LIC Housing Finance: Sell

Recommendation: Sell

Sanjiv Shankaran

THE housing loans market is one of the safest areas to lend in the financial sector.

The high degree of safety has attracted quite a few entities recently despite the relatively low profitability in the business.

The recent entrants in the housing finance market have had a significant impact on service and also triggered an interest rate war. Regardless of the recent developments, HDFC and LIC Housing Finance, the traditional powerhouses, continue to dominate the market.

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LIC Housing's significant presence in a low-risk business has impacted positively on the company's share price over the last 17 months. During the period when the market indices were weak, LIC Housing's share price increased about 63 per cent in July 2000 to trade around Rs 44 on December 20.

The advent of new competition in the housing finance market and the changed dynamics, and the marked growth in LIC Housing's share price since July 2000 suggest it may be time to take another look at the company's current equity valuation.

Background: LIC Housing Finance was promoted by Life Insurance Corporation to participate in the housing loans market and is believed to be the second largest housing finance company in the country.

Strengths: LIC housing is a dominant player in relatively low risk business. The company's long track record and reputation are likely to ensure its significant marketshare in the foreseeable future.

LIC Housing's bad loans came to about 3.44 per cent of the outstanding loans at the end of the last financial year. Though the proportion of bad loans is higher than that of the industry leader, HDFC, it is still among the best in the financial sector.

In an economy that appears to be in a rut, the market for housing loans continues to display robust growth. LIC Housing's business grew at 28 per cent over the last couple of years, and all indicators suggest the same rate may continue for a while.

Weakness: The advent of newer players has led to interest rates on housing loans converging among the stronger players. Consequently, unlike the past, quite a few companies offer housing loans at about the same rate. The heightened competition may mean the spread (difference between interest income and interest expense) on LIC Housing's business may narrow over the next year or two.

Recommendation: LIC Housing's earnings per share (EPS) has seen a slowdown in growth over the last couple of years. At the end of March 2001, the EPS was Rs 15.80. Using the 2000-01 EPS, the current price earnings multiple (PEM) is about three.

The growing competition in its business and the rapid strides made by new entrants may check an increase in the company's valuation. To compound the situation, the company does not seem to have captured the attention of institutional investors, whose presence can lead to a big push in a stock's valuation.

Given the above factors, it is appropriate to book profits in LIC Housing now.