Buy LIC HOUSING FINANCE: CBI investigation says Kotak Sec

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LIC Housing Finance clarification on the CBI investigation referring
to certain developer's loans sanctioned by the company
Following certain media reports suggesting CBI investigation referring to LICHF's exposure
to certain developers loan, the company has clarified on the issue to the exchanges
indicating that all the loans have been approved in compliance with relevant
regulatory norms. Additionally, all the loans in question are performing assets
and are secured by underlying assets to the full satisfaction of the approving authority.


Developer loans form close to 11.3% of the outstanding loan book with Gross NPA
of 0.08%, while the Gross NPA in the individual portfolio stood at 0.84%. LICHF has
provision coverage of 71.8% on its non-performing assets.
Mortgage loan book at Rs.433bn in H1FY11, grew by 36% yoy;
we maintain our FY11 estimate at 30% yoy and 23% yoy for
FY12

LICHF reported a growth of 36% yoy for H1FY11 to Rs. 433.8bn, of which developers
loan stood at Rs. 48.9bn forming 11.3% of the total loan book. Going forward,
we opine that the company would largely remain focused towards retail mortgage
loans which form close to 89% of the loan book. Individual sanction during H1FY11
grew by 42% yoy to Rs. 63bn while disbursements grew by 21% yoy to Rs.68.4bn.

We continue to maintain our loan growth estimates at 30% yoy for FY11 to Rs.
495bn and 23% yoy in FY12 to Rs. 606bn.

Maintain our earnings estimates, however rising interest rate
may impact NIM going forward; current market price indicates a
19% upside to our price target, recommend investors to accumulate
at lower levels

We continue to maintain our earnings estimates for LICHF; we expect net profit
growth of 44% yoy in FY11 to Rs.9.6 bn and 13% yoy in FY12 to Rs.10.8 bn. However,
LICHF NIM may witnesses cost pressures due to rising interest rates since close
to 70% of the assets are on floating as against 65% of the liabilities. We expect a
NIM of 2.8% for FY11 and 2.7% for FY12.

Post the recent correction, the current market price indicates a 19% upside to our
price target of Rs.1300 (currently trading at 2.1x FY12 P/ABVx). We recommend investors
to ACCUMULATE (reduce earlier).


Stock may be de-rated
LICHF has been a preferred stock, outperforming the index by 347% in the past two years.
The company has consistently reported impressive performance over the past few quarters,
thereby driving a rerating of the stock. We believe this event highlights the underlying risk of
its fast growing business model. The high share (89%) of retail loans in LICHF’s portfolio
provides comfort in this regard. We await more clarity to revise our estimates and target
price even as we expect the valuation multiples to de-rate.