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LIC Housing Finance (LICH.BO)
Rising Risks as Rates Rise
Revising Earnings, Target Price; Maintain Sell — We are revising our target
price for LIC Housing to Rs188 per share on account of slightly higher earnings
(+1-3% over FY12-13E, to adjust for lower credit costs) and rolling forward our
1.6x P/BV multiple to Sep’12 (Mar’12 earlier). However, our earnings remain well
below consensus as we expect LIC Housing’s net interest margins to come
under increasing pressure over the next few quarters and maintain Sell (3M).
Tight Liquidity and Fixed Rate Lending Could Pressures NIM — LICHF has
had strong loan growth over the last few years with minimal impact on asset
quality or margins. However this could start showing through, given the continued
high interest rate environment and likely slower loan growth ahead. Incremental
spreads on new business has declined significantly (~1% incremental vs 2%
historical average) and is likely to start impacting overall NIMs significantly. There
is also an additional concern on the need for additional provisioning required for
the tighter norms introduced by NHB (the regulator for HFCs), which could
impact earnings negatively.
Quant View: Attractive — As per our quantitative methodology, LIC Housing
Finance currently lies in the Attractive quadrant of our Value-Momentum map with
strong value and momentum scores.
LICHF currently lies in the Attractive quadrant of our Value-Momentum map with
strong value and momentum scores. The stock has moved from the Contrarian
quadrant to the Attractive quadrant in the past 3 months indicating rising momentum
(while valuations remain cheap) - which means the market has recognised the fact
that the stock is an attractive investment proposition. Compared to its peers in the
Banks sector, LICHF fares worse on the valuation metric and on the momentum
metric. On the other hand, compared to its peers in its home market of India, LICHF
fares better on the valuation metric and on the momentum metric.
From a macro perspective, LICHF is likely to benefit from small-cap
outperformance, tightening US credit spreads, falling commodity (ex-oil) prices,
falling EM yields, and a weaker US Dollar.
LIC Housing Finance
Company description
LIC Housing is the second-largest independent mortgage financier in India, with a
distribution network spread throughout the country. It was promoted as an
independent mortgage financing company by the Life Insurance Company of India
(LIC, which holds 36.5% stake currently) in 1989. The company went public in 1994
and successfully completed its maiden GDR offering in 2004.
Investment strategy
We rate LIC Housing shares as Sell / Medium Risk (3M). LIC Housing is among
India's larger mortgage financiers with strong growth momentum, a high return
profile and healthy asset quality. We believe LIC Housing's growth, return and risk
profile have reached their peaks and are likely to moderate from current levels. A)
Growth - LIC Housing has grown aggressively (+30% three-year CAGR) and at well
over industry growth levels (+12% three-year CAGR). We believe this gap is
unsustainable and expect LIC Housing's growth levels to moderate over the
medium term. B) LIC Housing has grown earnings at a rapid pace (+36% 3yr-CAGR
from FY08-11) and NIMs have expanded to over 300bps in FY11 (from 230bps in
FY07) benefiting from the declining interest rate environment. LIC Housing's funding
mix is predominantly wholesale, exposing it to a rising interest rate environment,
which we believe will hurt NIMs (this was partly evident in 1Q12 where NIMs
declined 67bps qoq). C) Structurally, we believe India's mortgage financing segment
offers relatively low asset risks, but this will lead to higher competitive intensity,
lowering the currently higher profitability in this segment. In sum, we believe
aggressive growth, rising risks of rate hikes and relatively expensive valuations will
likely cap stock returns.
Valuation
We value LIC Housing shares at Rs188 per share based on 1.6x one-year forward
P/BV (Sep'FY12E). LIC Housing's historical trading range is 0.5x - 2.5x one-year
forward P/BV and the stock is now trading at slightly above historical median
valuations. We believe a re-rating is warranted going forward given the company's
significant improvements in its market position, asset quality and return profile.
However, we also benchmark LIC Housing to other non-banking finance companies
in India and believe that LIC Housing should trade at a discount to peers due to its
lower return profile, weaker and inconsistent track record on asset quality and
significantly higher competition levels in the mortgage segment. Our target price is
also at a discount to our target multiples for private-sector banks (2.0x – 3.0x oneyear
forward P/BV).
We also see a fair value basis for LIC Housing shares at Rs193 based on CIRA's
EVA model, which captures the long-term value of the business, and is a standard
valuation measure for the CIRA India Banking coverage. Our EVA model assumes:
a) risk-free rate of 8.0% in line with our assumptions for other banks; b) longer-term
loan loss provisions of 15bps given its low asset risk profile, c) loan spreads of
150bps which is lower than banking industry average of 200bps, and d) long-term
fee income growth of 10%.
Risks
We rate LIC Housing shares Medium Risk, in-line with our quantitative risk-rating
system, which tracks 260-day historical share price volatility. Key upside risks that
could cause the stock to continue to trade above our target price include: a)
Stronger-than-expected economic and more specifically mortgage financing growth,
b) Reversal towards a lower interest rate / easy liquidity environment which could
support its net interest margins, c) Continued robust asset quality environment in
the mortgage segment, d) Any decrease in competitive intensity, and e) Favourable
regulatory changes.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
LIC Housing Finance (LICH.BO)
Rising Risks as Rates Rise
Revising Earnings, Target Price; Maintain Sell — We are revising our target
price for LIC Housing to Rs188 per share on account of slightly higher earnings
(+1-3% over FY12-13E, to adjust for lower credit costs) and rolling forward our
1.6x P/BV multiple to Sep’12 (Mar’12 earlier). However, our earnings remain well
below consensus as we expect LIC Housing’s net interest margins to come
under increasing pressure over the next few quarters and maintain Sell (3M).
Tight Liquidity and Fixed Rate Lending Could Pressures NIM — LICHF has
had strong loan growth over the last few years with minimal impact on asset
quality or margins. However this could start showing through, given the continued
high interest rate environment and likely slower loan growth ahead. Incremental
spreads on new business has declined significantly (~1% incremental vs 2%
historical average) and is likely to start impacting overall NIMs significantly. There
is also an additional concern on the need for additional provisioning required for
the tighter norms introduced by NHB (the regulator for HFCs), which could
impact earnings negatively.
Quant View: Attractive — As per our quantitative methodology, LIC Housing
Finance currently lies in the Attractive quadrant of our Value-Momentum map with
strong value and momentum scores.
LICHF currently lies in the Attractive quadrant of our Value-Momentum map with
strong value and momentum scores. The stock has moved from the Contrarian
quadrant to the Attractive quadrant in the past 3 months indicating rising momentum
(while valuations remain cheap) - which means the market has recognised the fact
that the stock is an attractive investment proposition. Compared to its peers in the
Banks sector, LICHF fares worse on the valuation metric and on the momentum
metric. On the other hand, compared to its peers in its home market of India, LICHF
fares better on the valuation metric and on the momentum metric.
From a macro perspective, LICHF is likely to benefit from small-cap
outperformance, tightening US credit spreads, falling commodity (ex-oil) prices,
falling EM yields, and a weaker US Dollar.
LIC Housing Finance
Company description
LIC Housing is the second-largest independent mortgage financier in India, with a
distribution network spread throughout the country. It was promoted as an
independent mortgage financing company by the Life Insurance Company of India
(LIC, which holds 36.5% stake currently) in 1989. The company went public in 1994
and successfully completed its maiden GDR offering in 2004.
Investment strategy
We rate LIC Housing shares as Sell / Medium Risk (3M). LIC Housing is among
India's larger mortgage financiers with strong growth momentum, a high return
profile and healthy asset quality. We believe LIC Housing's growth, return and risk
profile have reached their peaks and are likely to moderate from current levels. A)
Growth - LIC Housing has grown aggressively (+30% three-year CAGR) and at well
over industry growth levels (+12% three-year CAGR). We believe this gap is
unsustainable and expect LIC Housing's growth levels to moderate over the
medium term. B) LIC Housing has grown earnings at a rapid pace (+36% 3yr-CAGR
from FY08-11) and NIMs have expanded to over 300bps in FY11 (from 230bps in
FY07) benefiting from the declining interest rate environment. LIC Housing's funding
mix is predominantly wholesale, exposing it to a rising interest rate environment,
which we believe will hurt NIMs (this was partly evident in 1Q12 where NIMs
declined 67bps qoq). C) Structurally, we believe India's mortgage financing segment
offers relatively low asset risks, but this will lead to higher competitive intensity,
lowering the currently higher profitability in this segment. In sum, we believe
aggressive growth, rising risks of rate hikes and relatively expensive valuations will
likely cap stock returns.
Valuation
We value LIC Housing shares at Rs188 per share based on 1.6x one-year forward
P/BV (Sep'FY12E). LIC Housing's historical trading range is 0.5x - 2.5x one-year
forward P/BV and the stock is now trading at slightly above historical median
valuations. We believe a re-rating is warranted going forward given the company's
significant improvements in its market position, asset quality and return profile.
However, we also benchmark LIC Housing to other non-banking finance companies
in India and believe that LIC Housing should trade at a discount to peers due to its
lower return profile, weaker and inconsistent track record on asset quality and
significantly higher competition levels in the mortgage segment. Our target price is
also at a discount to our target multiples for private-sector banks (2.0x – 3.0x oneyear
forward P/BV).
We also see a fair value basis for LIC Housing shares at Rs193 based on CIRA's
EVA model, which captures the long-term value of the business, and is a standard
valuation measure for the CIRA India Banking coverage. Our EVA model assumes:
a) risk-free rate of 8.0% in line with our assumptions for other banks; b) longer-term
loan loss provisions of 15bps given its low asset risk profile, c) loan spreads of
150bps which is lower than banking industry average of 200bps, and d) long-term
fee income growth of 10%.
Risks
We rate LIC Housing shares Medium Risk, in-line with our quantitative risk-rating
system, which tracks 260-day historical share price volatility. Key upside risks that
could cause the stock to continue to trade above our target price include: a)
Stronger-than-expected economic and more specifically mortgage financing growth,
b) Reversal towards a lower interest rate / easy liquidity environment which could
support its net interest margins, c) Continued robust asset quality environment in
the mortgage segment, d) Any decrease in competitive intensity, and e) Favourable
regulatory changes.
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