UBS: LIC Housing Finance In a sweet spot but likely priced in

􀂄 Pure play on mortgage sector; gaining market share
LIC Housing Finance (LICHF) is one of the most experienced mortgage lenders in
India and has emerged as a dominant player in the past two years under new
leadership, improving its market share from 6% in FY08 to 11% in FY10. While
the company’s growth prospects remain strong, we believe this is reflected in the
current share price. LICHF is trading at an FY12E P/BV of 2.6x and PE of 12.1x.
􀂄 Can favourable ALM translate into strong NIMs?
The outlook for NIM remains a concern, in our view, due to AAA spreads
expanding in recent months and competitive intensity in the mortgage market
increasing. Although housing finance companies have favourable asset liability
management (ALM), their pricing power could be weak in the near term because
of public sector banks’ (State Bank of India in particular) focus on the segment.
􀂄 Aggressive growth may require capital earlier than expected
We expect LICHF’s financial leverage to reach 13x by FY11, which is high
compared to both the sector and the company’s own history. We believe this could
warrant a capital raising, which is not factored into our forecasts or consensus
estimates and could lead to EPS and ROE dilution.
􀂄 Valuation: likely priced in
We like the mortgage structural theme in India and believe LICHF is well placed
as the second largest mortgage player. However, its share price has outperformed
banks’ by 43% over the past 12 months, and we believe the valuations reflect its
strong underlying fundamentals. We initiate coverage with a Neutral rating and a
price target of Rs1,600 (3x FY12E P/BV, average ROE of 24%). We base our
price target on a residual income model.