given the longer track record of HDFC and the shrinking valuation discount, we recommend a switch to HDFC (36 per cent upside potential), and downgrade Indiabulls HF to ‘neutral’. Earnings growth at HDFC is also likely to stay robust, at 18 per cent compounded annually in its core business,” write analysts at Credit Suisse in a recent report. Listing of HDFC's life insurance business next year should be supportive of out-performance, they add.

A Bloomberg poll of analysts since July also indicates limited upside. Of the eight polled, four each have a 'buy' and 'hold' recommendation on the stock but their average target price of Rs 770 is pretty close to the current market price, indicating the stock is fairly valued for now.

LIC HF, another key peer, also appears attractively valued. The company's net interest margin is likely to see healthy expansion, due to lower cost of borrowing and increase in the loan against property and developer segments. This is estimated to drive earnings growth of 25 per cent annually over FY15-17.

“Both RoA (return on asset) and RoE (return on equity) would improve significantly to 1.5 per cent and 21 per cent respectively by FY17. We retain a ‘buy’ rating on the company as headroom exists for incremental re-rating from the current levels,” says Rajiv Mehta, financials analyst at IIFL. He expects the stock to trade at 2.5 times the FY17 estimated book value versus the 1.9 times now.