LIC Housing Finance: Accumulate at price 282

LIC Housing Finance Ltd (LICHFL), incorporated in 1978, is engaged in the business of providing housing loans, with the objective of making the much coveted dream of owning a home accessible and affordable. Its main business is to provide long-term housing finance to individuals, professionals and to builders & developers for residential & commercial projects.

LICHFL – Ready to augmenting its position of 2nd largest player in Housing Finance

LICHFL is 2nd largest player in Housing Finance Industry with a market share of 11%, and is augmenting its position for increasing its market share in highly competitive home financing space. Also better and controlled focus on a single market gives it a competitive edge over Banks. Management foresees strong demand scenario over the next 7 years considering the supply gaps and under penetration for financing affordable housing, despite of some pockets remaining soft. It has strong pan India presence with 193 offices and +10,000 agents to extend its marketing reach with strong brand recognition of its parent LIC.

Prime focus remains on home loans, but tilting again towards project loans

LICHFL’s prime focus remains on individual home loans (96% of total loan mix) which has been main driver for growth, while it is now seeing good number of project being launched, so is now tilting its focus towards increasing mix of project loans and take back to its historical levels of 10% from current 4% in the next 2 years which is high yielding in nature but without compromising on the quality of loan. Its loan book grew by 29% CAGR in the last 5 years with individual loan portfolio growing at 29% CAGR and project loan portfolio growing at 42% CAGR. Currently outstanding portfolio stands at Rs.691 bn o/w individual portfolio at Rs.665 bn and project loan portfolio at Rs.27 bn as of 30th Sept 2012. It expects its loan book to grow at 22%-23% levels in FY13 with individual loans growing at ~21-22%, while project loan to grow at much higher levels.

Asset quality quite comforting, credit costs to remain lower

LICHFL has come a long way in improving its asset quality. Overtime LICHFL has shifted its loan mix to individual loans (o/w 90% salaried class) and reducing exposure to project loans which has helped to improve its asset quality significantly. Its Gross NPAs has reduced from 4.4% in FY05 to 0.4% in FY12 on back of strong recoveries, stringent approvals and quality collateral which induces confidence in high standard of asset quality (standing now in line with HDFC), although stress may increase due to increase in project loan portfolio. Going ahead, Sushil finance expect asset quality to remain healthy on more than required provisioning policy prescribed by RBI and adequate collaterals; Sushil finance also note that provision cover remains reasonably high at ~160% (including teaser & standard asset provisioning) and as teaser loan product starts resetting, provisions on these should start releasing in Q1FY14, which would help credit costs to remain lower ahead.

Interest spread to improve on re-pricing of teaser loans, moving towards low cost funding

LICHFL in 2009-10 introduced a teaser loan product “fix-o-floating” which has fixed interest rate for 3 years and then shift to the floating rate. The teaser loans coming for re-pricing is about ~Rs.52 bn in the H2FY13 (Rs.22 bn in Q3 & Rs.30 bn in Q4), which will be re-priced from ~9% to ~11% adding to incremental yields. It is also increasing its project loan portfolio which is high yielding in nature will add to the blended yields. On the liability side currently, it relies on Bank borrowing (32% mix) and whole-sale borrowing (63% mix) like NCDs, CPs, CDs, while parent borrowing in minimal. Going forward, LICHFL wants to escalate reliance on whole-sale borrowing (taking advantage of reduced rates) and reduce bank borrowing (to 25% of mix) which is costlier by 120-130 bps, while at same time any decrease in bank base rate would reduce cost of funds improving the interest spread and improving NIMs. Sushil finance believe NIMs have bottomed out at 2.1% in Q2FY13 and could see possible reversal, Sushil finance expect NIMs could improve to 2.49% in FY13E from 2.44% in FY12.

Ready for Banking Foray

LICHFL is keen to enter into the Banking space, in 2010 it setup a committee to explore the possibility of applying for banking license and evaluate the draft guidelines set out by RBI on new banking licenses. Sushil finance believe LICHFL can be one of the candidates to be allowed to enter the banking space on back of its working structure, backing of strong parent (LIC), strong brand recognition & reach on both in urban and rural side.

OUTLOOK AND VALUATION

LICHFL has grown at healthy pace in a past few years driven by strong growth in loan book along with improved asset quality and high return ratios. Going forward, Sushil finance believe its loan book could grow at 23% & 22%, while NII could grow at 25% & 42% in FY13E & FY14E respectively. Asset re-pricing coupled with strong disbursement growth to result in reversal of NIMs which in turn would lead to PAT growth of 21% in FY13E & 43% in FY14E. On back of overall growth in the housing finance industry, consistent good performance, strong comfort in asset quality & the positive fall out of capital raising plan are the key value drivers. At CMP, the stock trades at attractive valuation of 2.2x FY13E ABV & 1.8x FY14E ABV. Sushil finance are initiating their coverage on LICHFL with an Accumulate rating & a target price of Rs.330 (based on 2.1x ABV).

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