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Sunday, Jun 19, 2005

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GIC Housing: Buy

Suresh Krishnamurthy

INVESTMENTS can be considered in the stock of GIC Housing Finance,which trades at a multiple of 6.5 times its earnings for FY-05.

The stock also offers attractive dividend yield of about 3.5 per cent. Despite considerable improvement in the return on its net worth, the stock price is still below its book value.

The valuation of GIC Housing Finance stock is also at a significant discount to that commanded by stocks of other comparable housing finance companies such as Gruh Finance and Dewan Housing.

A lower discount is justified, considering the company's indifferent performance in the past and the relatively poor disclosure standards.

However, given the potential for growth in the housing finance sector and the company's performance over the past two years, a narrowing of the valuation discount appears justified.

Ramping up profits: In the last two years, GIC Housing has been able to ramp up disbursements. This has had a notable effect on the company's profitability. Profits have risen by over 50 per cent for two consecutive years. In the year-ended March 2005, profits have risen despite a spurt in operating expenses charged against profits.

This indicates the continuation of high provisions against loans that turned bad in previous years. GIC Housing has one of the higher proportion of bad loans mainly due to lending to the corporate sector.

In recent times, a change in strategy involving lending only to the retail sector has helped the firm control its bad loan assets and ramp up volumes.

The charges however still continue. If profits are healthy despite such charges it is because of the pace of growth in new business.

Net interest income (interest income less interest expenses) rose 56 per cent in the year-ended March 2005. As the charges for bad loans recede, profit growth could stay at healthy levels if disbursement remains robust.

The company's focus on the semi-urban and rural areas could help it sustain the pace of growth.

The only question, however, relates to capital adequacy; at end-March 2004, it was about 12.64 per cent, only marginally above the minimum required level of 12 per cent.

Capital funds would have risen by 30 per cent since then thanks to growth in profits and the rights offer in October 2004. This may, however, not be adequate in the wake of the growth rates in business.

The company, which deferred plans to approach the market in April 2005, may have no option but to approach it again in the next 12 months.

That may, however, prove positive for shareholders as the valuation anomalies may get rectified, especially if it is a rights offer at a discount to the market price.

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