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LIC Housing Finance
Raising price target and upgrading to OUTPERFORM
We raise our PT to Rs235 from Rs175.
LICHF has withdrawn its risky fixed rate Advantage 5
product and replaced it with a more profitable floating
rate product ‘Freedom’.
Advantage 5 (discontinued now) accounted for 85% of
disbursements and 18% of loans in FY11. Incremental
spread on Advantage 5 was a low 1.2% against the
portfolio spread of 1.9% on retail loans and 2.3% on
total loans. Given the high contribution of Advantage 5
to overall loan growth and low spreads, the product put
substantial pressure on incremental profitability.
The newly launched product is variable rate and at the
current incremental cost of funds earns an incremental
spread of 1.6-1.7%, much higher than 1.2% of
Advantage 5.
Higher incremental profitability with launch of new
product. LIC Housing has withdrawn the risky Advantage 5
product, which was a fixed rate loan for 5 years, and
introduced a new variable rate product Freedom, which is
linked to the company’s reference rate with an option in the
first year to convert to a fixed rate loan for 5 years. The fixed
rate loan will be 25-50bps more expensive than the variable
option. The replacement of the fixed rate product with a
variable rate product will reduce pressure on spread and
improve profitability in a rising rate environment.
Raise earnings. As a result of the new product, we are
raising earnings by 9% for FY12E and 15% for FY13E. We
now expect pre-exceptional earnings to grow 30% in FY12E
and 22% in FY13E. Unadjusted earnings are likely to grow
slower at 15% in FY12E. In FY11, LICHF booked one-time
gains of Rs1bn from sale of stake in LIC Mutual Fund to
Nomura.
Upgrading target price and rating. We raise our target
price to Rs235 from Rs175. Our target P/BV changes to
2.2x from 1.7x as we build in higher sustainable spreads.
The stock trades at 1.95x FY12E P/BV. We now rate LICHF
OUTPERFORM from UNDERPERFORM earlier.
Asset quality remains healthy. We build in higher NPLs
for FY12E/FY13E on a very low base. We expect gross
NPLs of 0.7% in FY12/13E from 0.5% but it still remains
low. Strong earnings growth, comfortable asset quality and
low regulatory risks will be the key rating drivers for the
stock. Slower than sector disbursement growth and tighter
than expected liquidity are key risks.
Advantage 5 put pressure on spreads
The table below indicates how the Advantage 5 product, which was a fixed rate loan for the first
five years, was negative for spreads and profitability for LIC Housing Finance. Advantage 5
accounted for 85% of total disbursements and 18% of total loans in FY11.
Fig 1 – Incremental yields and spreads
%
Incremental yield on Advantage 5 in FY11 10.2
Incremental cost of funds in FY11 9.0
Incremental spread on Advantage 5, % 1.2
Average spread on retail home loans in FY11 1.9
Average spread on developer loans in FY11 6.0
Weighted average spread on the total portfolio in FY11 2.3
Difference in portfolio spreads and spread on Advantage 5, % -1.1
Source: Standard Chartered Research estimates
New product is variable rate
Advantage 5 has been replaced with a variable rate product called Freedom. As the rate is
variable, it will allow LICHF to pass on higher cost of funds to borrowers.
Raise earnings
As the new product is expected to ease pressure on spreads, we raise earnings by 9% for FY12E
and 15% for FY13E. We expect unadjusted earnings to grow 15% in FY12E and 22% in FY13E.
We expect unadjusted earnings to grow faster at 30% in FY12E and 22% in FY13E. In FY11
LICHF booked exceptional post tax gains of Rs1bn from the sale of stake in LICMF to Nomura.
We expect spread to decline to 2% in FY12E from 2.3% in FY11. The decline in spreads will
be driven by slower growth in high yielding developer loans and rising cost of funds. The
decline in spread is lower than our earlier forecasts.
Fig 2 – Raising EPS
(Rs)
EPS
(New)
EPS
(Old)
% change Reason for change
FY11 21 19 9.9 Shift to actuals
FY12E 24 22 9.3 Higher spreads following new product launch
FY13E 29 25 14.9 Higher spreads following new product launch
Source: Company data and Standard Chartered Research estimates
Fig 3 – Change in spreads
%
Spread
(New)
Spread
(Old)
Change in bps
FY11 2.01 1.85 16
FY12E 1.88 1.57 31
FY13E 1.74 1.28 46
Source: Company data and Standard Chartered Research estimates
Fig 4 – Change in BVPS
(Rs)
BVPS
(New)
BVPS
(Old)
FY11 88 89
FY12E 106 105
FY13E 130 124
Source: Company data and Standard Chartered Research estimates
Raise price target to Rs235
The following table compares our new price target to the old.
Fig 5 – Price target derivation
% of average assets
Target
(Old)
Target
(New)
Yield on loans 9.8 10.0
Yield on assets 9.8 10.0
Cost of funds 7.8 7.8
Net interest income 2.0 2.3
Other income 0.4 0.4
Operating expenses 0.4 0.4
Provisions 0.2 0.2
PBT 1.8 2.1
Tax
PAT 1.3 1.5
Leverage 13.0 14.0
RoE 16.4 20.6
Price target calculation
Risk free rate 7.5 7.5
Risk premium 5.0 5.0
Beta 1.0 1.1
CoE 12.7 13.2
G 7.3 7.0
P/BV 1.7 2.2
BVPS 105 106
Target price 177 235
Target price rounded off 175 235
Source: Standard Chartered Research estimates
Now OUTPERFORM
We now rate LICHF OUTPERFORM from UNDERPERFORM earlier. Higher spreads on account
of the change in product, strong growth in core earnings and comfortable asset quality will be the
key rating drivers for the stock. The stock trades at 1.95x FY12E P/BV.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
LIC Housing Finance
Raising price target and upgrading to OUTPERFORM
We raise our PT to Rs235 from Rs175.
LICHF has withdrawn its risky fixed rate Advantage 5
product and replaced it with a more profitable floating
rate product ‘Freedom’.
Advantage 5 (discontinued now) accounted for 85% of
disbursements and 18% of loans in FY11. Incremental
spread on Advantage 5 was a low 1.2% against the
portfolio spread of 1.9% on retail loans and 2.3% on
total loans. Given the high contribution of Advantage 5
to overall loan growth and low spreads, the product put
substantial pressure on incremental profitability.
The newly launched product is variable rate and at the
current incremental cost of funds earns an incremental
spread of 1.6-1.7%, much higher than 1.2% of
Advantage 5.
Higher incremental profitability with launch of new
product. LIC Housing has withdrawn the risky Advantage 5
product, which was a fixed rate loan for 5 years, and
introduced a new variable rate product Freedom, which is
linked to the company’s reference rate with an option in the
first year to convert to a fixed rate loan for 5 years. The fixed
rate loan will be 25-50bps more expensive than the variable
option. The replacement of the fixed rate product with a
variable rate product will reduce pressure on spread and
improve profitability in a rising rate environment.
Raise earnings. As a result of the new product, we are
raising earnings by 9% for FY12E and 15% for FY13E. We
now expect pre-exceptional earnings to grow 30% in FY12E
and 22% in FY13E. Unadjusted earnings are likely to grow
slower at 15% in FY12E. In FY11, LICHF booked one-time
gains of Rs1bn from sale of stake in LIC Mutual Fund to
Nomura.
Upgrading target price and rating. We raise our target
price to Rs235 from Rs175. Our target P/BV changes to
2.2x from 1.7x as we build in higher sustainable spreads.
The stock trades at 1.95x FY12E P/BV. We now rate LICHF
OUTPERFORM from UNDERPERFORM earlier.
Asset quality remains healthy. We build in higher NPLs
for FY12E/FY13E on a very low base. We expect gross
NPLs of 0.7% in FY12/13E from 0.5% but it still remains
low. Strong earnings growth, comfortable asset quality and
low regulatory risks will be the key rating drivers for the
stock. Slower than sector disbursement growth and tighter
than expected liquidity are key risks.
Advantage 5 put pressure on spreads
The table below indicates how the Advantage 5 product, which was a fixed rate loan for the first
five years, was negative for spreads and profitability for LIC Housing Finance. Advantage 5
accounted for 85% of total disbursements and 18% of total loans in FY11.
Fig 1 – Incremental yields and spreads
%
Incremental yield on Advantage 5 in FY11 10.2
Incremental cost of funds in FY11 9.0
Incremental spread on Advantage 5, % 1.2
Average spread on retail home loans in FY11 1.9
Average spread on developer loans in FY11 6.0
Weighted average spread on the total portfolio in FY11 2.3
Difference in portfolio spreads and spread on Advantage 5, % -1.1
Source: Standard Chartered Research estimates
New product is variable rate
Advantage 5 has been replaced with a variable rate product called Freedom. As the rate is
variable, it will allow LICHF to pass on higher cost of funds to borrowers.
Raise earnings
As the new product is expected to ease pressure on spreads, we raise earnings by 9% for FY12E
and 15% for FY13E. We expect unadjusted earnings to grow 15% in FY12E and 22% in FY13E.
We expect unadjusted earnings to grow faster at 30% in FY12E and 22% in FY13E. In FY11
LICHF booked exceptional post tax gains of Rs1bn from the sale of stake in LICMF to Nomura.
We expect spread to decline to 2% in FY12E from 2.3% in FY11. The decline in spreads will
be driven by slower growth in high yielding developer loans and rising cost of funds. The
decline in spread is lower than our earlier forecasts.
Fig 2 – Raising EPS
(Rs)
EPS
(New)
EPS
(Old)
% change Reason for change
FY11 21 19 9.9 Shift to actuals
FY12E 24 22 9.3 Higher spreads following new product launch
FY13E 29 25 14.9 Higher spreads following new product launch
Source: Company data and Standard Chartered Research estimates
Fig 3 – Change in spreads
%
Spread
(New)
Spread
(Old)
Change in bps
FY11 2.01 1.85 16
FY12E 1.88 1.57 31
FY13E 1.74 1.28 46
Source: Company data and Standard Chartered Research estimates
Fig 4 – Change in BVPS
(Rs)
BVPS
(New)
BVPS
(Old)
FY11 88 89
FY12E 106 105
FY13E 130 124
Source: Company data and Standard Chartered Research estimates
Raise price target to Rs235
The following table compares our new price target to the old.
Fig 5 – Price target derivation
% of average assets
Target
(Old)
Target
(New)
Yield on loans 9.8 10.0
Yield on assets 9.8 10.0
Cost of funds 7.8 7.8
Net interest income 2.0 2.3
Other income 0.4 0.4
Operating expenses 0.4 0.4
Provisions 0.2 0.2
PBT 1.8 2.1
Tax
PAT 1.3 1.5
Leverage 13.0 14.0
RoE 16.4 20.6
Price target calculation
Risk free rate 7.5 7.5
Risk premium 5.0 5.0
Beta 1.0 1.1
CoE 12.7 13.2
G 7.3 7.0
P/BV 1.7 2.2
BVPS 105 106
Target price 177 235
Target price rounded off 175 235
Source: Standard Chartered Research estimates
Now OUTPERFORM
We now rate LICHF OUTPERFORM from UNDERPERFORM earlier. Higher spreads on account
of the change in product, strong growth in core earnings and comfortable asset quality will be the
key rating drivers for the stock. The stock trades at 1.95x FY12E P/BV.
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