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LIC Housing Finance: Hold/Avoid fresh exposures

Sanjiv Shankaran

Spurt in building boom boosts housing loans... Competition may pressure profitability.

IN the backdrop of a boom in the housing finance business, LIC Housing Finance (LICHF) turned in an impressive performance for the first quarter (April-June) of the financial year 2002-03. The company registered a post-tax profit of Rs 33.59 crore on an income of Rs 219 crore in the first quarter.

High volume but moderate income growth

In the last fiscal, 2001-02, LICHF's disbursement towards housing loans grew by about 25 per cent in relation to the preceding year, in line with other significant players.

The sharp growth in housing disbursement has not led to a proportionate growth in income because of a sharp fall in interest rates over the last couple of years.

Incremental loans have come at lower rates, thereby resulting in only a moderate growth in income. LICHF's income from operations in the first quarter of 2002-03 grew over the corresponding previous period by about 12 per cent to stand at Rs 219 crore.

Interest burden dips

The interest expense in the first quarter of 2002-03 was Rs 156 crore, about 5.12 per cent higher in relation to the corresponding previous period. Significantly, interest expenses as a proportion of income in the same period dropped from 75.58 per cent to 71.07 per cent.

The development is significant because housing finance companies will be required to reduce the burden of interest expenses in the wake of banks operating in the market with renewed vigour. Banks have access to the lowest cost funds, and their entry has played an important role in pushing down interest rates.

Profitability rises

LICHF's profit from operations (after interest but before depreciation and tax) in the first quarter of 2002-03 was Rs 44.68 crore, higher by 26.35 per cent in relation to the corresponding period of the previous year. Operating profit as a proportion of income was 20.40 per cent, a significant increase over the previous year's 18.06 per cent.

Post-tax profit for the first quarter of 2002-03 was Rs 33.59 crore, higher by 31.67 per cent in relation to the corresponding previous period

Investment outlook

LICHF's share price is around Rs 73 now, about 3.71 times its 2001-02 EPS. The outlook for housing finance business is good, but banks have the upper hand. The EPS is likely to show the same pace of growth over the remaining quarters, but over a longer period, heightened competition may nibble away at the profitability of traditional housing finance companies. Under uncertain economic conditions, LICHF's upbeat business prospects may be a safe harbour for shareholders. But fresh exposure may be avoided till we get a better idea of the way LICHF responds to competition.

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