Reduce recommendation on LIC Housing by Kotak

Visit http://indiaer.blogspot.com/ for complete details 􀂄 􀂄


LIC HOUSING FINANCE
PRICE: RS.1458 RECOMMENDATION: REDUCE
TARGET PRICE: RS.1300 FY12E P/E:12.8X

q Healthy mortgage loan growth of 36% yoy drives the earnings; overall
performance better than our expectation with net profit growth of 37%
yoy to Rs.2.34bn
q Core interest income remains strong during Q2FY11; NIM under pressure
due to rising cost of fund
q Asset quality improves sequentially, along with improved provision coverage;
LICHF targets a 0.5% GNPA level
q Rolling over our estimates to FY12, revising our price target to Rs. 1300,
valuations appear rich therefore maintain Reduce recommendation


Healthy mortgage loan growth drives the earnings; overall performance
better than our expectation
LICHF's Q2FY11 performance is better than our expectations, supported by strong
growth in advances and improvement in assets quality. LICHF has reported mortgage
growth of 36% yoy to Rs. 433.8bn aided by a 35.8% yoy growth in disbursements
to Rs. 51.0bn. The strong growth in business is attributable to improved retail
demand; however, LICHF's developer's loan sanctions and disbursements have
also grown at relatively faster pace. LICHF's outstanding developer's loan book
forms close to 11% (10% in Q1FY11) of the total loan book.

Core interest income remains strong during Q2FY11; NIM under
pressure due to rising cost of fund
LICHF has reported a strong growth in its core earnings supported by improved interest
income and steady growth in its processing fee income. Overall interest income
(including retail and developers) grew by 31.7% yoy to Rs.10.4bn from
Rs.7.8bn in Q2FY10. Growth in interest income from developer's loan book was
relatively strong at 58.7% in the backdrop of strong growth in developers loan and
higher interest yields.
NIM for Q2FY11 witnesses some pressure following increase in the cost of funds as
the overall interest rates have started moving northwards during Q2FY11. LICHF
reported a NIM of 2.94% as compared to 3.0% (lower by 6bps qoq) in Q1FY11.
NIM is impacted by a 6bps sequential increase in cost of funds to 7.9% and also
due to pressure on yield on developer's loan.
With the 50 bps increase in benchmark rate and re-pricing of its assets, LICHF is
expected to maintain NIM at around 2.9%-3% for FY11 since close to 65% of its
loan book is on a floating rate while 58% of its liabilities are at fixed rate.
Asset quality improves sequentially, along with improved provision
coverage; LICHF targets a 0.5% GNPA level
LICHF has reported improvement in its asset quality for Q2FY11, with gross NPA of
0.74% as compared to 0.92% in Q1FY11. Its net NPA ratio has also improved to
0.21% from 0.35% seen in Q1FY11 on the back of steady recoveries and sequentially
improved provision coverage of 71.8% from 62%. For FY11, LICHF is targeting
to maintain provision coverage of over 82% and expecting material improvement
in its asset quality.
Rolling over our estimates to FY12, revising our price target to
Rs. 1300, valuations appear rich therefore maintain Reduce recommendation
We are now rolling over estimates for LICHF to FY12 and accordingly revising our
price target for the stock (dividend discount model based) to Rs. 1300 (includes
value of 20% stake in LICMF). We expect advances growth of 30%yoy for FY11
and 23% yoy for FY12 to Rs. 495.0bn and Rs.606.4bn respectively. We expect net
profit of Rs.9.6bn and EPS of Rs.101 for FY11 and net profit of Rs.10.85bn and EPS
of Rs.114 for FY12.
At the current market price the stock is trading at P/Ex of 14.4x and P/ABV of 3.4x
its FY11 estimates and P/Ex of 12.8x and P/ABVx of 2.8x its FY12 estimates. LICHF's
valuations appear rich and therefore we continue to maintain our REDUCE recommendation
for the stock.