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Update - GIC Housing Finance October 13, 2006

1

Update - GIC Housing Finance

BUY

Industry Housing Finance

52Wk High/Low Rs.59.80 / 31.40

Equity Rs.53.85 crores

CMP (Face Value) Rs.46.75 (Rs.10)

Market Cap. Rs.252 crores

Book Value Rs.47.22

Last Dividend

15% Div. Yield 3.21%

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IN NUT SHELL

From our recommendation in last year in Sep 2005, GIC Housing Finance (GICHF) has not really gone

up due to equity dilution by 100% and low growth in Loan approvals and sanctions during 05-06.

However, we have reasons to believe that the growth story in GIC is still intact for the following reasons.

Continued Positive outlook for Housing finance industry

Beaten our Earning projections - 86% growth in profits in 2005-06, 40% growth in q1. Growth

momentum to continue

Continued Focus on NPA bearing results – NPAs down from 5.9% to 2.97% - a decline of almost

50% in percentage terms

Still among Cheapest Housing Finance Stocks.

Cost of Borrowings maintained at low level of 6.42% (6.25%)

Still offering a good dividend yield of more than 3%

Promoters have raised stake

Valuechase

Update - GIC Housing Finance October 13, 2006

2

INVESTMENT RATIONALE

Promising Industry Outlook

_ Future outlook for Housing Finance sector continues to be highly promising. According to the

National Building Organisation (NBO), the total housing shortfall is estimated to be 19.4 million

units, of which 12.76 million units is from rural areas and 6.64 million units from urban areas. Such

shortage will ensure the boom for housing sector in general and therefore in for the housing finance

sector.

The share of housing mortgages in India is just at 2-3% of GDP as compared to above 6% of GDP in

case of China, reflecting a huge scope for growth of housing finance sector in India. In addition,

relaxation in entry norms for 100% FDI through automatic route in construction and development of

mega housing projects by the Government is likely to further boost the growth of housing sector and

therefore housing finance sector.

The growing affluence of the middle class has acted as a great impetus for housing projects taking off

in a big way. There is a wave of consumerism fuelling the onset of retail boom and therefore retail

sector will offer growth opportunities for Housing Finance Companies.

Income tax sops for interest on Housing loans and repayment of housing loans have helped people

achieve two purposes simultaneously, i.e., save taxes and build houses. Continuation of tax sops will

continue to draw people to Housing Finance companies in flock.

Profit Growth to continue

For the year 2005-06, GICHF saw a de-growth in its Loan approvals and disbursements by almost 60%

and 43% respectively as with its then net worth, it could not grow any more due to regulatory requirement

of maintaining Capital Adequacy ratio of 12% and its Debt-Equity Ratio going up to almost 11 times.

Despite the above, GICHF has surpassed our expectations and has reported an EPS of Rs.12.29

representing a growth of 86% in earnings year on year as against our projection of EPS of Rs.10.52.

In March 2006, GICHF made a Rights issue to its shareholders in the ratio of 1:1 at a price of Rs.40 per

share to overcome its Capital Adequacy requirements. The issue was successfully completed in April

2006.

For the Q1 of 2007, GICHF has reported a growth of record 40.5% in its profits from Rs.7.08 crores to

Rs.9.95 crores.

With the Capital Adequacy now well above prescribed levels and post-rights Debt-Equity ratio of 6.25

times, GICHF can easily grow its Loan book by additional Rs.500 crores, which would work out to 30%

growth in loanbook and will ensure sustained growth in earnings. The proceeds of Rights issue itself

should add Rs.10 crores to its profitability this year.

Continued focus on NPAs

GICHF increased its focus on recoveries from NPA accounts and provisions worth Rs.2.31 crores were

reversed / adjusted during 2005-06. Consequently, the allocation for provisioning for NPAs was much

lower at Rs.6.11 crores as against Rs.15.24 crores in previous year. Net NPAs of individual housing loans

is now 2.97% as against 5.90% in the previous year.

Valuechase

Update - GIC Housing Finance October 13, 2006

3

Still among Cheapest Housing Finance Stock

The valuation of GIC Housing Finance stock is also at a discount to that commanded by stocks of other

comparable housing finance companies such as Gruh Finance, Dewan Housing, Ganesh Housing as

reflected below, not to compare the same with biggies like HDFC and LIC Housing Finance.

Company PE Ratio Price to Book Value Ratio Div. Yield (%)

Can Fin Homes 3.8 0.62 4.75

GIC Housing 5.8 1.04 3.37

LIC Housing 6.4 1.02 3.73

Dewan Housing 7.6 1.64 3.06

Ganesh Housing 11.9 7.82 0

GRUH Finance 17.3 2.59 2.27

HDFC 26.4 7.87 1.43

From the above, only Can Fin Homes* is cheaper based on its Price to Book Value Ratio (PBV) and

higher Dividend Yield. As discussed above, GICHF has a scope to add to its loan book by 33% thus

leaving a great scope for earnings growth and therefore triggering a re-rating at par with Dewan Housing

and LIC Housing Finance, meaning a scope of appreciation to the extent of about 30% from current

levels.

Other Relevant points

Cost of borrowing has been kept under check. While the interest costs have generally gone up in the

last year, GICHF has managed to control its borrowing costs at 6.42% (6.25% - 2005-06).

GICHF has maintained a dividend of 15% for FY 2006 also despite its capital has doubled due t

Rights Issue. At price of Rs.46.75, the stock offers attractive dividend yield of about 3.21 per cent.

It has a consistent record of dividend paying for more than 10 years.

The good fact about GICHF is that it has a Dividend Payout ratio of 25%.

_ The company has changed its strategy to focus only to the retail sector to maximize returns and

minimising risks. It may be noted that borrowings to retail sector command higher interest spread and

lower default rates as compared to corporate sector. Not just that, the company is focussing on the

semi-urban and rural areas, which should help it sustain the pace of growth.

There has been an increase in Promoters stake in the Company from 42.04% in March 2006 to

50.94% as at 30th June 2006. It is understood that the promoters have subscribed for the additional

shares in the recently concluded in the Rights issue for the unsubscribed portion of the issue.

Increasing the stake by 8.9% on expanded capital means an additional investment of approximately

Rs.19 crores in addition to their normal share of Rs.44.88 crores. Raising of stake by Promoters

indicate their continued belief in the Company’s earnings potential.

In the recently held AGM, the shareholders have approved raising of further sums to the extent of

Rs.350 crores through FCCB / GDR / Rights / Public issue. Any further dilution of equity would

affect the share price.

Valuechase

We expect GIC Housing Finance to give returns of approximately 30% from

current levels in a time span of next 6-12 months.

* Please write to us at valuechase@rediffmail.com for

our research report on Can Fin Homes and

previous research report on GIC Housing Finance Limited.

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