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LIC Housing Finance (LICHF)
Banks/Financial Institutions
Going strong. We believe LICHF remains well placed on its growth track. The real
estate sector has not yet shown signs of slowdown and disbursements will likely remain
strong. Borrowing costs are rising, but we believe LICHF’s liability profile has buffers in
the medium-term that reduce downside risk. We tweak our estimates and retain our
ADD rating with a price target of Rs240 (Rs210 earlier).
Loan growth strong
We expect LICHF to deliver 29% and 24% housing loan growth in FY2012E and FY2013E as
compared to 33% and 37% in FY2011E and FY2010, respectively. In light of higher interest rates
and likely moderation in housing, we are modeling 15% disbursements growth over next two
years as compared to 30%+ in FY2011E. The current trend, if it continues, provides higher upside
risk than downside risk to our estimates.
According to our real estate analysts, real estate demand is in line with expectations and there
is no visible sign of a slowdown in 4QFY11E. DLF and Unitech continue to launch projects in the
NCR region. Despite fears of a slowdown in Mumbai, real estate offtake has been stable till
February (Exhibit 1). Other markets continue to report steady growth.
LICHF’s management has highlighted that it has not seen any slowdown yet, it remains positive
on disbursements and growth targets.
However, rising rates and real estate prices in the past 4-5 quarters have affected affordability.
The affordability index is now back at 2006 levels (Exhibit 2).
LICHF better placed despite pressures on margins
We expect LICHF’s margins to moderate to 2.7% in FY2012E and FY2013E from about 3% in
FY2011E on the back of rising bulk borrowings rates in the system.
As highlighted in Exhibit 3, about Rs300 bn of loan assets and Rs175 bn of loan liabilities will
likely be due for re-pricing over the next four quarters. As such, LICHF is comfortable in
maintaining its spreads even if it can raise lending rates by 50-60bps for a 1% rise in borrowing
cost.
LICHF offers new home loans at 10.5%, existing loans at 10.75-11% and developer loans at
14%. Its marginal borrowing cost is close to 9-9.5%, thereby resulting in marginal spreads of
1.5-1.7% (stable qoq).
LICHF has not yet resumed lending to developers. The company continues to disburse
developer loans approved in the past. Lending to developers cushions its spreads and
hence it is imperative that the company resumes focus on this segment. The management
has highlighted that the company’s processes remain robust and that it does not find any
cause for concern in the developer-loan portfolio; they propose to re-commence their
developer loan business shortly. We understand from market sources that developers are
finding it challenging to raise bank loans post the bribes-for-loan scam and general tight
liquidity in the system. Consequently, the interest rates for developer loans will likely
remain buoyant; this will augur well for margins of housing finance companies.
LICHF’s ‘Advantage five’ i.e. 5-year fixed rate home loans are now about 10% of the
overall loan book. We believe the management will need to take a call on this product
since the company does not have five-year fixed rate liabilities and the loan book in this
segment is now sizeable. We believe the company will need to discontinue this product in
next 1-2 quarters or raise lending rates sharply. This products earns about 50-60 bps of
higher yields and boosts yields by 5-10 bps.
Await regulatory clarity on teaser loans
As on December 2010, LICHF had dual rate home loans of Rs160 bn (including a 5-year
fixed rate loan of Rs50). In 3QFY11, LICHF made provisions of Rs3.2 bn i.e. at 2% of
standard assets on these loans (in line with recent NHB regulation). However, LICHF is not
clear if 5-year fixed rate loans will quality to be ‘teaser loans’. The management is seeking
clarification from NHB on the definition on ‘teaser loan’. In case the 5-year fixed rate home
loans are considered as a ‘teaser loans’, the management will likely review its strategy- i.e.
discontinue 5-year fixed rate loans or raise lending rates. Notably, SBI has not yet made
provisions on its teaser loan book and LICHF will likely consider a reversal of provisions on
the 5-year loans (Rs 1 bn) subject to NHB approval.
Gains from investments in real estate fund
LICHF has invested Rs500 mn in Kotak Real Estate Fund. The fund recently sold one of its
properties in Mumbai at ~300% gain. LICHF will likely recognize capital gain of Rs300 mn
(9% of PBT before extraordinary items) in 4QFY11E on the back of this transaction.
Retain ADD with price target of Rs240
We are tweaking our estimates to factor capital gains in 4QFY11E and somewhat better
growth traction. We now expect LICHF to deliver about 25% yoy earnings growth (PAT of
Rs2.7 bn) in 4QFY11 on the back of over 33% loan growth and moderation in margins.
Despite pressure on NBFCs due to higher bulk borrowing rates, we find higher upside risk
than downside risk for our estimates on LICHF due to the factors discussed above. We
remain positive on the stock. At our price target, the stock will trade at 11.2X PER and 2.4X
PBR FY2012E for about 23-24% RoE and 20% CAGR in core income between FY2011E and
FY2013E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
LIC Housing Finance (LICHF)
Banks/Financial Institutions
Going strong. We believe LICHF remains well placed on its growth track. The real
estate sector has not yet shown signs of slowdown and disbursements will likely remain
strong. Borrowing costs are rising, but we believe LICHF’s liability profile has buffers in
the medium-term that reduce downside risk. We tweak our estimates and retain our
ADD rating with a price target of Rs240 (Rs210 earlier).
Loan growth strong
We expect LICHF to deliver 29% and 24% housing loan growth in FY2012E and FY2013E as
compared to 33% and 37% in FY2011E and FY2010, respectively. In light of higher interest rates
and likely moderation in housing, we are modeling 15% disbursements growth over next two
years as compared to 30%+ in FY2011E. The current trend, if it continues, provides higher upside
risk than downside risk to our estimates.
According to our real estate analysts, real estate demand is in line with expectations and there
is no visible sign of a slowdown in 4QFY11E. DLF and Unitech continue to launch projects in the
NCR region. Despite fears of a slowdown in Mumbai, real estate offtake has been stable till
February (Exhibit 1). Other markets continue to report steady growth.
LICHF’s management has highlighted that it has not seen any slowdown yet, it remains positive
on disbursements and growth targets.
However, rising rates and real estate prices in the past 4-5 quarters have affected affordability.
The affordability index is now back at 2006 levels (Exhibit 2).
LICHF better placed despite pressures on margins
We expect LICHF’s margins to moderate to 2.7% in FY2012E and FY2013E from about 3% in
FY2011E on the back of rising bulk borrowings rates in the system.
As highlighted in Exhibit 3, about Rs300 bn of loan assets and Rs175 bn of loan liabilities will
likely be due for re-pricing over the next four quarters. As such, LICHF is comfortable in
maintaining its spreads even if it can raise lending rates by 50-60bps for a 1% rise in borrowing
cost.
LICHF offers new home loans at 10.5%, existing loans at 10.75-11% and developer loans at
14%. Its marginal borrowing cost is close to 9-9.5%, thereby resulting in marginal spreads of
1.5-1.7% (stable qoq).
LICHF has not yet resumed lending to developers. The company continues to disburse
developer loans approved in the past. Lending to developers cushions its spreads and
hence it is imperative that the company resumes focus on this segment. The management
has highlighted that the company’s processes remain robust and that it does not find any
cause for concern in the developer-loan portfolio; they propose to re-commence their
developer loan business shortly. We understand from market sources that developers are
finding it challenging to raise bank loans post the bribes-for-loan scam and general tight
liquidity in the system. Consequently, the interest rates for developer loans will likely
remain buoyant; this will augur well for margins of housing finance companies.
LICHF’s ‘Advantage five’ i.e. 5-year fixed rate home loans are now about 10% of the
overall loan book. We believe the management will need to take a call on this product
since the company does not have five-year fixed rate liabilities and the loan book in this
segment is now sizeable. We believe the company will need to discontinue this product in
next 1-2 quarters or raise lending rates sharply. This products earns about 50-60 bps of
higher yields and boosts yields by 5-10 bps.
Await regulatory clarity on teaser loans
As on December 2010, LICHF had dual rate home loans of Rs160 bn (including a 5-year
fixed rate loan of Rs50). In 3QFY11, LICHF made provisions of Rs3.2 bn i.e. at 2% of
standard assets on these loans (in line with recent NHB regulation). However, LICHF is not
clear if 5-year fixed rate loans will quality to be ‘teaser loans’. The management is seeking
clarification from NHB on the definition on ‘teaser loan’. In case the 5-year fixed rate home
loans are considered as a ‘teaser loans’, the management will likely review its strategy- i.e.
discontinue 5-year fixed rate loans or raise lending rates. Notably, SBI has not yet made
provisions on its teaser loan book and LICHF will likely consider a reversal of provisions on
the 5-year loans (Rs 1 bn) subject to NHB approval.
Gains from investments in real estate fund
LICHF has invested Rs500 mn in Kotak Real Estate Fund. The fund recently sold one of its
properties in Mumbai at ~300% gain. LICHF will likely recognize capital gain of Rs300 mn
(9% of PBT before extraordinary items) in 4QFY11E on the back of this transaction.
Retain ADD with price target of Rs240
We are tweaking our estimates to factor capital gains in 4QFY11E and somewhat better
growth traction. We now expect LICHF to deliver about 25% yoy earnings growth (PAT of
Rs2.7 bn) in 4QFY11 on the back of over 33% loan growth and moderation in margins.
Despite pressure on NBFCs due to higher bulk borrowing rates, we find higher upside risk
than downside risk for our estimates on LICHF due to the factors discussed above. We
remain positive on the stock. At our price target, the stock will trade at 11.2X PER and 2.4X
PBR FY2012E for about 23-24% RoE and 20% CAGR in core income between FY2011E and
FY2013E.
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