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` India Equity Research | Banking and Financial Services Company Update LIC HOUSING FINANCE INR
`
India Equity Research | Banking and Financial Services
Company Update
LIC HOUSING FINANCE
INR 447
Due for structural re-rating
BUY
May 26, 2009
Delivering quarter after quarter; building a strong track record
LIC Housing Finance (LICHF) is delivering strong operating performance quarter after
quarter on all key parameters (refer chart 1). It has been consistently reporting - (1)
20% plus loan growth; (2) sharp reduction in NPLs; and (3) margins of ~2.8-3.2% -
despite weak real estate sentiments and intense competition from PSU banks (with
lower lending rates). Moreover, the outlook on mortgage growth and asset quality has
improved since January with change in macro environment and increased availability
of capital. Also, margins are expected to be sustained due to sharp decline in
wholesale funding cost, which will help LICHF sustain this strong performance.
Vishal Goyal, CFA
+91-22-6620 3022
vishal.goyal@edelcap.com
Kunal Shah
+91-22-4040 7579
kunal.shah@edelcap.com
Significant improvement in market share
LICHF is estimated to have improved its market share to 9% plus in FY09 from ~6% in
FY08. After muted disbursements over FY05-07, LICHF has been gaining market share
(due to internal restructuring), growing its disbursements by 38% in FY08 and 24% in
FY09. We expect the company’s loan book to grow at 22% CAGR over FY09-11E.
Reuters
:
LICH.BO
Bloomberg
:
LICHF IN
Concerns on corporate developers abating with improved capital availability
LICHF’s exposure to corporate developers has gone up to 8.8% in FY09 (from 3% in
FY07). However, NPL risk on the corporate developer book has abated (compared with
December 2008) with improved capital availability as reflected in fund raising by
Unitech and DLF (and more QIPs in pipeline). Moreover, with anticipated economic
recovery and increased property deals in the second half of FY10, we expect gross
NPAs to remain below 2% over FY09-11E. Its gross NPAs declined sharply to 1.07% in
FY09 and with provision coverage of 80%, net NPAs declined to 0.2% (refer chart 2).
Market Data
52-week range (INR)
:
453 / 151
Share in issue (mn)
:
84.9
M cap (INR bn/USD mn)
:
38.0 / 804.0
Avg. Daily Vol. BSE/NSE (‘000) :
921.6
Share Holding Pattern (%)
Outlook and valuations: Due for structural re-rating; upgrading to ‘BUY’
Promoters*
:
40.8
LICHF is consistently delivering strong profitability quarter after quarter and concerns
over stability in business growth, earnings and asset quality are gradually getting
diluted. The company has constantly improved RoEs from 16% in FY06 to 26% in
FY09 (refer chart 3), and even post equity dilution (of say 15%) it will continue to
generate RoEs in the range of 21-22%. We had downgraded the stock in January due
to increased risks on developers’ loan. However, we believe on the back of sustained
operating metrics and improving real estate environment (when NPL risk on developer
book is lower), the stock has potential for a re-rating. Over the next one year, we
expect the stock to get re-rated and trade in the range of 1.8-2.0x book value, which
gives a target price of INR 610 per share. We are revising our earnings estimate
upwards by 4% for FY10 to INR 73.5 per share and by 5% for FY11 to INR 84.7 per
share. It is currently trading at 1.4x FY10E book and 6x earnings, and we are
upgrading it from ‘ACCUMULATE’ to ‘BUY’.
MFs, FIs & Banks
:
18.8
FIIs
:
21.6
Others
:
18.8
*
Promoters pledged shares
(% of share in issue)
:
Nil
Relative Performance (%)
Sensex
Stock
Stock over
Sensex
1
month
22.8
25.3
2.5
3
months
25.3
108.9
51.2
12 months
(14.9)
31.5
46.4
Financials
Year to March
FY07
FY08
FY09
FY10E
Revenues (INR mn)
4,970
7,190
8,948
10,530
600
4,200
Rev growth (%)
15.3
44.7
24.5
17.7
Net interest income(INR mn)
3,976
5,644
7,315
8,778
400
2,800
Net profit (INR mn)
2,792
3,872
5,319
6,246
Shares outstanding (mn)
85.0
85.0
85.0
85.0
EPS (INR)
32.9
45.6
62.6
73.5
200
1,400
EPS growth (%)
33.8
38.7
37.3
17.4
PE (x)
13.6
9.8
7.1
6.1
0
0
Price to book (x)
2.5
2.1
1.7
1.4
May-08 Nov-08 May-09
ROE (%)
19.3
22.9
26.2
25.3
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Edelweiss Securities Limited
1
(INR)
('000)

LIC Housing Finance

LIC Housing Finance Chart 1: PAT growth of 38% in FY08 an d FY09; loan book

Chart 1: PAT growth of 38% in FY08 and FY09; loan book grew by 20% plus

3.0 30.0 2.4 26.0 1.8 22.0 1.2 18.0 0.6 14.0 0.0 10.0 Q108 Q208 Q308
3.0
30.0
2.4
26.0
1.8
22.0
1.2
18.0
0.6
14.0
0.0
10.0
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Revenues
Profits
Loan growth
Source: Company
(INR bn)
(%)
Chart 2: NPLs declining significantly 5.0 100.0 4.0 80.0 3.0 60.0 2.0 40.0 1.0 20.0
Chart 2: NPLs declining significantly
5.0
100.0
4.0
80.0
3.0
60.0
2.0
40.0
1.0
20.0
0.0
0.0
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Gross NPAs
Net NPAs
Prov coverage
Source: Company
(%)
(%)

Chart 3: RoEs on an uptrend

12 30.0 10 26.0 8 22.0 6 18.0 4 14.0 2 10.0 FY06 FY07 FY08
12
30.0
10
26.0
8
22.0
6
18.0
4
14.0
2
10.0
FY06
FY07
FY08
FY09
FY10E
Revenues
Profits
Loan growth
RoEs
Source: Company, Edelweiss research
(INR bn)
(%)

Edelweiss Securities Limited

2

LIC Housing Finance

LIC Housing Finance Significant improvement in market share LICHF is estimated to have improved its market

Significant improvement in market share

LICHF is estimated to have improved its market share to 9% plus in FY09 from ~6% in FY08. Of the estimated disbursements of ~INR 685 bn in FY09 of the top four players - namely HDFC, ICICI Bank, SBI and LIC Housing (accounting for ~75% of the mortgage space) - LICHF has disbursed ~INR 88 bn. After muted disbursements over FY05-07, LICHF has been gaining market share (due to internal restructuring) in the past two years, growing its disbursements by 38% in FY08 and 24% in FY09. Its focus on the salaried class (which forms 80% of its individual loan segment), and particularly public sector entities (~50-60% of salaried class), has enabled to post better-than-industry growth; these segments have benefited from implementation of Sixth Pay Commission recommendations and no job losses. The company is now planning to increase its presence in the mid-ticket size segment and add 26 new offices in Q1FY10. We expect the company’s loan book to grow at 22% CAGR over

FY09-11E.

Chart 4: Strong disbursement growth—Higher than industry average

40 60.0 32 48.0 24 36.0 16 24.0 8 12.0 0 0.0 Q108 Q208 Q308
40
60.0
32
48.0
24
36.0
16
24.0
8
12.0
0
0.0
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Individual
Project
Disbursement growth
Source: Company
(INR bn)
(%)

Wholesale funding cost dipping; margins to sustain

The wholesale funding cost has come down significantly and, incrementally, the company is raising funds at the rate of ~7.0-7.5%; there is further scope of reduction in average funding cost, going forward. Taking this into account, the company has reduced its lending rates further by 75bps with effect from April 2009 (besides 75bps reduction in January). The spreads (calc) during FY09 were maintained at ~2.3% and the outlook on spreads is positive in the near term considering shift in favour of the high-yielding corporate developer space and sharp correction in wholesale funding cost.

Edelweiss Securities Limited

3

LIC Housing Finance

LIC Housing Finance Company Description LICHF is the fourth-largest mortgage finance co mpany in India. It

Company Description

LICHF is the fourth-largest mortgage finance company in India. It provides loans for homes, construction activities, and corporate housing schemes. Almost 91% of the company’s loans are to retail customers and the balance 9% to large ticket commercial sector companies. It is fourth in terms of market share (including banks), with ~8% market share in home loan disbursements in FY08. The company has loan outstanding of INR 277 bn as at March 31, 2009. It has 130 offices and 100 camps across the country. The company has a marketing network of over 6,000 direct sales agents, home loan agents, and associates. LIC India is its majority shareholder with 41% equity holding, followed by FIIs at 22%.

Investment Theme

Internal restructuring and intense pricing war resulted in LICHF’s disbursals growing a paltry 9% (below industry average of 36%) over FY04-06. Post internal restructuring, defying the concerns of slowdown in mortgages, and expectations of margin compression, LICHF reported robust disbursals in FY07-08. We expect the company to grow its disbursement at higher-than-historical growth rates. With the change in competitive landscape in favour of HFCs, we expect LICHF to gain market share and report margin improvement. Historically, asset quality for LICHF has not been highly impressive; however, with adoption of better and strict risk management process and concerted efforts on NPA recoveries, the company has reported significant improvement in its net NPAs. LICHF also holds 39% stake in LIC Mutual Fund.

Key Risks

Loss of market share to commercial banks and HFCs and pressure on spread due to inability to raise lending rates amidst stiff competition.

Real estate lending is becoming more challenging due to a high interest-rate background and weak property prices.

Deterioration of asset quality can increase NPA provisioning and affect profitability.

Edelweiss Securities Limited

4

LIC Housing Finance

Financial Statements

Income statement

(INR mn)

Year to March

FY07

FY08

FY09

FY10E

FY11E

Interest income

15,054

20,587

27,476

32,629

38,582

Interest expended

11,079

14,943

20,162

23,851

28,189

Net interest income

3,976

5,644

7,315

8,778

10,393

Non interest income

817

1,248

1,470

1,581

1,728

- Fee & forex income

583

655

789

915

1,024

- Investment profits

29

24

24

24

24

- Misc. income

205

568

658

642

680

Income from operations

4,792

6,892

8,785

10,358

12,120

Other income

177

299

163

171

180

Net revenues

4,970

7,190

8,948

10,530

12,300

Operating expenses

1,244

1,467

1,542

1,694

1,863

- Employee exp

267

345

407

470

543

- Depreciation /amortisation

38

37

50

52

54

- Other opex

939

1,085

1,085

1,172

1,266

Preprovision profit

3,725

5,723

7,406

8,835

10,437

Provisions

188

400

139

263

739

PBT

3,538

5,323

7,267

8,573

9,698

Taxes

746

1,451

1,948

2,327

2,501

PAT

2,792

3,872

5,319

6,246

7,197

Basic number of shares (mn)

85

85

85

85

85

Basic EPS (INR)

32.9

45.6

62.6

73.5

84.7

Diluted number of shares (mn)

85

85

85

85

85

Diluted EPS (INR)

32.9

45.6

62.6

73.5

84.7

DPS (INR)

8.0

10.0

13.0

14.7

16.9

Dividend pay out (%)

28.0

25.7

24.3

23.4

23.4

Growth metrics (%)

Year to March

FY07

FY08

FY09

FY10E

FY11E

Net interest income

17.0

42.0

29.6

20.0

18.4

Net revenues growth

15.3

44.7

24.5

17.7

16.8

Opex growth

18.1

17.9

5.1

9.9

10.0

PPP growth

14.5

53.6

29.4

19.3

18.1

Provisions growth

(70.6)

113.3

(65.3)

89.2

181.2

PAT growth

33.8

38.7

37.4

17.4

15.2

Operating ratios (%)

Year to March

FY07

FY08

FY09

FY10E

FY11E

Yield on assets

9.2

10.3

11.1

10.6

10.3

Yield on advances Cost of funds

9.3

10.3

11.1

10.6

10.3

7.4

8.1

8.8

8.4

8.1

Spread

1.9

2.2

2.3

2.2

2.2

Net interest margins

2.4

2.8

2.9

2.8

2.8

Cost-income

25.0

20.4

17.2

16.1

15.1

Tax rate

21.1

27.3

26.8

27.1

25.8

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LIC Housing Finance

Balance sheet

(INR mn)

As on 31st March

FY07

FY08

FY09E

FY10E

FY11E

LIABILITIES

 

Equity capital

850

850

850

850

850

Share premium

2,533

2,533

2,533

2,533

2,533

Reserves & surplus

12,056

14,934

18,960

23,744

29,258

Net worth

15,438

18,317

22,343

27,127

32,641

Total deposits

-

157

1,630

3,141

5,199

Secured Loans

146,770

191,134

237,776

292,116

352,186

Unsecured Loans

16,557

12,153

16,195

19,237

22,630

Total liabilities

178,764

221,761

277,943

341,621

412,656

ASSETS

 

Loans

175,635

219,364

276,784

340,410

410,013

Investments

2,061

7,746

6,119

5,423

4,576

Current assets

9,074

5,214

6,819

8,976

7,689

Current liabilities

9,076

11,792

13,102

14,618

11,091

Net current assets

(2)

(6,578)

(6,282)

(5,642)

(3,402)

Fixed assets (net block) Other assets

236

300

277

245

134

834

929

1,046

1,185

1,335

Total assets

178,764

221,761

277,943

341,621

412,656

Balance sheet ratios (%)

 

Loan growth

19.6

24.9

26.2

23.0

20.4

EA growth

18.3

24.1

25.4

23.0

20.9

Gross NPA ratio

2.6

1.7

1.1

1.1

1.3

Net NPA ratio Provision coverage

1.3

0.6

0.2

0.3

0.5

51.2

62.2

80.9

70.0

62.0

Sanctions and disbursements

(INR mn)

Year to March

FY07

FY08

FY09

FY10E

FY11E

Sanctions (INR mn)

61,050

86,179

108,984

130,780

154,321

Disbursements (INR mn)

51,210

70,715

87,619

105,143

124,069

Disbursements to sanction ratio (%)

83.9

82.1

80.4

80.4

80.4

Disbursements growth (%)

4.6

38.1

23.9

20.0

18.0

Sanctions growth (%)

19.4

41.2

26.5

20.0

18.0

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6

LIC Housing Finance

RoE decomposition (%)

Year to March

FY07

FY08

FY09

FY10E

FY11E

Net interest income/assets

2.4

2.8

2.9

2.8

2.8

Non interest income/assets

0.6

0.8

0.6

0.6

0.5

Investment gains/assets

0.0

0.0

0.0

0.0

0.0

Net revenues/assets

3.0

3.6

3.6

3.4

3.3

Operating expense/assets

0.8

0.7

0.6

0.5

0.5

Provisions/assets

0.1

0.2

0.1

0.1

0.2

Taxes/assets

0.5

0.7

0.8

0.8

0.7

Total costs/assets

1.3

1.7

1.5

1.4

1.4

ROA

1.7

1.9

2.1

2.0

1.9

Equity/assets

8.8

8.5

8.2

8.0

8.0

ROAE

19.3

22.9

26.2

25.3

24.1

Valuation metrics

Year to March

FY07

FY08

FY09

FY10E

FY11E

Diluted EPS (INR)

32.9

45.6

62.6

73.5

84.7

EPS growth (%)

33.8

38.7

37.3

17.4

15.2

Book value per share (INR)

181.6

215.5

262.9

319.1

384.0

Adjusted book value per share (INR)

163.4

203.9

258.2

310.1

367.8

Diluted P/E (x)

13.6

9.8

7.1

6.1

5.3

Price/ BV (x)

2.5

2.1

1.7

1.4

1.2

Price/ Adj. BV (x)

2.7

2.2

1.7

1.4

1.2

Dividend yield (%)

1.8

2.2

2.9

3.3

3.8

Valuation metrics (considering 15% equity dilution)

 

Year to March

FY07

FY08

FY09

FY10E

FY11E

Diluted EPS (INR)

32.9

45.6

62.6

65.7

77.4

EPS growth (%)

33.8

38.7

37.3

5.0

17.8

Book value per share (INR)

181.6

215.5

262.9

337.6

396.9

Adjusted book value per share (INR)

163.4

203.9

258.2

329.7

382.8

Diluted P/E (x)

13.6

9.8

7.1

6.8

5.8

Price/ BV (x)

2.5

2.1

1.7

1.3

1.1

Price/ Adj. BV (x) Dividend yield (%)

2.7

2.2

1.7

1.4

1.2

1.8

2.2

2.9

2.9

3.5

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Edelweiss Securities Limited, 14 th Floor, Express Towers, Nariman Point, Mumbai – 400 021,

Edelweiss Securities Limited, 14 t h Floor, Express Towers, Nariman Point, Mumbai – 400 021 ,
Edelweiss Securities Limited, 14 t h Floor, Express Towers, Nariman Point, Mumbai – 400 021 ,

Board: (91-22) 2286 4400, Email: research@edelcap.com

Naresh Kothari

Co-Head

Institutional Equities

naresh.kothari@edelcap.com

+91 22 2286 4246

Vikas Khemani

Co-Head

Institutional Equities

vikas.khemani@edelcap.com

+91 22 2286 4206

Nischal Maheshwari

Head

Research

nischal.maheshwari@edelcap.com

+91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services:

Allahabad Bank, Axis Bank, Centurion Bank of Punjab, Federal Bank, HDFC Bank, ICICI Bank, IOB, Karnataka Bank, Kotak Mahindra Bank,

OBC, SBI, Yes Bank, IDFC, HDFC, LIC Housing Finance, PNB, Power Finance Corporation, Reliance Capital, SREI Infrastructure Finance,

Shriram City Union, Syndicate Bank and Union Bank.

LIC Housing Finance

Recent Research

 

500

Buy Buy Accm
Buy
Buy
Accm

Accm

Date

Company

Title

Price (INR)

Recos

430

25-May-09

Banking

Tirupur textile demand Stays sluggish; Sector Update

 

360

 

(INR)

290

220

22-May-09

Federal

Pressure on margins; 228 stable asset quality; Result Update

Buy

 

Bank

150

 
 

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

 

Apr-09

May-09

21-May-09

Punjab

Improving asset quality; Result Update

667

Buy

National BK

 

13-May-09

Kotak

Changing gears;

485

Accum.

 

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Result Update

Distribution of Ratings / Market Cap

 

Rating Interpretation

 

Edelweiss Research Coverage Universe

 

Rating

Expected to

 
 

Buy

Accumulate

Reduce

Sell

Total

Buy

appreciate more than 20% over a 12-month period

Rating Distribution*

46

46

25

8

126

Accumulate

appreciate up to 20% over a 12-month period

 

* 1 stocks under review

 
 

> 50bn

Between 10bn and 50 bn

 

< 10bn

Reduce

depreciate up to 10% over a 12-month period

 

Market Cap (INR)

68

 

39

19

Sell

depreciate more than 10% over a 12-month period

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