LIC Housing Finance - Valuations comfortable; upgrade to BUY:: Emkay

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LIC Housing Finance

Valuations comfortable; upgrade to BUY

BUY

CMP: Rs 174                                        Target Price: Rs 210

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n     Recent increases in the lending rates to take care of NIMs atleast for next two quarters. We are already building in 20bps pressure in spreads/NIMs next year

n     Developers’ loan portfolio only on pause now, to start disbursing fresh loans from Q4FY11 onwards. The proportion of developers’ loan to remain steady at 11% of total

n     Developers’ loans portfolio NPAs are minimal. The loans under investigation at Rs3.9bn which are all performing assets

n     Valuations at 1.7x/1.4x FY11E/FY12E ABV – valuations attractive looking at 22% avg RoEs despite higher provisions and building lower NIMs. Upgrade to BUY with TP of Rs210

We recently hosted a conference call of LIC Housing Finance. Here are

few takeaways from the call

NIMs can be maintained/incremental spread to improve next quarter

As LICHF revised its benchmark lending rates by 50bps wef Oct-10, the NIMs during

the quarter expanded by 22bps and overall spreads were maintained. However,

incremental spreads contracted by sharp 47bps as the incremental cost of funds during

the quarter rose by 40bps.

Albeit, we have already built in 20bps contraction in NIMs for FY12, we believe that the

NIMs can be maintained in near term as

¾ LICHF has revised its benchmark lending rates by 50bps more wef Jan-11 and also

revised rates for advantage-five scheme by 50-85bps,

¾ Roughly 55% of the liabilities are on fixed basis compared with 65% of the assets on

floating basis

¾ Developers’ loan come back to 11% of the total loans

Developers’ loan portfolio to pick up from Q4FY11

LICHF had put a temporary pause on its developers’ loan portfolio in December 2010

due to events which happened last month. However, the management is confident of

resuming the disbursements from Q4FY11 on loans which have already been

sanctioned. The developers’ loan portfolio is likely to remain around 11% of total in

future.

Developers’ loan portfolio almost NPA free

The developers’ loan portfolio was virtually NPA free as they stood at 0.08% of the

portfolio or just Rs38mn. Of the loans under investigations (Rs3.9bn), the repayment is

happening on schedule. Our assessment of annual reports of few real estate players

suggests that LICHF’s developers’ loan portfolio has adequate collaterals.

RoEs to still remain strong despite additional provisions

We are building in provisions of Rs3.1bn/Rs3.7bn in FY12E and FY13E each for the

teaser rate loans assuming that the scheme is continued. We have also built in

NIMs/spreads contraction of ~20bps in FY12E. We are also building in lower

disbursement CAGR of 21% over FY11-13E. Despite the same we expect LICHF’s RoEs

would average at 22% over FY12-13E.

Valuations and view

At the CMP, the stock is quoting at 1.7x FY12E ABV and 1.4x FY13E ABV. We find

valuations attractive looking average RoEs of 22% over next two years. We upgrade the

stock to BUY with target price of Rs210.