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LIC Housing Finance (LICHF IN)

Rating: ACCUMULATE | CMP: Rs529 | TP: Rs637

August 27, 2018 Tepid performance


Q1FY19 Result Update Quick pointers

☑ Change in Estimates | ☑ Target |  Reco  Weak loan growth and developer loan concerns continue to remain an
overhang on the stock
Change in Estimates
Current Previous
Tepid performance continues for LICHF with weak NII traction as loan growth
FY19E FY20E FY19E FY20E
Rating ACCUMULATE ACCUMULATE and margins stood lower. However, earnings at Rs 5.7bn stood higher than
Target Price 637 649 estimates (PLe: Rs 5.5bn) with benefits emerging from INDAS reflected in
NII (Rs.) 43,715 50,796 43,717 50,801
% Chng. - - lower opex and lower provisions YoY. Disbursements grew lower than loan
PPoP (Rs.) 38,420 44,760 38,422 44,766
indicating better repayments but individual loan book and LAP traction
% Chng. - -
EPS (Rs.) 44.4 52.2 46.0 53.6 weakened. Developer disbursements and loan growth continue to stay
% Chng. (3.5) (2.5)
strong. YoY both asset quality and margins stood under pressure largely due
to INDAS, seasonality in book and concerns on few large accounts on
Key Financials
developer side. However, going forward, asset quality slip-ups should be
FY17 FY18 FY19E FY20E
arrested with recoveries in pipe-line backed by ECL provision buffer and
Net Int. Inc. 36,861 37,627 43,715 50,796
Growth (%) 24.0 2.1 16.2 16.2 meaningful asset re-pricing should protect spreads enabling 17% RoEs
Op. Profit 32,370 33,007 38,420 44,760 sustenance. We build in slight conservatism into our credit costs/NPA
PAT 19,310 19,895 22,401 26,371
EPS (Rs.) 38.2 39.4 44.4 52.2
estimates for over FY19-20E leading to revised PT of Rs 637(earlier Rs 649)
Gr. (%) 16.3 3.0 12.6 17.7 based on 1.9x Mar-20 ABV.
DPS (Rs.) 6.8 7.6 9.2 9.2
Yield (%) 1.3 1.4 1.7 1.7
 Weak loan growth: Loan growth at 14.7% stood lowest in past 7 quarters as
Margin (%) 2.7 2.4 2.4 2.4
RoAE (%) 19.1 16.7 16.5 17.0 retail home loans grew tepid at 11% YoY but developer loans continued the
RoAA (%) 1.4 1.2 1.2 1.2 strong growth at ~50% YoY. Individual loan disbursements growth stood muted
PE (x) 13.8 13.4 11.9 10.1
P/BV (x) 3.6 3.2 2.8 2.4
at 5% YoY largely due to de-growth in LAP. Loan mix continues to tilt towards
P/ABV (x) 3.7 3.4 3.1 2.6 LAP+developer at 19.5%. We expect loan growth at ~15-16% for FY19 with
improvement in core book led by 24 incremental branches turning operational.

Key Data LICH.BO | LICHF IN


 Margins to stay soft: Growing competitive intensity, INDAS implication (that
52-W High / Low Rs.691 / Rs.455
Sensex / Nifty 38,694 / 11,692 also led to 39 bps dip in loan yields YoY) and higher base (lower interest rates
Market Cap Rs.266bn/ $ 3,799m
a year ago) weighed on NIMs at 2.34, down 18bps YoY. Going forward, asset
Shares Outstanding 505m
3M Avg. Daily Value Rs.1817.12m (Rs 1.4 lakh crs back-book) re-pricing benefits (50bps rate spike from April –
August) should directly support Q2/Q3 earnings given higher share of 77% of
Shareholding Pattern (%) fixed rate liabilities coupled with marginal benefits from developer loan
Promoter’s 40.31 recoveries should be supportive of spreads. Taking cognizance of high interest
Foreign 31.72
Domestic Institution 8.44
rate scenario and increased competitive intensity, particularly, from banks in
Public & Others 19.53 the segments in which LICHF operates, we maintain conservative estimates of
Promoter Pledge (Rs bn)
2.4% NIMs over FY19-20E.

Stock Performance (%)  GNPA up, recoveries flowing: GNPA stood at 1.21% vs 0.72% in Q1FY18
1M 6M 12M on Stage 3 INDAS based accounting largely due to 5-6 lumpy developer NPAs.
Absolute (1.7) 3.6 (19.8)
Relative (5.1) (8.1) (34.5) While one such developer recovery of Rs 400mn on principal component came
through, another Rs 300mn should flow through interest component with
Shweta Daptardar provision release ahead. However, developer GNPAs continue to stay elevated
shwetadatpardar@plindia.com | 91-22-66322245 at 8.9% (small accounts), Q1FY19 also witnessed marginal spike in individual
Pritesh Bumb GNPAs (LRDs). Certain high value lumpy developer accounts and slower loan
priteshbumb@plindia.com | 91-22-66322232 growth trends prompt us to build-in higher conservatism into our GNPA (earlier:
0.7%, now 0.9%), credit costs (earlier: 15bps, now 20-22bps) over FY19-20E.

August 27, 2018 1


LIC Housing Finance

Slower top line fails to improve earnings


YoY chg. QoQ chg.
P&L (Rs m) Q1FY19 Q1FY18 Q4FY18
(%) (%)
Interest Income 40,190 36,269 10.8 39,009 3.0
Interest Expense 30,249 26,982 12.1 28,431 6.4
Net Interest Income 9,940 9,286 7.0 10,036 (1.0)
Other operating Inc. - - NA 542 NA
Other Income 320 214 49.6 332 (3.5)
Total Income 10,260 9,500 8.0 10,910 (6.0)
Employee Expense 473 534 (11.4) 631 (25.1)
Other Expenses 296 381 (22.4) 1,611 (81.6)
Operating Profit 9,492 8,586 10.6 8,669 9.5
Provisions 1,608 2,040 (21.2) 281 471.4
Tax 2,205 1,749 26.0 2,994 (26.4)
Net Profit 5,679 4,796 18.4 5,393 5.3

Balance Sheet (Rs m)


O/S Loans 16,86,520 14,70,510 14.7 16,63,630 1.4
-Individual loans 16,02,650 14,14,400 13.3 15,82,700 1.3
Retail Home Loans 13,58,105 12,24,704 10.9 13,44,801 1.0
Retail LAP / Non Core 2,44,545 1,89,696 28.9 2,37,899 2.8
-Corporate loans 83,870 56,110 49.5 80,930 3.6
-Individual loans (%) 95.0 96.2 (1.2) 95.1 (0.1)
Retail Home Loans 80.5 83.3 (2.8) 80.8 (0.3)
Retail LAP / Non Core 14.5 12.9 1.6 14.3 0.2
-Corporate loans (%) 5.0 3.8 1.2 4.9 0.1

Incr. Disbursements 95,940 86,990 10.3 1,74,020 (44.9)


-Individual loans (%) 90.7 95.3 (4.5) 87.0 3.7
Retail Home Loans (%) 75.7 76.7 (1.0) 62.3 13.4
Retail LAP / Non Core (%) 15.1 18.5 (3.5) 24.7 (9.6)
-Corporate loans (%) 9.3 4.7 4.5 13.0 (3.7)

Asset quality
Gross NPL 20,407 10,660 91.4 13,040 56.5
Gross NPL (%) 1.21 0.7 0.5 0.78 0.4
Net NPL 13,883 5,530 151.0 7,120 95.0
Net NPL (%) 0.82 0.38 0.4 0.43 0.4
Coverage ratio (%) 32.0 48.1 (16.2) 45.4 (13.4)

Others / Ratios (%)


Yield on Loans - Calc 9.6 10.0 (0.4) 9.5 0.1
Cost of Borrowings - Calc 8.3 8.4 (0.2) 8.0 0.2
Spread 1.34 2.08 (0.7) 2.25 (0.9)
NIMs 2.34 2.52 (0.2) 2.49 (0.2)
Cost/ Income Ratio 7.49 9.63 (2.1) 20.55 (13.1)
Source: Company Data, PL Research

August 27, 2018 2


LIC Housing Finance

Loan book growth led by developer book; retail stands weak

Loan Growth Project Loan growth Individual loan growth

75%
60%
45%
30%
15%
0%
-15%
-30%
-45%

4Q13
1Q14
2Q14
3Q14

2Q15
3Q15
4Q15
1Q16

4Q16
1Q17
2Q17
3Q17

1Q18
2Q18
3Q18
4Q18
2Q13
3Q13

4Q14
1Q15

2Q16
3Q16

4Q17

1Q19
Source: Company Data, PL Research

Seasonality plays out on retail side Developer loan disbursements stood tepid

Individual Disbursements (Rs bn) Project Disbursements (Rs bn)


25.0
140
120 20.0
100
15.0
80
60 10.0
40
20 5.0
0
0.0
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19

2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
Source: Company, PL Source: Company, PL

LAP & developer mix close to 20% of overall book; highest ever

% of Individual Loans excl LAP % of LAP loans % of corporate Loans

3% 3% 3% 3% 2% 3% 3% 2% 3% 3% 3% 3% 3% 3% 4% 4% 4% 4% 5% 5%
4% 5% 5% 6% 6%
9% 9% 10% 10%
13% 13% 13% 13%
14% 15%
98%
97%
97%
97%

97%

93%

93%

93%

92%

91%

88%

88%

88%

86%

84%

83%

83%

83%

81%

81%
3Q14
4Q14
1Q15
2Q15

4Q15
1Q16
2Q16
3Q16

1Q17
2Q17
3Q17
4Q17

2Q18
3Q18
4Q18
2Q14

3Q15

4Q16

1Q18

1Q19

Source: Company Data, PL Research

August 27, 2018 3


LIC Housing Finance

Cost of funds pressures impacted spreads

Cost of Funds Spread Profile (RHS)


12.0% 2.4%
2.3%
10.0% 2.2%
2.1%
2.0%
8.0% 1.9%
1.8%
6.0% 1.7%
1.6%
4.0% 1.5%
1.4%
1.3%
2.0% 1.2%
1.1%
0.0% 1.0%

3Q13
4Q13

2Q14

4Q14
1Q15
2Q15
3Q15

1Q16

3Q16
4Q16

2Q17

4Q17
1Q18
2Q18
3Q18

1Q19
1Q14

3Q14

4Q15

2Q16

1Q17

3Q17

4Q18
Source: Company Data, PL Research

NIMs drop as company shifts to INDAS accounting

3.0% NIMs (%)


2.9% 2.97%
2.75%
2.8%
2.7% 2.58% 2.61%
2.6% 2.71% 2.68%
2.52%
2.5% 2.41%2.56% 2.34%
2.4% 2.47% 2.49%
2.30% 2.40% 2.38%
2.3% 2.20% 2.33%
2.16% 2.19%
2.2% 2.09% 2.22%
2.23%
2.1%
2.0%
3Q13

2Q14
3Q14
4Q14
1Q15
2Q15

1Q16
2Q16
3Q16
4Q16
1Q17

4Q17
1Q18
2Q18
3Q18
4Q18
4Q13
1Q14

3Q15
4Q15

2Q17
3Q17

1Q19
Source: Company Data, PL Research

Developer loan NPAs spike, Stage 3 NPA under INDAS up

Gross NPLs (%) Net NPLs (%) Coverage ratio - RHS(%)

1.3% 70%
1.2%
1.1% 65%
1.0% 60%
0.9%
0.8% 55%
0.7%
50%
0.6%
0.5% 45%
0.4%
0.3% 40%
0.2% 35%
0.1%
0.0% 30%
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
1Q14
2Q14
3Q14

3Q18
4Q18
1Q19

Source: Company Data, PL Research

August 27, 2018 4


LIC Housing Finance

ROE to move close to 17% in FY19-FY20


RoE decomposition (%) FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Interest income 10.13 10.21 10.31 10.19 10.17 9.95 9.28 9.42 9.47
Interest expenses 7.76 8.10 8.14 8.00 7.71 7.32 6.94 7.05 7.11
Net interest income 2.37 2.11 2.17 2.18 2.46 2.63 2.35 2.37 2.36
Other income 0.38 0.26 0.28 0.21 0.17 0.12 0.12 0.11 0.11
Total income 2.75 2.37 2.45 2.40 2.63 2.75 2.46 2.48 2.47
Employee expenses 0.12 0.12 0.12 0.12 0.12 0.18 0.14 0.13 0.12
Other operating expenses 0.28 0.26 0.24 0.24 0.26 0.26 0.27 0.27 0.26
Operating profit 2.34 1.99 2.09 2.03 2.24 2.31 2.06 2.08 2.08
Provisions for NPA/ others 0.26 0.11 0.02 0.01 0.12 0.20 0.15 0.21 0.19
Taxes 0.54 0.48 0.58 0.69 0.75 0.73 0.67 0.65 0.66
ROAA 1.55 1.40 1.49 1.34 1.38 1.38 1.24 1.21 1.23
ROAE 18.56 16.82 18.80 18.06 19.58 19.10 16.74 16.49 16.99
Source: Company Data, PL Research

Change in estimates table – We revise our earnings to factor in


marginally higher credit costs/NPAs
Old Revised % Change
(Rs mn)
FY19E FY20E FY19E FY20E FY19E FY20E
Net interest income 43,717 50,801 43,715 50,796 (0.0) (0.0)
Operating profit 38,422 44,766 38,420 44,760 (0.0) (0.0)
Net profit 23,220 27,055 22,401 26,371 (3.5) (2.5)
EPS (Rs) 46.0 53.6 44.4 52.2 (3.5) (2.5)
ABVPS (Rs) 279.4 330.9 273.0 327.9 (2.3) (0.9)
Price target (Rs) 649 637 (1.8)
Recommendation ACCUMULATE ACCUMULATE
Source: Company Data, PL Research

We maintain Accumulate with revised TP to Rs637 (from Rs649)


based on 1.9x Mar-20E
PT calculation and upside
Fair price - EVA 631
Fair price - P/ABV 643
Average of the two 637
Target P/ABV 1.9
Target P/E 12.2
Current price, Rs 572
Upside (%) 11.4
Dividend yield (%) 1.6
Total return (%) 13.0
Source: Company Data, PL Research

August 27, 2018 5


LIC Housing Finance

LICHF – One year forward P/ABV trend

P/ABV 3 yr avg. avg. + 1 SD avg. - 1 SD

3.3
3.0
2.7
2.4
2.1
1.8
1.5
1.2
0.9

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18
Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18
Dec-16

Dec-17
Dec-12

Dec-13

Dec-14

Dec-15
Source: Company Data, PL Research

August 27, 2018 6


LIC Housing Finance
Income Statement (Rs. m) Quarterly Financials (Rs. m)
Y/e Mar FY17 FY18 FY19E FY20E Y/e Mar Q2FY18 Q3FY18 Q4FY18 Q1FY19
Int. Inc. / Opt. Inc. 1,39,177 1,48,874 1,74,075 2,03,935 Int. Inc. / Operating Inc. 36,581 37,124 38,467 40,190
Interest Expenses 1,02,315 1,11,247 1,30,360 1,53,139 Income from securitization - - - -
Net interest income 36,861 37,627 43,715 50,796 Interest Expenses 27,705 28,148 28,431 30,249
Growth(%) 24.0 2.1 16.2 16.2 Net Interest Income 8,875 8,976 10,036 9,940
Non-interest income 1,627 1,854 2,025 2,306 Growth (%) 2.5 (1.9) (3.5) 7.0
Growth(%) (21.1) 14.0 9.2 13.9 Non-Interest Income 586 552 874 320
Net operating income 38,488 39,482 45,740 53,102 Net Operating Income 9,461 9,528 10,910 10,260
Expenditures Growth (%) 2.0 0.1 (0.1) 8.0
Employees 2,458 2,175 2,393 2,680 Operating expenditure 1,402 1,477 2,242 742
Other Expenses 3,565 4,200 4,830 5,554 PPP 8,059 8,050 8,669 9,492
Depreciation 94 100 97 107 Growth (%) - - - -
Operating Expenses 6,023 6,375 7,223 8,234 Provision 578 484 281 1,608
PPP 32,370 33,007 38,420 44,760 Exchange Gain / (Loss) - - - -
Growth(%) 19.4 2.0 16.4 16.5 Profit before tax 7,481 7,566 8,387 7,884
Provisions 2,813 2,389 3,957 4,190 Tax 2,589 2,655 2,994 2,205
Profit Before Tax 29,557 30,618 34,463 40,570 Prov. for deferred tax liability - - - -
Tax 10,247 10,723 12,062 14,200 Effective Tax Rate 34.6 35.1 35.7 28.0
Effective Tax rate(%) 34.7 35.0 35.0 35.0 PAT 4,891 4,911 5,393 5,679
PAT 19,310 19,895 22,401 26,371 Growth (1) (2) 2 18
Growth(%) 16.3 3.0 12.6 17.7
AUM 15,14,17 15,61,76 16,63,63 16,86,52
Balance Sheet (Rs. m) 0 0 0 0
YoY growth (%) 15.5 15.4 15.1 14.7
Y/e Mar FY17 FY18 FY19E FY20E
Source of funds Borrowing 13,36,22 13,76,29 14,53,39 14,77,35
Equity 1,010 1,010 1,010 1,010 0 0 0 0

Reserves and Surplus 1,09,760 1,25,897 1,43,809 1,64,598 YoY growth (%) 15.1 15.2 15.0 14.4

Networth 1,10,770 1,26,907 1,44,819 1,65,608 Key Ratios


Growth (%) 21.1 14.6 14.1 14.4 Y/e Mar FY17 FY18 FY19E FY20E
Loan funds 12,63,371 14,38,856 16,79,437 19,64,759
CMP (Rs) 529 529 529 529
Growth (%) 13.9 13.9 16.7 17.0
EPS (Rs) 38.2 39.4 44.4 52.2
Deferred Tax Liability - - - -
Book value (Rs) 146 168 191 219
Other Current Liabilities 1,14,298 1,28,566 1,47,851 1,70,029
Adj. BV(Rs) 142 153 173 203
Other Liabilities 11,394 13,762 15,413 17,263
P/E(x) 14 13 12 10
Total Liabilities 14,99,833 17,08,091 19,87,520 23,17,658
P/BV(x) 4 3 3 2
Application of funds
P/ABV(x) 4 3 3 3
Net fixed assets 965 971 1,068 1,175
DPS (Rs) 7 8 9 9
Advances 14,45,340 16,63,630 19,33,929 22,56,128
Dividend Payout Ratio(%) 19.5 20.7 20.6 21.2
Growth (%) 15.5 15.1 16.2 16.7
Dividend Yield(%) 1.3 1.4 1.7 1.7
Investments 5,270 9,868 10,868 11,969
Current Assets 54,674 40,718 50,086 58,387 Asset Quality

Net current assets (59,624) (87,848) (97,765) (1,11,642) Y/e Mar FY17 FY18 FY19E FY20E

Other Assets (6,416) (7,096) (8,431) (10,000) Gross NPAs(Rs m) 6,270 13,040 17,179 17,935
Total Assets 14,99,833 17,08,092 19,87,520 23,17,658 Net NPA(Rs m) 2,050 7,120 9,280 7,941
Growth (%) 15.7 13.9 16.4 16.6 Gross NPAs to Gross Adv.(%) 0.4 0.8 0.9 0.8
Business Mix Net NPAs to net Adv.(%) 0.1 0.4 0.5 0.4
AUM 14,45,340 16,63,630 19,33,929 22,56,128 NPA coverage(%) 67.3 45.4 46.0 55.7
Growth (%) 15.5 15.1 16.2 16.7
Du-Pont
On Balance Sheet 14,45,340 16,63,630 19,33,929 22,56,128
Y/e Mar FY17 FY18 FY19E FY20E
% of AUM 100.00 100.00 100.00 100.00
NII 2.6 2.3 2.4 2.4
Off Balance Sheet - - - -
NII INCI. Securitization 2.6 2.3 2.4 2.4
% of AUM - - - -
Total income 2.8 2.5 2.5 2.5
Profitability & Capital (%) Operating Expenses 0.4 0.4 0.4 0.4
Y/e Mar FY17 FY18 FY19E FY20E PPOP 2.3 2.1 2.1 2.1
NIM 2.7 2.4 2.4 2.4 Total Provisions 0.2 0.1 0.2 0.2
ROAA 1.4 1.2 1.2 1.2 RoAA 1.4 1.2 1.2 1.2
ROAE 19.1 16.7 16.5 17.0 Avg. Assets/Avg. net worth 13.8 13.5 13.6 13.9
Source: Company Data, PL Research RoAE 19.1 16.7 16.5 17.0
Source: Company Data, PL Research

August 27, 2018 7


LIC Housing Finance

Price Chart Recommendation History

(Rs)
No. Date Rating TP (Rs.) Share Price (Rs.)
800
1 09-Oct-17 Accumulate 762 662
698 2 31-Oct-17 Accumulate 701 619
596 3 10-Jan-18 Accumulate 701 578
4 26-Jan-18 Accumulate 667 557
494
5 13-Apr-18 Accumulate 667 562
391 6 24-Apr-18 Accumulate 649 550
Feb-16

Feb-18
Feb-17
Aug-15

Aug-16

Aug-18
Aug-17
7 10-Jul-18 Accumulate 649 489

PL’s Recommendation Nomenclature (Absolute Performance)


Buy : > 15%
Accumulate : 5% to 15%
Hold : +5% to -5%
Reduce : -5% to -15%
Sell : < -15%
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly

August 27, 2018 8


LIC Housing Finance

ANALYST CERTIFICATION
(Indian Clients)
We/I, Ms. Shweta Daptardar- MBA-Finance, Ms. Pritesh Bumb- MBA, M.com Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views
expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or
indirectly related to the specific recommendation(s) or view(s) in this report.

(US Clients)
The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately
reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific
recommendation or views expressed in this research report.

DISCLAIMER
Indian Clients
Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for
third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking,
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