Saurabh Mukherjea Shocks With Contra Sell Call On LIC Housing Finance Even As Daljeet Kohli Puts A Buy On It

In my last piece, I drew attention to UBS’ advice on why housing finance company stocks are a great buy at present. I also pointed out that UBS has indicated its favourite housing finance stocks to be LIC Housing Finance (with a target price of Rs. 550 per share) and IndiaBulls Housing Finance (with a target price of Rs. 575 per share).

Daljeet Kohli has always been a fan of LIC Housing Finance. He spotted its potential very early (March 2012) and has been consistently recommending a buy. Daljeet has been richly rewarded by the stock with a YOY return of 100%.

Daljeet has now issued a report dated 22nd December 2014 in which he has advised a buy on the basis that LIC Housing Finance is a “stable performer” and is quoting at “reasonable valuations”. He has foreseen a target price of Rs 485 for the stock, which gives us comfortable upside from the CMP of Rs. 413. This target price is much lower than the price of Rs. 550 foreseen by UBS.

Daljeet’s logic is worth noting:

“We upgrade LIC Housing Finance to BUY from HOLD as we believe 1) softening of interest rates at wholesale level by ~100 bps and 10 year G sec yields falling by ~50 bps in last 3 months and 2) decline in lending rates by banks in early FY16 is likely to play well for the company. Management indicating that incremental market borrowings cost for LIC Housing has come down significantly to 8.6% as against ~9.6% earlier. This along with increasing proportion of LAP is likely to help company in increasing NIMs. LIC Housing has disbursed Rs 6 bn in project loans segment till Q2FY15 which is exactly in line with our project loan disbursement assumption and further company has strong pipeline of Rs 10 bn for H2FY15. With strong pipeline of sanctioning in project loans, focus on LAP and decline in interest rates, we are increasing our loan book assumption to 19% CAGR for FY14-16E and NIMs for FY16E to 2.27% as against earlier assumption of 18% CAGR and 2.2% respectively. Further LIC Housing’s valuation remains of 2.2x for FY16E comforts us as against 2.5-3.5x for other NBFCs. Upgrade to BUY with revised target price of Rs 485, valuing it at 2.5x FY16E ABV.”

However, Saurabh Mukherjea’s Ambit Capital has chosen to go the reverse path and has recommended a “sell” of LIC Housing Finance. Lets’ listen in to their words of wisdom:

“Wholesale rates in India have been falling faster than banks’ base rates over the last couple of months. This is incrementally positive for LICHF since it lowers LICHF’s funding cost without pressurising its yields. However, this situation is unlikely to sustain and we expect base rates to follow bond rates soon. The impact of lower bond costs on LICHF’s funding costs would be gradual but its assets could re-price faster (since ~40% LICHF’s assets are floating rate assets). Hence, margin expansion could remain elusive for LICHF. We retain our SELL stance.…”

If you are feeling perplexed about what to do, a via media is to tuck into Dewan Housing Finance, which is backed by Rakesh Jhunjhunwala and recommended by Nirmal Bang. The other option is IndiaBulls Housing Finance which is recommended by Motilal Oswal. Both are quoting at low valuations and there ought to be good upside left for patient investors.

If you are prepared to pay for quality, you can consider Repco Home Finance, which comes highly recommended by Basant Maheshwari, Brahmal Vasudevan’s Creador Capital, Edelweiss’ Vinay Khattar and Shiv Puri of TVF Capital.