UBS: LIC Housing Finance- Further de-rating likely

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UBS Investment Research
LIC Housing Finance 
Further de-rating likely 
„ Change in CEO could mean change in strategy
Under the leadership of former management (CEO RR Nair), the company
achieved market share gains in both developer and retail loans. The change in CEO
and allegations of corruption against former management could lead to a more
cautious approach to business by the company, particularly towards the builder
portfolio (11% of the book) which has a direct as well as indirect bearing on
growth (as developer loans also facilitate retail loans). Near-term growth, however
(Q3/Q4) is unlikely to deviate from trend.

„ ALM is favourable but competitive intensity is high
The NIM outlook remains a concern, in our view, due to AAA spreads expanding
in recent months and competition in the mortgage market intensifying. Although
housing finance companies have favourable asset liability management (ALM),
their pricing power could be weak in the near term because of State Bank of
India’s focus on the segment.
„ Growth may require capital sooner than later
We expect LICHF’s financial leverage to reach 13x by FY11, which is high
compared to the sector’s 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: risk-reward unfavourable
We maintain our residual income-based price target of Rs160 (1.5x FY12E book)
which is at a premium to its five-year historical average (due to improved ROE and
growth). Our valuation assumes a discount rate of 13.5%; terminal ROE of 13.5%;
and a terminal year growth rate of 5%.