LIC Housing Finance (LICHF IN, INR 258, upgrade to Buy)
We are upgrading LIC Housing Finance (LICHF) to ‘BUY’ (TP: INR 315, 2.25x FY13E book) as it scores high on two counts: i) benign asset quality; ii) upward NIM trajectory benefiting from easing wholesale cost. While perception is that prepayment penalty waiver will pose threat to LICHF’s NIMs and growth amidst intensifying competition (from banks), our interactions with DSAs indicate rate differential is not significant enough to entice customers to switch from LICHF. Moreover, it has a relatively stable customer profile (90% salaried class, 50%+ from PSUs). We believe there is scope for re-rating from 1.8x FY13E book for 17-19% RoE given limited vulnerability of RoA/RoE.
NIMs to touch atleast 2.7% by FY14E
Analysing the trend of 150bps contraction in LICHF’s interest spreads over the past five quarters, we understand: (i) 25-30bps compression was due to run-down of developer loans; (ii) loss of repricing benefit on Fix-O-Floaty (average yield at 8.9%) and Advantage 5 (9.6%) led to compression of ~45bps and ~25bps, respectively. Post Q2FY13, we are confident of NIMs improving gradually to 2.7% (from 2.18% in Q1FY13) with multiple levers in place: i) Upwards repricing of Fix-O-Floaty loans; ii) Benefit on funding cost with wholesale rates coming off and banks expected to cut base rates. This is without taking into effect equity infusion (boosting NIMs 8bps). We have also not considered aggressive build up in corporate loans. (Refer table 1 & 2 for quarterly NIM forecast till Q4FY14)
Business dynamics robust despite prepayment penalty waiver
Increasingly, the concern is that prepayment penalty waiver will alter business dynamics as churn will increase with intensified competition threatening LICHF’s NIMs or growth. However, interactions with DSAs indicate there have been limited balance transfer cases out of LICHF or HDFC. However, we are conservative and in our base case scenario, we build in higher repayment/prepayment rate (of 18-19%) and building in lower incremental spreads. (Refer table 4 for sensitivity of growth to prepayments)
Outlook and valuations: Multiple levers for NIM; upgrade to ‘BUY’
We are confident of LICHF’s NIMs gradually inching towards 2.7% by FY14 (without taking benefit of equity dilution and build up in corporate developer loans) and growth sustaining at 20% plus. Against expectation of downward risk to earnings amidst competition, we maintain 30% CAGR over FY12-14E. The stock currently trades at 1.8x FY13E P/B and there is scope of re-rating given limited vulnerability to return ratios. Hence, we upgrade recommendation to ‘BUY/ Sector Outperformer’.
Regards,
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