Goldman Sachs: LIC Housing Finance (Sell, On Conviction List)

We believe LICHF stock will underperform as: 

(1) Competition is intensifying in home loans


(2) LICHF’s strategy of maintaining above-industry growth will
likely be achieved by keeping rates low which would exert
pressure on its spreads.

(3) Growth would require the company to raise capital, thereby
suppressing near-term RoEs


(4) LICHF is trading at peak valuations of 3.3X FY11E P/BV and
13.7X FY11E P/E which, in our view, fully reflects high growth,
turnaround in its operating processes/under-writing standards

Differentiation from consensus

• We are -11% below Bloomberg consensus for FY12E.

• We believe competition is intensifying in the mortgage market with ICICI Bank back in the fray, suggesting more margin compression.

Key Catalyst

• Quarterly results giving evidence of declining margins.

• Increased competition and pricing wars in the mortgage market

Key risks:

• •LICHF moderates growth and passes on cost pressures to end borrowers to maintain margins

• Disbursement growth is significantly higher than our estimates