• Housing Finance Companies: Initiating coverage – Firm foundation, distant ceiling. The Indian housing finance sector has had a long track record of shareholder value creation based on excellent borrower behaviour and largely secular growth in assets financed with mostly stable spreads. Competition from banks has always been there with varying intensities. We feel with recent regulatory changes like abolition of pre-payment penalty, spreads for the sector as a whole is likely to decline in the medium term although we expect some near term benefits from the expected fall in wholesale borrowing costs. Growth opportunity is unlikely to be a constraint in our opinion, and under penetrated niches will support specialized players. We initiate coverage on HDFC, LIC Housing Finance, GRUH Finance and Dewan Housing Finance. LIC Housing Finance is our top pick, based on a thesis of imminent margin reversal and consequent re-rating. • HDFC: Initiating coverage – King of the hill. HDFC remain easily the leader of the whole HFC pack on the back of both pure size and multi-decade demonstrated excellence in both sustained profitable growth and pristine asset quality. HDFC Bank and its sales subsidiary now contribute 74% of its new loan leads and provide it with wide reach. Asset growth is likely to continue at 20%+ despite size constraints and the company is one of the best positioned to defend margins in case sector spreads start to get squeezed in the medium term, by dint of both its liability franchise and asset product capabilities. We initiate coverage with an ADD recommendation. • LIC Housing Finance: Initiating coverage – Ready for a bounce back. LIC Housing Finance (LICHF), the second largest HFC in India with an asset base of Rs780bn is poised to continue its growth momentum at a CAGR of 22.5% over the next three years. Dual rate loans at ~80% of incremental disbursements will remain the growth driver, although at rates pretty close to usual floating rate ones. Our analysis reveals that margins are ready for a rebound from the serious erosion they suffered in last two years. RoE should trend back up the 20% mark, a level sustainable in the next few years in our view. We initiate coverage with a BUY recommendation and mark it our top pick amongst HFCs.. • GRUH Finance: Initiating coverage – The Specialist. GRUH Finance, a pioneer in being a dedicated rural housing finance player in India has built up an AUM of Rs55bn and continues to grow like clockwork at 25-26% while maintaining 30%+ RoE despite full GNPA coverage and pricing moderation. The company remains a key beneficiary of NHB funding and the parentage of HDFC raises its profile in both debt and equity markets. Valuations at 6.7xFY14E P/B appear high, but the company does tick almost all boxes of an investor’s wish list. Our target price of Rs222, indicates marginal downside from current levels. We initiate coverage with a REDUCE recommendation, outstanding fundamentals not withstanding. • Dewan Housing Finance: Initiating coverage – Seeds of doubt souring the harvest. Dewan Housing Finance (DHFL) primarily provides housing loans to the low and middle income group in tier II, tier III cities and metro peripheries where large HFCs and private banks have a limited presence. Its acquisition of First Blue provides it with a foothold in the mid to high ticket housing finance market in the North, but we feel its lower yields may not suit DHFL’s cost structure. The company has charted close to 44% CAGR (organic) in the last three years in AUM but we feel capital paucity may temper growth to 20% over next 3 years. RoE looks likely to remain close to the current 17% levels, in absence of cost cutting. Multiple controversies have dealt a severe damage to company valuations despite reasonable valuations. We initiate coverage with BUY and a target of Rs350. • FMCG - Cigarette: Sector update – FY14 kicks off with strong 64mm push. While FY13 saw cigarette companies reluctant or calibrating their strategy for the 64mm product segment, market visits indicate FY14 has started with a strong surge in contribution from the same. We believe, with higher contribution from 64mm, ITC shall report 1% volume growth in FY14 and VST shall report flat volumes, though there may be upside risks to our estimates. ITC’s portfolio mix is expected to continue to premiumise with gross margin contribution from the premium segments to increase to 74% in FY14E, strengthening its ability to take requisite price hikes in the coming years to report ~20% cigarette PBIT growth. At the same time, VST’s continued dominance in the economy RSFT segment, and now in economy 64mm, may allow it to become the second-largest player in the Indian cigarette industry over the next three years. We retain our BUY rating on VST with a target price of Rs2,064, and our ADD our rating on ITC with a target price of Rs372.
Posted on: Mon, 08 Jul 2013 04:20:03 +0000
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