LIC Housing Finance Ltd. (LICHF) is one of the largest Housing Finance Company
in India promoted by LIC. The main objective of the company is to provide long
term finance to individuals for purchase/reconstruction of new / existing flats.
We are positive on the company owing to the fundamental improvement in
earnings from FY13E onwards benefiting from re-pricing and higher developer
loan build up. We expect net profit to grow at 30.8% CAGR over FY12-14E.
Increasing market share in the mortgage market
LICHF’s market share has consistently witnessed an improvement over the past
5 years. The company has been able to increase its market share from 5% in
FY07 to 10% in FY12 benefiting from the good distribution network of the
company. The company has been witnessing healthy growth in its
disbursements and going forward, Management expects the loan book to grow
at 20-25% for FY13E vs 23.5% in FY12.
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Increasing share of high yielding developer loan
The share of developer loans declined sharply from 10.9% in FY10 to 5% in
FY12. Going forward, Management expects to increase the loan book back to its
historical levels given the high yields which the business generates and the
improving conditions in the mortgage market. This increase in the portfolio is
expected to lead to an increase in the company’s margins. Developer loans are
high yielding loans (~15% rate) higher by almost 300-400 bps offered on
individual loans (~11-12%).
Re-pricing of loans remains a major catalyst
As on 31st March 2012, the total teaser loan portfolio of the company stood at
~Rs 12,000 crs which is expected to be re-priced in FY13E and FY14E. The repricing
of the loan book from fixed (~9%) to floating rate (~11%) will act as a
major catalyst for the company to report an improvement in the net interest
income.
Healthy asset quality
LICHF has shown an improvement in its asset quality with shift in focus towards
salaried customers. Almost 90% of the company’s customers are salaried class
reaffirming the confidence of less chances of default. LIC housing has reported a
significant decline in its gross NPAs from the levels of 4.4% in FY05 to almost
0.42% in FY12. Going forward we have factored in higher delinquencies.
However, we believe that the asset quality would remain reasonably healthy as
compared to its peer banks operating in the same environment.
Valuation & Recommendation
Driven by strong disbursement and focus on asset quality LIC Housing is well
positioned to deliver sustainable and profitable growth. We believe that the
current valuations of 2.02x FY13E and 1.69x FY14E BV are attractive. We
recommend BUY on the stock with a target price of Rs 333 (2.5x FY13E BV)
implying an upside of 23.7% from current levels.
Investment Rationale
HFCs placed at a better position as compared to banks
It has been observed that the Housing Finance Company’s (HFCs) have been consistently gaining
market share in mortgage market as compared to its peer banks over the last 5 years. According to a
report by CRISIL, HFC’s market share in disbursement growth has increased to ~51% in FY11 from
~36% in FY07. This is a result of better and controlled focus on single market which is further
enhanced by better customer focus. Moreover, we have seen that as compared to banks which have
been facing stress in their asset quality, the HFCs have been able to maintain their asset quality at
comfortable levels.
Although there is increasing competition in the mortgage market with many banks offering the same
product as compared to HFCs, we believe that still HFCs are better placed as compared to banks in
this business because of the domain knowledge and expertise which the HFCs have as compared to
banks. Banks have exposure to different sectors and can lend only some portion of loan as retail
mortgage whereas the HFCs have mortgage loans as their main business. Moreover, HFCs are better
placed in the Tier II, Tier III and Tier IV cities than most of the banks.
In addition, even though the business model of the banks and HFCs are different, if we compare the
provision norms of the two; HFCs are almost at par with banks. This gives the HFCs an edge over the
banks and thus we believe that even if the competition intensifies, HFCs will continue to stand at an
advantage in the business.
Stringent regulations: At Par with Banks
The revised guidelines of the National Housing Bank (NHB) have made it mandatory for the HFCs to
maintain stricter provisioning norms thereby further strengthening the balance sheet of the
companies. We believe that the implementation of new norms will not have a material impact on the
profitability of these companies. Infact stricter norms will further provide a cushion against
deteriorating macro-economic environment.
Prepayment penalty have been removed for both the banks as well as the HFCs. Removal of
differential pricing between old and new borrowers will prevent the HFCs to resort to irrational
pricing which will help in lowering the competition amongst the industry players. We believe that
with these revised norms the HFCs will emerge as better and safe players for the long run.
Valuation and Recommendation
LIC Housing operates in the mortgage financing business where growth and asset quality have been
proven to be healthy in the last few years. LIC Housing is one of the top players in this mortgage
market with 10% market share.
Driven by strong disbursement and focus on asset quality LIC Housing is well positioned to deliver
sustainable and profitable growth. With an improvement in the company’s operating performance
the return ratios are set to improve going forward. Moreover, the company has already proved its
worth by reporting an excellent track record of profitability and building up a healthy balance
sheet. Healthy asset quality and prudent provisioning policy makes LIC Housing better placed
compared to its peers in the housing financing space.
We believe that the current valuations of 2.02x FY13E and 1.69x FY14E P/BV are attractive. We
recommend BUY on the stock with a target price of Rs 333 (2.5x FY13E BV) implying an upside of
23.7% from current levels.
Company Profile
LIC Housing Finance Ltd. is one of the largest Housing Finance Company in India. The company was
promoted by LIC of India and it went public in the year 1994. The Company launched its maiden
GDR issue in 2004. The GDR's are listed on the Luxembourg Stock Exchange.
The main objective of the company is to provide long term finance to individuals for purchase /
construction / repair and renovation of new / existing flats. It also provides finance on existing
property for business or personal reasons as well as provides loans to professionals for purchase /
construction of equipments.
LIC Housing Finance has an extensive marketing network in India with 7 Regional Offices, 13 Back
Offices and 190 marketing units across India. In addition the company has over 1241 Direct Sales
Agents (DSAs), 6535 Home Loan Agents (HLAs) and 782 Customer Relationship Associates (CRAs) to
extend its marketing reach.
Risks and Concerns
The company operates in a highly competitive environment facing competition from banks,
other financial institutions which have access to cheaper funds. If the company is forced to
reduce its lending rates, then it might impact its NIMs.
Slowdown in the mortgage market can impact the company’s operating performance and our
estimates.
Any regulatory changes relating to the Housing Finance companies can have an adverse impact
on the overall performance of the company.
Shift of customers towards banks after the re-pricing of the teaser loans due to lower interest
rates by banks remain a risk.
Higher than expected slippages will impact the company’s otherwise healthy asset quality.
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