Buy LIC Housing Finance; target Rs 315: Prabhudas Lilladher
Prabhudas Lilladher has come out with its report on financial services. The research firm is bullish on LIC Housing Finance and has recommended buy rating on the stock with a target price of Rs 315 in its June 19, 2013 research report.
June 19, 2013 / 17:54 IST
According to Prabhudas Lilladher the current rate environment is very favourable for housing finance companies (HFCs) but our management meetings indicate that spreads for HDFC will remain in the tight historic range (2.25-2.35%), given the asset mix change, whereas LIC Housing Finance (LICHF)’s spreads are likely to improve by 20-25bps.
Limited near-term catalysts + not so undemanding valuations (3.5x) underpins our Neutral rating for HDFC Ltd, whereas improving spreads + abating risks from dilution and builder book asset quality + undemanding valuations at 1.65x Sep-14 book underpins our BUY rating for LIC Housing Finance with a target of Rs 315 per share, (18% upside).LIC Housing Finance - Best play on the cyclical rate advantage: With the fall in AAA funding rates, LICHF’s incremental spreads have inched up from ~150bps to >170- 180bps, with >90% of the current funding being through bonds (+150bps difference v/s bank base rates) and thus, LICHF is likely to surprise on incremental spreads in H1FY14. With banks facing deposit growth pressure, we believe this cyclical rate advantage will sustain in the near term and will offset the impact of slowdown in the builder portfolio which is unlikely to pick up in H1FY14.LIC Housing Finance - Valuations very reasonable; Dilution & builder book risks lower; BUY: With LICHF’s spreads finally improving + risks from the builder book and dilution abating, we believe valuations at ~15-20% discount to historic multiples offers room for a positive surprise. We expect LICHF’s ROEs to inch up to ~18-19% in FY14/15, factoring a modest ~20bps of improvement in spreads in FY14 and hence, valuations at 1.65x Sep-14 book seems undemanding. We do not expect a structural re-rating (>2x book) for LICHF, given the historic volatility in spreads. However, some mean reversion on valuations looks likely, given the cyclical advantage.HDFC - Spreads to remain a tight band: HDFC’s management expects spreads to remain in the tight band (2.25-2.35%) despite a significant drop in wholesale funding rates. Higher share of individual mortgages in the asset mix will net off ~10-15bps of spreads gains from the near-term differentials between base rate and wholesale funds (2.5-3.0% mix with ~400bps lower yields). However, over the long term, management intends to rely on larger pool of sell downs to support spreads with the changing asset mix. HDFC’s spread stability has been commendable but with no material inch-up expected in spreads, we do not see HDFC Ltd as a cyclical play on the current rate cycle.HDFC - Gradual ROE improvement but we see limited catalysts, Upgrade to Accumulate: With stable margins, we expect adjusted ROEs to inch up from 23.8% to ~25% in FY16 largely linked to leveraging up, post the FY13 warrant conversion. Since our last downgrade (Dec-12), HDFC Ltd has remained relatively flat and with a rollover to Sep-14, our PT implies a modest 7% upside. Hence, we upgrade HDFC to ‘Accumulate’ from Reduce. We do not see nearterm catalysts for HDFC Ltd and prefer HDFC Bank, given <10% valuation differentials (P/B multiples)," says Prabhudas Lilladher research report.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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