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Valuations pricing in negatives, upgrading to Hold
We upgrade LICHF to Hold with a revised target price of INR190. Loan growth
momentum could slow as retail loan growth mean-reverts and LICHF goes slow
on developer loans. Incrementally spreads are likely to contract as cost of funds
rises. However, valuations already seem to factor in a lot of negatives. The stock is
down 35% in the past three months and is trading at 1.7x FY12E, which is back to
the June 2009 levels and appears fairly valued.
3QFY11 – Sanctions and disbursements to developers slow down
LICHF reported 3QFY11 net profit of INR2.14bn, up 39% YoY and ~4% below our
estimates. Adjusted for two one-off items – standard asset provision on teaser
loans (INR2.33bn) and gain on the sale of MF stake (INR1.37bn) – operating profit
was up 51% YoY and 8%.ahead of our estimates. As expected the share of
project loans in incremental sanctions and disbursements declined to ~8% in
3QFY11 from ~25% in 2QFY11. Spreads contracted 5bps QoQ and we expect
them to contract further as funding costs rise.
Operating profit momentum to slow, overhang on provision reduces
Loan disbursement growth is running at a very high level due to the base effect
and a late catch-up of LICHF relative to peers – this could revert to sector averages
in FY12E. Spreads should also contract, partly due to reduced momentum in the
higher-yielding developer finance business. The company has completed the
teaser loan provision and that reduces the overhang. We believe that the sharp fall
in stock price has priced in concerns over excessive growth in developer lending
and possibility of large-scale write-offs associated with the alleged improper loans.
SOTP valuation; growth strength and low funding cost the key risks
We value LIC Housing Finance using the sum-of-the-parts method with the
mortgage business valued using the single-stage Gordon Growth model and the
stake in LIC Mutual Fund valued as a percentage of AuM. The key upside risk is
increase in cost of funds being lower than expected and the key downside risk is
higher slippages from the developer loan book.
Investment thesis
Outlook
Loan disbursements growth is running at a very high level due to the base effect and a late
catch-up of LICHF relative to peers. This is likely to mean-revert to much lower levels of
growth in FY12E. Spreads should also contract, partly due to reduced momentum in the
higher-yielding developer finance business. The company has completed the teaser loan
provision and that reduces the overhang. We believe that the sharp fall in stock price has
priced in concerns over excessive growth in developer lending and the possibility of largescale write-offs associated with the alleged improper loans. The valuation discount of LICHF
vs. HDFC has widened and the narrowing of the discount to that extent protects the
downside. For the above reasons we rate the stock a Hold.
Valuation
We value the core mortgage business of LICHF using the single stage Gordon Growth model
P/BV = (ROE-g)/ (COE-g), similar to the valuation methodology we use for banks and the
asset financing business of other non-banking finance companies (NBFCs). We use Deutsche
Bank estimates for risk-free rate (6.4%) and market-risk premium (7.2%) to arrive at a cost of
equity of 16.12%. We calculate blended RoE of 21.7% by giving 25% weight to FY12E RoE
(25%) and 75% weight to normalized RoE (21%). We use a perpetual growth rate of 5%
(long-term nominal growth rate of developed economies). This gives us a target P/B multiple
of 1.50x. We value the 20% stake of LICHF in LIC Mutual Fund using 2.5% of AuM (the price
paid by a buyer for acquiring a 35% stake).
Risks
Key upside risks are include high property market volumes leading to higher volume growth.
In this case, loan growth could be higher than our estimates. If system liquidity improves
leading to wholesale borrowing costs remaining stable or declining, then LICHF would
benefit as 99% of its liabilities are wholesale. This would enable LICHF to protect its NIM.
Key downside risks include high slippages from the developer loan book and LICHF’s inability
to pass on the increase in funding costs due to stiff competition in the mortgage lending
market.
Q3FY results – stake sale offsets higher provisioning
LIC HF reported net profit of INR2.1bn, up 39% YoY and 4.5% lower than estimated. Net
interest income was up 54.5% YoY and 10% higher than estimated. This was driven by a
strong 21bps QoQ rise in margins.
There were two one-off items in the results – standard asset provision on teaser loans
(INR2.33bn) and gain on sale of MF stake (INR1.37bn). Adjusting for these two items
operating profit growth was up 51% YoY and 8% ahead of our estimates.
Earnings, valuation and target
price
Earnings estimates revision – adjusting for high NII for 9MFY11
We are adjusting our FY11E estimates for higher NII and higher provisions (we now build in
the standard asset provision on teaser loans) resulting in a 4% reduction in net profit. We
revise our NII for FY12E and FY13E upwards on account of the higher NII in FY11E, resulting
in net profit estimate increases of 5% and 4% in FY12E and FY13E.
Stock appears fairly valued after its fall from the peak
LICHF has fallen sharply since the allegations of housing loan misdemeanours came to light.
It is down 34% over the past three months, significantly underperforming both the Sensex
(down 4%) and Bankex (down 11.6%). The stock is currently trading at 1.7x FY12E P/B and
7.4x FY12E P/E and appears fairly priced.
We believe that the fall has priced in i) concerns on excessive growth in developer lending –
there are already signs of their slowing that down. Though this may have a negative impact
on spreads (which we have built into our forecasts), in the present weak environment for
commercial real estate, the reduced emphasis actually alleviates credit quality concerns; and
ii) the possibility of large scale write-offs associated with the alleged improper loans. The
management has clarified that the amount of these loans is INR3.89bn, which is 9.5% of
book value, and payments against these loans are regular, not warranting provisions. These
loans are also 2x collateralised.
After the price decline, in valuation terms the stock has returned to June 2009 levels. That
too is some source of comfort because it was then just riding out of the overall valuation
downturn caused by the credit crisis, and hence valuations were still subdued. Since the
company has completed the teaser loan provision already, the overhang from that also
reduces.
Discount relative to HDFC has widened and can narrow ahead
LICHF has historically traded at a discount of 70-80% to HDFC’s core P/B. This discount had
narrowed to < 50% in November 2010, but is now back to ~65%. Given that HDFC has
better spreads and profitability compared to LICHF, we do not expect the discount to go
away; however, narrowing of the discount to that extent protects the downside.
However, some concerns still do remain – loan disbursements growth is running at a very
high level due to the base effect and a late catch-up of LICHF relative to peers. This is likely
to mean-revert to much lower levels of growth in FY12E. Spreads should also contract, partly
due to reduced momentum in the higher-yielding developer finance business. Also, LICHF
has less reliance on retail deposits which can be a cost-effective source of funding in times of
tight liquidity
SOTP-based valuation, mortgage business valued on single-stage
Gordon Growth
We are lowering the SOTP based target price to INR190 from INR226.
We value the core mortgage business of LICHF using the single stage Gordon Growth model
P/BV = (ROE-g)/ (COE-g), similar to the valuation methodology we use for banks and asset
financing businesses of other non-banking finance companies (NBFCs). We value LICHF’s
20% stake in LIC Mutual Fund using 2.5% of AuM (the price paid by the buyer for acquiring a
35% stake). Given the likely slowdown in loan growth and spread compression, we are doing
away with the premium to theoretical P/B.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Valuations pricing in negatives, upgrading to Hold
We upgrade LICHF to Hold with a revised target price of INR190. Loan growth
momentum could slow as retail loan growth mean-reverts and LICHF goes slow
on developer loans. Incrementally spreads are likely to contract as cost of funds
rises. However, valuations already seem to factor in a lot of negatives. The stock is
down 35% in the past three months and is trading at 1.7x FY12E, which is back to
the June 2009 levels and appears fairly valued.
3QFY11 – Sanctions and disbursements to developers slow down
LICHF reported 3QFY11 net profit of INR2.14bn, up 39% YoY and ~4% below our
estimates. Adjusted for two one-off items – standard asset provision on teaser
loans (INR2.33bn) and gain on the sale of MF stake (INR1.37bn) – operating profit
was up 51% YoY and 8%.ahead of our estimates. As expected the share of
project loans in incremental sanctions and disbursements declined to ~8% in
3QFY11 from ~25% in 2QFY11. Spreads contracted 5bps QoQ and we expect
them to contract further as funding costs rise.
Operating profit momentum to slow, overhang on provision reduces
Loan disbursement growth is running at a very high level due to the base effect
and a late catch-up of LICHF relative to peers – this could revert to sector averages
in FY12E. Spreads should also contract, partly due to reduced momentum in the
higher-yielding developer finance business. The company has completed the
teaser loan provision and that reduces the overhang. We believe that the sharp fall
in stock price has priced in concerns over excessive growth in developer lending
and possibility of large-scale write-offs associated with the alleged improper loans.
SOTP valuation; growth strength and low funding cost the key risks
We value LIC Housing Finance using the sum-of-the-parts method with the
mortgage business valued using the single-stage Gordon Growth model and the
stake in LIC Mutual Fund valued as a percentage of AuM. The key upside risk is
increase in cost of funds being lower than expected and the key downside risk is
higher slippages from the developer loan book.
Investment thesis
Outlook
Loan disbursements growth is running at a very high level due to the base effect and a late
catch-up of LICHF relative to peers. This is likely to mean-revert to much lower levels of
growth in FY12E. Spreads should also contract, partly due to reduced momentum in the
higher-yielding developer finance business. The company has completed the teaser loan
provision and that reduces the overhang. We believe that the sharp fall in stock price has
priced in concerns over excessive growth in developer lending and the possibility of largescale write-offs associated with the alleged improper loans. The valuation discount of LICHF
vs. HDFC has widened and the narrowing of the discount to that extent protects the
downside. For the above reasons we rate the stock a Hold.
Valuation
We value the core mortgage business of LICHF using the single stage Gordon Growth model
P/BV = (ROE-g)/ (COE-g), similar to the valuation methodology we use for banks and the
asset financing business of other non-banking finance companies (NBFCs). We use Deutsche
Bank estimates for risk-free rate (6.4%) and market-risk premium (7.2%) to arrive at a cost of
equity of 16.12%. We calculate blended RoE of 21.7% by giving 25% weight to FY12E RoE
(25%) and 75% weight to normalized RoE (21%). We use a perpetual growth rate of 5%
(long-term nominal growth rate of developed economies). This gives us a target P/B multiple
of 1.50x. We value the 20% stake of LICHF in LIC Mutual Fund using 2.5% of AuM (the price
paid by a buyer for acquiring a 35% stake).
Risks
Key upside risks are include high property market volumes leading to higher volume growth.
In this case, loan growth could be higher than our estimates. If system liquidity improves
leading to wholesale borrowing costs remaining stable or declining, then LICHF would
benefit as 99% of its liabilities are wholesale. This would enable LICHF to protect its NIM.
Key downside risks include high slippages from the developer loan book and LICHF’s inability
to pass on the increase in funding costs due to stiff competition in the mortgage lending
market.
Q3FY results – stake sale offsets higher provisioning
LIC HF reported net profit of INR2.1bn, up 39% YoY and 4.5% lower than estimated. Net
interest income was up 54.5% YoY and 10% higher than estimated. This was driven by a
strong 21bps QoQ rise in margins.
There were two one-off items in the results – standard asset provision on teaser loans
(INR2.33bn) and gain on sale of MF stake (INR1.37bn). Adjusting for these two items
operating profit growth was up 51% YoY and 8% ahead of our estimates.
Earnings, valuation and target
price
Earnings estimates revision – adjusting for high NII for 9MFY11
We are adjusting our FY11E estimates for higher NII and higher provisions (we now build in
the standard asset provision on teaser loans) resulting in a 4% reduction in net profit. We
revise our NII for FY12E and FY13E upwards on account of the higher NII in FY11E, resulting
in net profit estimate increases of 5% and 4% in FY12E and FY13E.
Stock appears fairly valued after its fall from the peak
LICHF has fallen sharply since the allegations of housing loan misdemeanours came to light.
It is down 34% over the past three months, significantly underperforming both the Sensex
(down 4%) and Bankex (down 11.6%). The stock is currently trading at 1.7x FY12E P/B and
7.4x FY12E P/E and appears fairly priced.
We believe that the fall has priced in i) concerns on excessive growth in developer lending –
there are already signs of their slowing that down. Though this may have a negative impact
on spreads (which we have built into our forecasts), in the present weak environment for
commercial real estate, the reduced emphasis actually alleviates credit quality concerns; and
ii) the possibility of large scale write-offs associated with the alleged improper loans. The
management has clarified that the amount of these loans is INR3.89bn, which is 9.5% of
book value, and payments against these loans are regular, not warranting provisions. These
loans are also 2x collateralised.
After the price decline, in valuation terms the stock has returned to June 2009 levels. That
too is some source of comfort because it was then just riding out of the overall valuation
downturn caused by the credit crisis, and hence valuations were still subdued. Since the
company has completed the teaser loan provision already, the overhang from that also
reduces.
Discount relative to HDFC has widened and can narrow ahead
LICHF has historically traded at a discount of 70-80% to HDFC’s core P/B. This discount had
narrowed to < 50% in November 2010, but is now back to ~65%. Given that HDFC has
better spreads and profitability compared to LICHF, we do not expect the discount to go
away; however, narrowing of the discount to that extent protects the downside.
However, some concerns still do remain – loan disbursements growth is running at a very
high level due to the base effect and a late catch-up of LICHF relative to peers. This is likely
to mean-revert to much lower levels of growth in FY12E. Spreads should also contract, partly
due to reduced momentum in the higher-yielding developer finance business. Also, LICHF
has less reliance on retail deposits which can be a cost-effective source of funding in times of
tight liquidity
SOTP-based valuation, mortgage business valued on single-stage
Gordon Growth
We are lowering the SOTP based target price to INR190 from INR226.
We value the core mortgage business of LICHF using the single stage Gordon Growth model
P/BV = (ROE-g)/ (COE-g), similar to the valuation methodology we use for banks and asset
financing businesses of other non-banking finance companies (NBFCs). We value LICHF’s
20% stake in LIC Mutual Fund using 2.5% of AuM (the price paid by the buyer for acquiring a
35% stake). Given the likely slowdown in loan growth and spread compression, we are doing
away with the premium to theoretical P/B.
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