Stocks
Sensex, Nifty may see some more gains: Thursday closing report

The Nifty has to firm up above today’s high for a short-term upmove

 

Almost all the Asian indices opened positive and so did Nifty and Sensex. The positive opening continued with the latest data showing the growth rate in China’s industrial production and retail sales accelerated in September 2012. Yesterday we mentioned that the Sensex and the Nifty awaits fresh signals and that a close above 5,700 on the Nifty would be mildly bullish. Today the Nifty closed above this level. From here we may see the index making some gains if the benchmark manages to close above today’s high. The National Stock Exchange (NSE) saw a volume of 72.45 crore shares and an advance decline ratio of 956:494

US stocks rose on Wednesday, after the latest data indicated that the US housing market continues to improve.

The Sensex opened in the 18,654 while the Nifty opened at 5,675. Among the morning news to influence Asian markets, China's industrial production increased 9.2% in September from a year earlier, rebounding from a three-year low of 8.9% expansion in August. Retail sales rose 14.2% in September from a year earlier, up from 13.2% growth in August. Ahead of the data, Chinese Premier Wen Jiabao said that the Chinese economy was in reasonable shape in the third quarter and that he expected the country to reach its fiscal-year economic targets

The benchmarks moved into the negative for about an hour during the morning session, when the indices hit their intra day lows. From there the indices continued to rise higher and hit their respective high in the last hour of the trading session. Sensex hit a higher low of 18,576 while the Nifty hit a higher low of 5,651. Both the Sensex and the Nifty hit a four day intra-day high (including today) at 18,807 and 5,723 respectively. The Sensex and the Nifty closed above their respective 20-day moving averages which is a positive for the bulls. Sensex closed at 18,792 (0.97% or 181 points up) while the Nifty closed at 5,719 (1.03% or 58 points up)

The broader indices reported a mixed close today; the BSE Mid-cap index rose 1.16% and the BSE Small-cap index gained 0.86 %.

The sectoral gainers were led by BSE Realty (up 2.58%); BSE Bankex (up 2.09%); BSE Consumer Durables (up 1.50%); BSE Auto (up 1.40%); BSE Capital Goods (up 1.31%). The lone loser was BSE Healthcare (down 0.30%).

Of the 30 stocks in the Sensex, 24 closed in the positive. The key gainers were Tata Power (up 3.13%); State Bank of India (up 2.80%); Tata Motors (up 2%); Hero MotoCorp (up 1.89%) and TCS (up 1.82%). The main losers were Wipro (down 1.97%); Sun Pharma (down 1.73%); Bharti Airtel (down 1.63%); GAIL India (down 0.57%) and ONGC (down 0.20%);

The top two A Group gainers on the BSE were— Century Textiles (up 5.65%) and  Jaiprakash Power Ventures (up 5.49%) The top two A Group losers on the BSE were — Dish TV India (down 3.17%) and Wipro (down 1.97%)

The top two B Group gainers on the BSE were—Cable Corp (up 20%) and Dr Agarwals (up 19.97%). The top two B Group losers on the BSE were— Zylog Systems (down 19.99%) and Tuticorin Alkali Chemicals & Fertilisers (down 9.87%)

Out of the 50 stocks listed on the Nifty, 38 stocks settled in the positive. The top gainers were Jaiprakash Associates (up 4.73%); Axis Bank (up 4.59%); Bank of Baroda (up 4%); HCL Technologies (up 3.69%) and Tata Power (up 2.89%). The major losers were Wipro (down 1.92%); Bharti Airtel (down 1.89%); Sun Pharma (down 1.78%); Grasim (down 0.89 %) and Cairn India (down 0.75 %).

According to Nomura, India's current deficit may soar to a record high in the September quarter on high non-oil imports after briefly narrowing in the June quarter, which could make the rupee susceptible to a sudden reversal in capital inflows.

Japanese media reported that the Bank of Japan may introduce more monetary-easing moves at its next policy meeting.

All the Asian indices ended in the positive with the highest gainer being Nikkei 225 which rose 2% while the least gain of 0.01% was made by Taiwan Weighted.   

A two-day summit of European Union leaders began in Brussels, Belgium today, 18 October 2012 to decide on the bailouts to Spain and Greece.

Back home, foreign institutional investors were net sellers of shares amounting to Rs 68.87 crore on Thursday while domestic institutional investors too were net sellers of equities aggregating Rs 184.56crore.

Agro Tech Foods, a company is engaged in the business of marketing food and food ingredients to consumers and institutional customers,for the September 2012 quarter reported a 6% growth in the standalone net sales grew on year-on-year (y-o-y) basis while its net profit jumped by  16% in y-o-y basis. The stock rose by 4.57% to Rs 433.20 on the Bombay Stock Exchange (BSE)

Kingfisher Airlines has hit the lower circuit filter of 4.76% at Rs 12 on the BSE after the company said that a meeting with the striking employees and the management failed to reach an agreement to re-start flights. Meanwhile, Directorate General of Civil Aviation rejected giving it an approval for the winter schedule of flights.

 

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Is LIC Housing Finance undervalued compared to HDFC?

LIC Housing Finance trades at 50% of the book value of HDFC which is excessive given that it is lower than HDFC is just one out of five key metrics, says Espirito Santo Securities 

 
LIC housing Finance (LICHF) has underperformed the Bankex over the last six months, given the switch out of defensives and also the consistent decline in NIM (Net Interest Margin) as LICHF has struggled to increase its builder loan book. However, Espirito Santo Securities expects NIMs to slowly expand by 40bps over the next four quarters with no negative impact on credit quality. It believes that LICHF will be a consistent performer with 20% loan book CAGR (compounded annual growth rate) and 20% stable state ROE (Return on Equity). 
 
“We value LICHF on an excess return on equity method and increase our valuation from Rs280 to Rs308, mainly as a result of rollover from FY13E to FY14E, implying 23% upside from the current levels. This implies a 1.9 times FY14E P/B multiple. Currently the stock trades at a more than 50% discount to HDFC core book value which we think is excessive given a higher growth rate and in our opinion more defensive book,” said Espirito Santo in a research note.
 
HDFC is considered to be the benchmark in the housing finance sector given the consistency of earnings and sustainable growth rate; hence the brokerage has compared LICHF with HDFC on five key metrics (consistency, transparency, brand name and customer service, distribution and quality of book). Despite the valuation discount, LICHF rates consistently lower than HDFC on only one of these metrics.
 
“HDFC’s ROA and ROE have been more consistent than LICHF’s, but the book value growth rate is more consistent and higher on an organic basis for LICHF; we would rate LICHF’s disclosure standards as better than HDFC’s; LIC’s agency base is one of the most potent and efficient distribution forces in India and LICHF has one of the most efficient operations with its opex/AUM (operating expenses to assets under management) ratio now below HDFC’s. It might not be HDFC, but in our view LICHF is a very strong housing finance company,” Espirito Santo said.
 
Consistency is observed in return on equity (ROE) and return on assets (ROA) over the years, and LICHF has performed well in comparison with HDFC and Dewan Housing. LICHF has significantly improved the quality of its loan book as well as systems and controls over the last five years leading to consistently declining NPLs (non-performing loans), which are now at par with HDFC at 0.42%. LICHF has consistently delivered loan book growth in excess of 20% over the last five years, and better than HDFC. The graphs below are indicative of how LICHF fares on the consistency metric.
 
 
Transparency in LICHF has improved in recent times. The company’s disclosure levels are rated as the best in the industry, with all the income and expenditure passing through the P&L, compared with the peer group which charges some provisions directly to the Balance Sheet. Also, quarterly disclosure levels are industry leading.
The company has now entirely put the shock of its previous CEO’s arrest in December 2010 ‘bribe for loan’ behind it, and handled the issue in a mature manner. Overall transparency and behaviour towards minority shareholders are considered to be good.
 
LICHF has a strong distribution network with a presence in more than 450 locations across India with around 210 offices across the country. More than 60% of the loans are originated through home loan agents (agents of parent life insurance company, LIC). As the largest life insurance company in India LIC has more than 1.3m agents and hence offers great potential growth opportunities at very low cost to LICHF. LICHF has hired less than 10,000 agents of LIC as of March 2012. Moreover, this is a tied agency for LIC, with relationships spanning more than a decade in the majority of cases and hence likely to be loyal and know the profile of customer’s better than any other channel.
 
HDFC originates bulk of the loans through HDFC Sales Pvt. Ltd (wholly owned subsidiary) and HDFC Bank. Both of these distribution networks have worked superbly well for HDFC. But LICHF’s distribution is equally strong and efficient, concludes Espirito Santo Securities.
 
“The only flaw which we can see in LICHF is that it is akin to a PSU given LIC ownership, and hence there could be negative perception amongst investors about quality of management. Hence, we expect the stock to continue to trade at a discount. However over time, this discount is likely to shrink as investors become convinced about the quality of the franchise.”
 
“Other than the macro factors that concern the entire housing finance sector, our investment case on LICHF mainly depends on an increase in NIM from hereon given conversion of teaser rate loans into floating rate loans. However, there is a risk -- if there is no NIM expansion, due to an increase in the cost of funds, or if the teaser rate loans start getting prepaid,” points out Espirito Santo Securities in its risk analysis.
 
The brokerage points out that “given the LIC (Life Insurance Corporation of India) name attached with LICHF (LIC Housing Finance), the brand is clearly strong, as is the credit rating, meaning a consistently low cost of funds and a high level of customer trust. Channel checks suggest that service levels are superior to PSU (public sector undertakings) banks. The company’s agents provide a doorstep service to the borrower. The processing time is longer than private HFCs (housing finance companies) but much better than PSU banks. However, on this metric it is inferior to the peer group as well as some of the private sector banks.”

 

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COMMENTS

Rajeev Kapur

5 years ago

The big difference is the quality of management and trust. HDFC scores over LICHFL easily. Govt interference, track record of investing in PSU issues to bail them out, rampant corruption with its head going to jail are responsible for the low market valuation of LICHFL. The author is naive to suggest that it deserves valuation equal to HDFC.

Nilesh KAMERKAR

5 years ago

While HDFC may be way ahead as a company; as an investment LICHF may be more profitable from current levels. . . A good company and a good investment can be two different things.

Shekhar

5 years ago

Seems the author(s) is being paid to whip up emotions to prop up LIC HsgFin price

R Balakrishnan

5 years ago

Amusing comparison. Chalk and cheese. Two ends of quality and management. Very odious comparison trying to justify a ten percent price target revision.

REPLY

Rajeev Kapur

In Reply to R Balakrishnan 5 years ago

I agree with R Balakrishnan.

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