CMP = Rs 16.8 (as of Tuesday)
Price target: Rs 30
Key points - Riding on improved prospects for tourism sector
- To benefit from the positive outlook on tourism sector: Tourism Finance Corporation of India’s (TFCI) deteriorating financial performance and increasing NPAs were a direct consequence of the downturn in the tourism sector in the late 1990s.
- However, the positive outlook for the tourism sector going forward would significantly benefit TFCI in terms of higher loan growth.
- Substantial improvement in asset quality: TFCI has significantly improved its asset quality. Its net NPAs, which were high at 11% in FY2004, were at 2.6% in FY2006 and are expected to fall further in FY2007. Higher recoveries and lower incremental NPAs have helped reduce the level of its NPAs.
- Possible foray into private equity space to boost future earnings: TFCI is also reported to be in talks with major private hotel chains, real estate funds and private equity players to raise private equity to finance large hotel projects.
- This will enable TFCI to generate a fee income, and increase its ability to co-invest and lend.
- Dividend payment now possible: Due to its high NPAs, TFCI was not permitted by the RBI to pay dividends in FY2005 and FY2006. TFCI had paid a dividend of Rs 0.7 per share in FY2004. If it resumes dividend payment at the earlier historical rate, the dividend yield would work out to 4%, which could provide a margin of safety for the stock.
- Stock could trade at Rs30: TFCI had a reported book value of Rs27 per share in FY2006. The stock is trading at 0.6x trailing book and is cheaper than most other financial stocks. At target price/book value of 0.8x for FY2009, the price target for the stock works out to Rs 30 per share.
- I believe that the valuation at 0.8x is reasonable given that the company has never made losses, its NPAs have turned around and its loan growth is expected to be strong with the improving prospects of the hotel and tourism industry.
- I therefore recommend a Buy on TFCI with a price target of Rs 30.
