Suresh Krishnamurthy

The rights offer valuation is not demanding. A price-to-earnings multiple of less than three and a dividend yield of about 8 per cent will give decent returns even if the profit grows in single-digits.

Mr A.K. Guha, MD... Performance hinges on volume growth.

SHAREHOLDERS can consider subscribing to the rights offer of GIC Housing Finance. The offer is made at a price of Rs 16 per share. The price-earnings multiple works out to less than five, based on average earnings for the past three years.

The dividend yield is 8 per cent, even when based on the average dividends for the past three years. Shareholders are entitled to apply for one share for every two held.

Considerable risks are, however, involved. The interest rate cycle is now on an upswing. This has implications for future profit growth. In addition, the proportion of non-performing assets to advances is high.

This would ensure the need for continuation of high level of provisions. That the return on net worth even in a good year such as 2003-04 has been only about 12 per cent is also disappointing.

In this context, it would be better for shareholders to apply for additional shares at the rights offer price of Rs 16 and sell their existing holdings. The stock now trades at about Rs 24.

Improved performance

The performance of GIC Housing has improved in the past two years. The rate of growth in advances has been about 25 per cent. Net interest income has risen at a higher rate of 36 per cent.

With provisions declining, GIC Housing Finance's net profits have jumped from about Rs 1.20 crore at the end of March 2002 to Rs 11.11 crore at end-March 2004.

The company's performance in the first quarter of FY-05 has also been impressive with net profits rising 53 per cent, boosted by strong increase in the net interest income.

The company's performance depends on volume growth and the ability to pass on increase in interest costs.

The company says that about 80 per cent of advances lent in the past two years have been on a floating rate basis.

Still, it may be difficult to pass on increase in interest costs because of pressure from competition. In contrast, the rate on floating rate borrowings will keep rising. This could ensure that fresh business growth too may be contracted only at lower spreads.

This combined with the need to sustain provisions and the expansion in equity base could restrict growth in earnings per share. On the positive side, the valuation of the rights offer price does not require large growth in profits. A price-to-earnings multiple of less than three and a dividend yield of about 8 per cent will give decent returns even if the profit grows in single-digits.

Poor disclosures

The quality of disclosures in the offer documents is also disappointing. It does not give the absolute level of non-performing assets.

Important parameters such as capital adequacy ratio, spreads and their movement over the past three years are also missing. This adds to the risks involved in the investment.

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