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LIC Housing Finance
Cracks in the house
Initiate with Underperform and below consensus earnings
We initiate coverage on LIC Housing Finance with an Underperform rating. Our
TP of Rs190 provides 12% downside from current levels. We believe ROEs will
compress driven by falling margins and higher credit costs while further capital
issuance remains an overhang. Our earnings are 18% below FY12E and 10%
below FY13E Bloomberg consensus respectively.
Subdued earnings growth in FY12E
We expect earnings growth to be -6%YoY in FY12E. This should be driven by
lower NIMs and higher standard asset provisioning. We expect spreads to
normalise and NIMs to compress by ~25bp YoY to 2.8% in FY12. LICHF has
been aggressive in lowering loan rates to capture market share. We believe
management continues to focus on growing its book aggressively which should
come at the expense of margins. The company is also likely to be hit, in our
view, by the provisioning for standard assets as well as ‘teaser’ rate loans, which
may lead to negative earnings growth in FY12E.
Asset quality – a fly in the ointment
LICHF has really pushed on the growth pedal from FY08/09 onwards – about the
same time we believe banks became more cautious lending to commercial real
estate. The company’s retail loan book has grown at an average of 31% YoY
with its commercial book even faster at 48% YoY in the last three years.
Historically the company has had bouts of poor asset quality. We do not expect
asset quality to deteriorate to that extent. However the portfolio is not seasoned
yet with 56% of the retail book built in the last 3 years. The loan book may show
increased delinquencies in the future. Provisions in the future should be driven
by higher delinquencies, higher standard asset provisioning on retail loans and a
teaser rate provision. The cumulative amount of the last two provisions should
be Rs3.3bn (36% of FY12 PAT), which we have built into our numbers.
Possible capital raising an overhang
Compared to the other NBFCs in our coverage, LICHF operates at stretched
leverage. The Tier I ratio is at 9% currently and given the fairly strong growth,
(we expect an average of 27% loan growth in FY11-13E); management may
need to go for a capital issuance late FY12/ early FY13. We have not built an
equity dilution into our numbers. For 10% dilution, the ROEs could come down
from 23% in FY13E to 21%.
Valuations rich
The stock is trading at 1.7x FY13E BVPS, which is more than 1 std dev above
historical averages. Given the concerns – declining margins and higher
provisioning in the near term and an overhang of deteriorating asset quality and
capital issuance in the longer term – we think the valuations are rich and there
could be earnings downgrades by the Street. Our TP values the stock at 1.5x
FY13E adjusted BVPS for a sustainable ROE of 18.3%. Risks to the upside
would be spreads being maintained and asset quality holding off
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
LIC Housing Finance
Cracks in the house
Initiate with Underperform and below consensus earnings
We initiate coverage on LIC Housing Finance with an Underperform rating. Our
TP of Rs190 provides 12% downside from current levels. We believe ROEs will
compress driven by falling margins and higher credit costs while further capital
issuance remains an overhang. Our earnings are 18% below FY12E and 10%
below FY13E Bloomberg consensus respectively.
Subdued earnings growth in FY12E
We expect earnings growth to be -6%YoY in FY12E. This should be driven by
lower NIMs and higher standard asset provisioning. We expect spreads to
normalise and NIMs to compress by ~25bp YoY to 2.8% in FY12. LICHF has
been aggressive in lowering loan rates to capture market share. We believe
management continues to focus on growing its book aggressively which should
come at the expense of margins. The company is also likely to be hit, in our
view, by the provisioning for standard assets as well as ‘teaser’ rate loans, which
may lead to negative earnings growth in FY12E.
Asset quality – a fly in the ointment
LICHF has really pushed on the growth pedal from FY08/09 onwards – about the
same time we believe banks became more cautious lending to commercial real
estate. The company’s retail loan book has grown at an average of 31% YoY
with its commercial book even faster at 48% YoY in the last three years.
Historically the company has had bouts of poor asset quality. We do not expect
asset quality to deteriorate to that extent. However the portfolio is not seasoned
yet with 56% of the retail book built in the last 3 years. The loan book may show
increased delinquencies in the future. Provisions in the future should be driven
by higher delinquencies, higher standard asset provisioning on retail loans and a
teaser rate provision. The cumulative amount of the last two provisions should
be Rs3.3bn (36% of FY12 PAT), which we have built into our numbers.
Possible capital raising an overhang
Compared to the other NBFCs in our coverage, LICHF operates at stretched
leverage. The Tier I ratio is at 9% currently and given the fairly strong growth,
(we expect an average of 27% loan growth in FY11-13E); management may
need to go for a capital issuance late FY12/ early FY13. We have not built an
equity dilution into our numbers. For 10% dilution, the ROEs could come down
from 23% in FY13E to 21%.
Valuations rich
The stock is trading at 1.7x FY13E BVPS, which is more than 1 std dev above
historical averages. Given the concerns – declining margins and higher
provisioning in the near term and an overhang of deteriorating asset quality and
capital issuance in the longer term – we think the valuations are rich and there
could be earnings downgrades by the Street. Our TP values the stock at 1.5x
FY13E adjusted BVPS for a sustainable ROE of 18.3%. Risks to the upside
would be spreads being maintained and asset quality holding off
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