IndiaBulls Housing Finance, With High ROE & Dividend Yield, Is A Buy: Motilal Oswal

Housing Finance stocks are in great demand because one of the primary agendas of the NAMO government is housing for the masses. I covered this in detail in my piece “Why We Need To Grab A Chunk Of Housing Finance Stocks Soon” & “Why We Need To Grab Stocks Now Before NAMO Implements His “100 Cities” Idea”.

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You can see how, over the past one year, housing finance stocks are on fire. Can Fin Homes, which is/was supposed to be an underdog owing to its PSU credentials has shocked everyone with a spectacular 193% YOY return. In fact, in just the past 3 months, the stock is up 119%. The other stocks are struggling to keep pace. Dewan Housing has given a 129% YOY return, Repco Home Finance has given a return of 108%, Gruh Finance 86% and GIC Housing comes last with a 67% YOY return.

IndiaBulls Housing Finance has so far flown under the radar of investors because its’ management does not enjoy the highest credibility. You may recall the great controversy that was created by the accusations of lack of corporate governance that was leveled by Veritas, the Canadian Investment research firm, and the police complaint that IndiaBulls filed against Veritas claiming that the latter had sought to profit from short-selling the stock.

Kailash Babar of ET put the issue in its correct perspective in his piece “Why a cloud of scepticism looms over Indiabulls group despite strong financials”

So, there are negatives surrounding the group and one would ordinarily like to avoid such stocks. But a 5% dividend yield, high ROEs and low valuations means that you cannot completely ignore the stock either.

You can also see how some savvy investors are taking advantage of the situation. Ajay Srivastava of Dimensions Consulting, for instance, recently declared that he was heavily buying IndiaBulls Power only because of its cheap valuations.

So, lets take a look at why Motilal Oswal has recommended a buy:

“Average three-year RoE at 25% is best among peers; +8% dividend yield

IHFL trades at 1.6x FY16E P/B and 5.3x FY16E P/E. Though the stock has got rerated over the last few months, we believe a strong positioning in mortgage segment, potential for market share gains, healthy margins and return ratios, good asset quality and healthy dividend yield would drive further re-rating. We initiate coverage with Buy rating and a target of INR445 (2x FY16E P/B).”

Personally, I think the logic makes sense. You have to go by the hard facts that you see on record and not be swayed by intangible perceptions of ‘skepticism’. We saw in Can Fin Homes how the so-called skepticism of it being a PSU underdog suddenly gave way to unbridled enthusiasm amongst investors when it reported robust results. Also, most of the negatives are already priced in the rock-bottom valuations of 1.6x FY16E P/B and 5.3x FY16E P/E. However, I am not inclined to buy the stock because in my portfolio, I already have Repco Home Finance & Dewan Housing & I am quite pleased by their performance so far.