Correction entry point for housing finance

Analysts say investors could look at LIC Housing Finance, Indiabulls Housing Finance and HDFC

Stocks of LIC Housing Finance (LICHF) and Indiabulls Housing Finance (IBHFL) have corrected by 16 to 20 per cent in the past month, while that of HDFC is down 10.5 per cent — it hit a 52-week low on Tuesday. At these levels, experts say these provide a good buying opportunity for investors wanting to cash-in on the housing finance segment.

These firms’ December 2015 quarter (Q3FY16) were better than Street’s expectations. In the past two years, LICHF’s assets have compounded 18 per cent annually and analysts expect this momentum to be maintained in FY16-18.

Net interest income (NII), too, grew 36 per cent year-on-year (y-o-y) in Q3’FY16. Although net interest margin at 2.5 per cent is a tad below peers such as IBHFL and HDFC, Shweta Darpadar-Mane of KRC Research feels this would improve in the coming quarters. “With 14 per cent of its loan book to be reprised at 200 basis points higher than current rates, expect the net interest margins to pick up going forward.”

Citi Research, justifying the run-up in LICHF’s valuations (now at 2.6 times price to book value compared to 1.4 times 18 months ago), says the re-rating is warranted given the firm’s significant improvements in market position, asset quality, and return profile.

IBHFL, too, saw its NIIs expand by 30 per cent y-o-y in Q3’FY16, while its loan growth remained at 25 per cent. Between FY12 and FY14, its loan portfolio grew at a compounded annual growth rate of 18 per cent, while its NII expanded at 11 per cent in this period.

Analysts at Motilal Oswal, while recommending ‘buy’ on IBHFL’s stock, peg for 24 per cent growth in assets under management aided by focus on mortgages and improving market share.

In case of HDFC, even as some of the key metrics such as loan growth and NII have seen some moderation from FY14-15 levels, its stock price — currently trading at three times price-to-book value — provides an attractive entry point. NII growth fell from its peak level of 25 per cent in FY11 to eight per cent in Q3FY16, while loan book which expanded 20 per cent historically, was up by 19 per cent (adjusted for loans sold in preceding 12 months) in Q3FY16. With improving traction in larger cities, analysts at Kotak Institutional Equities peg for 17 per cent growth in loan book.