Healthy loan book growth, NIMs expansion = positive FY14E
outlook
Investment Rationale
Loan growth to remain healthy
Over last 3-4 years, LIC Housing has consistently outperformed the industry on loan
book growth front. LIC Housing reported 32% CAGR loan growth during FY 09-12.
Owing to challenging macro environment, loan book growth slightly slowed-down
(23.8% y-o-y loan book growth rate seen at Q3FY13-end). This slow-down is mainly
on a/c of ~20.0% decline in y-o-y loans made to Builders segment (to Rs 28.1 bn).
Last 2 quarters have seen lowest share of Developer loans to total loan book (3.8%
in Q2FY13 and 3.9% in Q3FY13). We sense that this ratio would improve significantly
from here, as loans made to builders would catch-up from here-on, as builders are
likely to benefit from lower interest rates, faster pace of approvals seen across Delhi
& Mumbai real estate markets. Also, we expect the loan book growth momentum
to be maintained, as LIC Housing continues to penetrate in smaller cities across
Eastern & Central India. On a whole, we expect the overall loan book of LIC Housing
to grow at 21.2% CAGR during FY12-14E to Rs 927.1 bn.
NIMs to expand marginally
Against our expectations of improvement in the NIMs, we were disappointed by 1
bp sequential decline in Q3FY13 NIMs to 2.09%. Q3FY13 NIMs movement was mostly
impacted due to interest reversals on builder loan NPAs. Whereas, re-pricing of
individual home loans yields- mainly the teaser loans product “fix-o-floaty”,
supported in maintaining the NIMs.
We sense LIC Housing would benefit from ~Rs 30 bn (in Q4FY13) & ~Rs 27 bn (in
Q1FY14) of teaser loan re-pricings, going forward. LICs thrust to raise funds through
ECBs (External Commercial Borrowings) route, coupled with their strategy to reduce
dependency on bank borrowings, give them some more room to expand their NIMs.
We highlight that LIC has still not passed on the Feb-12 base rate cut announcement.
We sense that NIMs expansion could be possible, going forward.
We have revised downwards our NIM’s expectations for FY13E by 6 bps to 2.17%.
We also are of the view that worst is behind, from NIMs perspective (2.09% for
Q3FY13). We sense that increased disbursals to builder segment in FY14E coupled
with more and more loans getting converted from fixed rate to floating rate (fixed
rate loans of 8% continue to be below current floating rates), would help the LIC
Housing’s NIM’s improvement. We expect FY14E NIMs to improve to 2.29% (vs.
earlier expectations of 2.32%).
NPAs still under control
LIC Housing has been one of the few players in industry, which has been able to
keep control over its NPAs. The recent quarter (i.e. Q3FY13) witnessed 30%
sequential increase in gross NPAs (to Rs 5.4 bn), as loans to builders worth Rs 1.65
bn turned NPAs. Management expects to recover this amount in next 1-2 quarters.
Given that LIC Housing follows the policy of lending to Builders on the basis of the
Collateral and not on basis of Balance sheet, when coupled with the fact that they
have shifted their lending strategy towards individual loans (loans to builders
segment have reduced over the last few quarters), comforts us that the NPA scenario
won’t worsen from here-on.
This when coupled with their prudent a/c’ing (makes additional provisioning than
required by RBI) methodology, comforts us about our expectations of Net NPAs to
be at 0.2% by FY14E-end.
Valuation
Given their strong market positioning and FY14E growth prospects, we remain
positively biased towards the stock. Also factors such as expectations of healthy
loan book growth, NIMs expansion in FY14E, NPAs well under control comfort us
about the strong fundamentals of the LIC Housing.
Even though NIMs have fallen down in the last 2 quarters to 2.09% in Q3FY13, we
are of the view that fall in the NIMs has bottomed-out and there exists scope for
NIMs improvement. Our view of expansion in the NIMs is on the basis of (1) repricing
of Rs 57 bn of teaser loans in next 2 quarters, (2) increasing dependency on
the low cost ECBs, (3) pick-up in lending to builders segment, which usually has
higher yields (vs. individual home buyers).
Higher loan growth in FY14E, when coupled with factors such as, better NIMs,
containment of NPAs would translate to ~18% net profit CAGR during FY12-14E.
At CMP of Rs 240, LIC Housing is trading at FY13E & FY14E, P/ABV of 1.9x and 1.6x,
respectively. Even though we expect FY13 RoEs to decline to 16.6% (from 18.6% in
FY12), pick up across the metrics mentioned above should help the company report
improved ROEs of 18.1% in FY14E. After revising our estimates and assigning P/ABV
multiple of 2.0x, we have arrived at revised price target of Rs 294 (earlier target of
Rs 327).
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