Stock Pick from Financial Institutions

LOW PRICE SCRIP

HERE IS WHY:

Government’s pro-tourism initiative to boost company’s loan growth

Strong capital adequacy ratio (CAR) to support future growth

Available at attractive valuation of price to book value of 1.37 times

PROFITING FROM HOSPITALITY: TFCILTD.

Which is a common sector that gets benefited fromdifferent initiatives taken by the Central Government in last ten months?Be it“Swachh Bharat Abhiyan”,electronic travel authorisation or visa on arrival? There is no mark for guessing.It is the tourism and related sector that is going to gain from all such initiatives. Tourism Finance Corporation of India (TFCI), one of the specialist financiers of hospitality is in a sweet spot to exploit the opportunities presented by reviving tourism and anticipated spurt in the hotel industry. Beside this, scrip is available at an attractive valuation and is a consistent dividend payer. The institutional investors including FII and DII have already raised their exposure in the counter from 0.8 per cent at the end of June 2014 to 5.5 per cent at the end of December 2014.

TFCI, promoted by leading financial institutions in India, is in the business for 25 years now and has developed core competency in strong due diligence process and better understanding of the hospitality sector. This is already reflected in the loan growth trends of TFCI.  Although loan growth was lower in the last two years due to uncertainties in the sector and delay in decision making process, it is expected to accelerate now. Between FY11-14, loan portfolio of TFCI grew at compounded rate of 14 per cent and is expected to grow by more than 25 per cent annually in next three years. For first half of FY15, TFCI has already sanctioned Rs 420 crore against total sanction of Rs 680 crore for FY14.Overall sanctions for FY15 is set to be Rs 1000 crore,reflecting a growth of 47 per cent. Consequently disbursements are also expected to increase.  What will help TFCI to achieve such growth is focus on budget and Tier-3 hotels in its next phase of growth. According to HVS (independent consultancy firm), 66 per cent of the incremental supply in the organised hotel sector over the next five-years will be in the mid-market and budget segment.

To support such growth, TFCI is adequately capitalised. At the end of H1FY15, TFCI’s CAR stood at 39.9 per cent including Tier-I at 32.1 per cent. Moreover, strong rating profile (AA+ by Brickworks) enables TFCI to borrow at competitive rates. For FY14 TFCI reported spread of 3.4 per cent and given the floating nature of loan portfolio and fixed liability, we believe company will be able to improve its margin going ahead. Moreover, as company increases its leverage, it will help TFCI to increase its return on equities.

In addition to the lending business, TFCI has also entered into consultancy assignments with different state governments and this income is expected to increase its total share in total income.

Shares of TFCI are currently available at price to Book Value of 1.37 times. This is attractively priced if we look at strong return on assets of more than 4 per cent, expected earnings growth of company and improvement in return on equity due to higher leverage. Dividend yield of 1.6 per cent gives the added comfort to an investor.  Therefore, we advise our readers to enter the stock with Target of Rs 110 in next one year.