Best stocks in Housing and Housing finance sector

Housing and housing finance have been in the news lately. With prices rising around 50 per cent across the country in the past year, home buyers are confused on the future direction of prices, and more importantly, how they will finance the purchase.

The Reserve Bank of India is worried about unabated growth of housing loans, and has also warned home loan players, whose fortunes are tied to what home buyers do.

Despite property prices having zoomed over the past three years, the housing finance industry, which comprise of specialised institutions like HDFC, Dewan Housing, LIC Housing and even the banks, has also bloomed. Or is it the other way round?

In any case, all the four parties involved--individuals, home loan lenders, real estate developers and investors have gained, and this is expected to continue though at a moderate rate going forward.

HDFC

HDFC, the biggest home loan lender of the country, with the highest RoE of about 30 per cent and an asset size of Rs 56,496 crore (Rs 564.96 billion) in September 2006. The company's disbursements grew 27 per cent year-on-year in H1 FY07.

Similarly, its margins were also intact at 2.2 per cent despite a 30 basis point increase in the cost of funds.

Says D'Souza, "We are confident of maintaining overall loan approval and disbursement growth of 25 per cent. Despite rising costs, we have been able to maintain our margins while achieving our targeted growth in approvals and disbursements."

The stock trades at 5.7x and 4.8x estimated FY07E and FY08E book value respectively after excluding the value of investments in insurance, bank and asset management. Analysts feel that the company is fairly valued and investors can look at the stock as a long term investment for over a year.

BUILDING ASSETS
Rs crore	HDFC		LIC Housing		DHFL		ICICI Bank
	H1FY07	% chg	H1FY07	% chg	H1FY07	% chg	H1FY07	% chg
Net Interest Income	977.00	21.56	192.82	4.80	43.60	21.10	3052.00	49.70
Other Income	12.35	126.20	14.40	3.90	22.10	7.17	2847.00	29.30
Operating profit	854.00	22.00	138.47	1.38	26.50	23.30	2843.00	41.00
Net Profit	664.80	22.00	113.39	4.47	21.36	24.60	1375.00	23.90

Dewan Housing Finance (DHFL)

Unlike bigger players like HDFC and ICICI Bank, DHFL caters to less competitive lower and middle class segment in the income group of Rs 5,000-15,000 per month and urban and semi-urban areas through 60-odd service centres and 50 branches.

The company's loan book has grown at a CAGR of 28 per cent in last five years and is targeting to grow by 25-30 per cent for next few years. Similarly its profit grew 20-25 per cent in H1FY07 and is expected to be maintained.

Says Wadhawan, "We will be able to maintain the net interest margins at 3-3.5 per cent and are comfortable with a capital adequacy ratio of 13.5 per cent." The stock trades at 1.9x and 1.7x estimated book value for FY07E and FY08E respectively.

LIC Housing Finance

LIC Housing Finance is the second largest housing finance company with good presence in Tier-I cities in North and South India. Its loan book of Rs 14,690 crore (Rs 146.90 billion) as on March 2006 has grown at a CAGR of about 25 per cent over the last three years.

In Q2 FY07 though its total disbursements grew marginally, its retail loan book grew 20 per cent year-on-year and net interest margins improved 80 basis points to 2.6 per cent, thanks to the effect of interest rate hikes.

The stock trades at 1.4x and 1.2x estimated FY07 and FY08 book value respectively. Its low valuation is also because of its higher NPAs of about 2 per cent and comparatively lower return on equity of 16 per cent.

However, the company has targeted an NPA of one per cent by the year end, which is a positive development.

ICICI Bank

ICICI Bank, India's largest private bank, is also the largest player in the housing space among banks. Of its total retail loans of Rs 1.08 lakh crore (Rs 1.08 trillion), housing loan poertfolio accounts for about 40 per cent.

In Q2 FY07, its net profit grew 30 per cent due to higher net interest income and robust fee income even as NIMs remained flat at 2.5 per cent due to a 42-basis point rise in deposit costs.

Analysts expect the  bank's margins to improve as the bank has raised its lending rates in the past few quarters. The bank has raised its home loan and other retail loans by 250 basis points in last 12-18 month period.

The stock trades at 2.5x and 2.2x estimated FY07 and FY08 book value respectively excluding the value of investments in subsidiaries.

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