LIC Housing Finance… Stable performer, reasonable valuations… upgrade to buy from hold with revised target price of Rs 485… :: IndiaNivesh

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--> LIC Housing Finance –
Stable performer, reasonable valuations… upgrade to buy from hold with
revised target price of Rs 485…
We upgrade LIC Housing Finance to BUY from HOLD as we believe 1)
softening of interest rates at wholesale level by ~100 bps and 10 year G
sec yields falling by ~50 bps in last 3 months and 2) decline in lending
rates by banks in early FY16 is likely to play well for the company.
Management indicating that incremental market borrowings cost for LIC
Housing has come down significantly to 8.6% as against ~9.6% earlier.
This along with increasing proportion of LAP is likely to help company in
increasing NIMs. LIC Housing has disbursed Rs 6 bn in project loans
segment till Q2FY15 which is exactly in line with our project loan
disbursement assumption and further company has strong pipeline of Rs
10 bn for H2FY15. With strong pipeline of sanctioning in project loans,
focus on LAP and decline in interest rates, we are increasing our loan book
assumption to 19% CAGR for FY14-16E and NIMs for FY16E to 2.27% as
against earlier assumption of 18% CAGR and 2.2% respectively. Further
LIC Housing’s valuation remains of 2.2x for FY16E comforts us as against
2.5-3.5x for other NBFCs. Upgrade to BUY with revised target price of Rs
485, valuing it at 2.5x FY16E ABV.
Loan book likely to grow by 19% CAGR:
We expect loan book of LIC housing Finance is likely to grow by 19% CAGR
over FY14-16E as against our earlier assumption of 18% CAGR over the
same period. Increase in assumption is mainly led by strong pipeline of
sanctioned project loans of Rs 10 bn and thrust on increasing the LAP book
along with stable high teen growth in individual loan book. LIC housing has
disbursed Rs 6 bn in project loan segment in H1FY15 and likely to disburse
the sanctioned amount in H2FY15. Currently Individual loan book
constitutes 93.5% to loan book, LAP is 4% and Project loan at 2.5%.
Margins to improve in FY16E:
Currently ~68% of borrowings of LIC Housing are NCDs and 22% are from
banks. As per management, incremental cost of market borrowings for LIC
housing finance has come down to 8.6% as against 9.6% in Q2FY15 which is
likely to help in improving margins. Significant benefit of this will be visible
in FY16 wherein we expect margins to improve to 2.27%. However
Management is targeting for NIM of 2.75% by FY17E which will be led by 1)
increase in proportion of LAP to 5% from 4% currently, 2) Pick up in project
loans in H2FY15 and 3) change in borrowing mix from banks to NCDs where
the interest differential is 60-80 bps.
Stable asset quality:
Asset quality of LIC housing has always been best in the industry with Net
NPA of 0.3-0.5% in last 2 years. In Q2FY15, Asset quality of LIC housing has
surprised positive as Gross and Net NPA improved by 18 and 15 bps qoq to
0.63% and 0.33% respectively. Gross NPA in individual loan was stable qoq
at 0.38% (0.46% in Q2FY14) and project loan Gross NPA has improved to Rs
2.5 bn from Rs 3.9 bn in Q1FY15. Provision coverage ratio improved to 48%
from 39% in Q1FY15. One project loan account of Rs 1.3 bn was recovered
during Q2FY15. As a result there was a write back of provisioning to the
extent of Rs 200 mn due to recovery of one project loan account.

Valuation:
We continue to prefer LIC Housing Finance in housing finance space as it
continues to perform well in terms of loan book, likely improvement in
margins, stable asset quality and reasonable valuations amongst peers. We
are revising upwards our loan book assumptions to 19% CAGR in FY14-16E,
NIMs to 2.27% from 2.2% earlier. As a result, we revise Net profit by 1%
and 3% for FY15E and FY16E respectively with ROE of 18% and ROA of 1.4%
for FY16E. At CMP of Rs 423, LIC housing finance is trading at P/ABV of 2.2x
for FY16E which is lower as against peer valuation of 2.5-3.5x for FY16E. We
upgrade LIC housing to BUY from HOLD with upwards revised target price
of Rs 485, valuing it at 2.5x FY16E ABV