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LIC Housing Finance Company Update May 09 EDEL
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Delivering quarter after quarter; building a strong track record
LIC Housing Finance (LICHF) is delivering strong operating performance quarter afterquarter 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 (withlower lending rates). Moreover, the outlook on mortgage growth and asset quality hasimproved since January with change in macro environment and increased availabilityof capital. Also, margins are expected to be sustained due to sharp decline inwholesale funding cost, which will help LICHF sustain this strong performance.
Significant improvement in market share
LICHF is estimated to have improved its market share to 9% plus in FY09 from ~6% inFY08. 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% inFY09. We expect the company’s loan book to grow at 22% CAGR over FY09-11E.
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% inFY07). However, NPL risk on the corporate developer book has abated (compared withDecember 2008) with improved capital availability as reflected in fund raising byUnitech and DLF (and more QIPs in pipeline). Moreover, with anticipated economicrecovery and increased property deals in the second half of FY10, we expect grossNPAs to remain below 2% over FY09-11E. Its gross NPAs declined sharply to 1.07% inFY09 and with provision coverage of 80%, net NPAs declined to 0.2% (refer chart 2).
Outlook and valuations: Due for structural re-rating; upgrading to ‘BUY’
LICHF is consistently delivering strong profitability quarter after quarter and concernsover stability in business growth, earnings and asset quality are gradually gettingdiluted. The company has constantly improved RoEs from 16% in FY06 to 26% inFY09 (refer chart 3), and even post equity dilution (of say 15%) it will continue togenerate RoEs in the range of 21-22%. We had downgraded the stock in January dueto increased risks on developers’ loan. However, we believe on the back of sustainedoperating metrics and improving real estate environment (when NPL risk on developerbook is lower), the stock has potential for a re-rating. Over the next one year, weexpect the stock to get re-rated and trade in the range of 1.8-2.0x book value, whichgives a target price of INR 610 per share. We are revising our earnings estimateupwards by 4% for FY10 to INR 73.5 per share and by 5% for FY11 to INR 84.7 pershare. It is currently trading at 1.4x FY10E book and 6x earnings, and we areupgrading it from
‘ACCUMULATE’
to
‘BUY’
.
Vishal Goyal, CFA
+91-22-6620 3022vishal.goyal@edelcap.com
Kunal Shah
+91-22-4040 7579kunal.shah@edelcap.com
Reuters : LICH.BOBloomberg : LICHF IN 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 Promoters* : 40.8 MFs, FIs & Banks : 18.8 FIIs : 21.6 Others : 18.8
* Promoters pledged shares
:
Nil(% of share in issue)
Sensex Stock Stock overSensex
1 month 22.8 25.3 2.53 months 25.3 108.9 51.212 months (14.9) 31.5 46.4
India Equity Research | Banking and Financial ServicesCompanyUpdate
LIC
HOUSING
FINANCE
INR
447
Due for structural re-rating
BUY
May 26, 2009
Market Data
Share Holding Pattern (%)
Edelweiss Research is also available on
www.edelresearch.com
,Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited1
Relative Performance (%)
01,4002,8004,2000200400600May-08Nov-08May-09
( ' 0 0 0 ) ( I N R )
FinancialsYear to MarchFY07FY08FY09FY10E
Revenues (INR mn)4,9707,1908,94810,530
Rev growth (%)15.344.724.517.7
Net interest income(INR mn)3,9765,6447,3158,778
Net profit (INR mn)2,7923,8725,3196,246
Shares outstanding (mn)85.085.085.085.0
EPS (INR)32.945.662.673.5
EPS growth (%)33.838.737.317.4
PE (x)13.69.87.16.1
Price to book (x) 2.52.11.71.4
ROE (%)19.322.926.225.3
LIC Housing Finance
Edelweiss Securities Limited2
Chart 1: PAT growth of 38% in FY08 and FY09; loan book grew by 20% plus
10.014.018.022.026.030.00.00.61.21.82.43.0Q108Q208Q308Q408Q109Q209Q309Q409
( % ) ( I N R b n )
RevenuesProfitsLoan growth
Source: Company
Chart 2: NPLs declining significantly
0.020.040.060.080.0100.00.01.02.03.04.05.0Q108Q208Q308Q408Q109Q209Q309Q409
( % ) ( % )
Gross NPAsNet NPAsProv coverage
Source: Company
Chart 3: RoEs on an uptrend
10.014.018.022.026.030.024681012FY06FY07FY08FY09FY10E
( % ) ( I N R b n )
RevenuesProfitsLoan growthRoEs
Source: Company, Edelweiss research
LIC Housing Finance
Edelweiss Securities Limited3
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 - namelyHDFC, 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 beengaining market share (due to internal restructuring) in the past two years, growing itsdisbursements by 38% in FY08 and 24% in FY09. Its focus on the salaried class (which forms80% 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 havebenefited 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 add26 new offices in Q1FY10. We expect the company’s loan book to grow at 22% CAGR overFY09-11E.
Chart 4: Strong disbursement growth—Higher than industry average
0.012.024.036.048.060.00816243240Q108Q208Q308Q408Q109Q209Q309Q409
( % ) ( I N R b n )
IndividualProjectDisbursement growth
Source: Company
Wholesale funding cost dipping; margins to sustain
The wholesale funding cost has come down significantly and, incrementally, the company israising funds at the rate of ~7.0-7.5%; there is further scope of reduction in average fundingcost, going forward. Taking this into account, the company has reduced its lending ratesfurther by 75bps with effect from April 2009 (besides 75bps reduction in January). Thespreads (calc) during FY09 were maintained at ~2.3% and the outlook on spreads is positivein the near term considering shift in favour of the high-yielding corporate developer spaceand sharp correction in wholesale funding cost.
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LIC Housing Finance Company Update May 09 EDEL
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