Mohnish Pabrai and Vijay Kedia have a common investment philosophy. Both prefer companies with top-quality management, which are quoting at reasonable valuations. Both are staunch believers in the prospects for housing finance companies. Both are confident that PSU companies can deliver superior returns.
The only difference between the two stalwarts is in their choice of stocks. While Mohnish Pabrai prefers GIC Housing Finance, Vijay Kedia prefers LIC Housing Finance.
Pabrai has reaped hefty gains from GIC Housing Finance. He bought the stock in the July-September 2015. Assuming 1st September 2015 is the date of purchase, Pabrai is sitting on gains of 75% (apart from a hefty dividend yield).
The details of Vijay Kedia’s purchase of LIC Housing Finance are not known. However, he has made his preference for the stock known on a number of occasions. He first talked about it in November 2014 and reiterated it in a recent interview where he said:
“It may not be a multi-bagger and let me tell you LIC Housing finance did very well in the last decade, okay, after that for the last three, four years they are consolidating but I am very bullish on housing sector and you know investing in small cap is also not that easy because you do not get that kind of size also, volume also you do not get. So I am bullish on housing sector and in housing sector housing finance companies. LIC is cheaper than its peers. So that is why I have bought LIC and it has liquidity also. So not because it may not be a multi bagger but I think that it should give me a 20-25 per cent return every year.”
Daljeet has been following both stocks closely. He has earlier recommended both stocks and his followers have hefty gains in their portfolios.
Daljeet’s latest advice with respect to GIC Housing Finance is as follows:
“One good reason for picking a housing finance versus other finance companies is that in the last two to three months there has been a shift to other sectors and housing finance has lagged. That will ultimately pick up because there is a very clear demand for housing finance. We all know that how under-penetrated this market is. The other reason to pick GIC Housing amongst others is when we started GIC Housing, the valuation gap between GIC Housing and other listed housing finance players barring HDFC was around 50 percent. In last two months that gap has narrowed down to 30 percent.
We believe that this gap can further narrow down because GIC Housing is also growing at the similar rate at the same way than the other housing finance companies like DHFL or Repco Home Finance or Gruh Finance are all doing. They are all trading at a high price to earnings (PE) or price to book value multiple whereas this company was trading at a lower multiple because of PSU tag. So, this thesis has played out well in last two months. We believe that there is further more scope purely because the return ratios of GIS Housing are actually better than all these listed players so in terms of return on equity (ROE), return on asset (ROA), asset quality every where they score better.
Growth is also picking up; 20-25 percent growth which is normal run rate for all housing finance companies that GIC is also doing. The idea is that this valuation gap will narrow down and therefore even now at around Rs 270, GIC is trading at less than 2-1.8 times of book value. Whereas others are all trading at around 3 times, so even if we say 2 times of book value it will be Rs 330 which will again give you more than 10 percent returns from here also. So, we believe that GIC Housing is a good investment bet at this time purely because of valuation.”
Daljeet has expressed similar sentiments with regard to LIC Housing Finance in his latest report where he says:
“LIC housing Finance
Better play in NBFC space… reiterate buy with PT of 575…
We reiterate buy on LIC Housing Finance as it remains our preferred pick in Housing finance space over other NBFCs mainly due to 1) healthy Loan growth of 16% CAGR over FY16‐18E, 2) strong NIMs of 2.5%, 3) Best in class asset quality with Gross and Net NPA of 0.5% and 0.2% respectively, 4) strong earnings CAGR of 16% for FY16‐18E reflecting ROEs / ROAs of 19% / 1.4% for FY18E and 5) reasonable valuation of 2.3x and 2.0x for FY17E and FY18E ABV. Reiterate buy with target price of Rs 575, valuing it at 2.4x FY18E ABV.”
Daljeet’s logic is quite convincing. It does look like Mohnish Pabrai and Vijay Kedia can expect their portfolios to bulge with more mega bucks in the near future!