LICHSGFIN- BUY ( + ) Target Price Rs. 562 :: Kotak Sec,report

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LICHSGFIN			1-16-2015
Recommendation BUY ( + )	Target Price Rs. 562

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Q3FY15 Results: Marginally lower than expectation; however,
falling interest rate cycle to aid mortgage spread
NII (19.9% YoY) came marginally below our estimates largely on back of
lower than expected improvement in spread. However, we believe
mortgage spread is likely to expand on faster decline in borrowing cost vis-
à-vis cut in lending rate. PAT (Rs.3.44 bn) grew at moderate pace (5.4% YoY)
due to sharp rise in employee expense (provisions on higher pension
liabilities) along with additional Rs.340 mn provisions as DTL on special
reserves. Retail loan book continued to show strong traction while higher
repayments led to flat corporate book despite robust disbursement
witnessed during Q3FY15 (Rs.4.5 bn).
Developer segment GNPA has remained stable QoQ while individual
segment saw improvement to 33bps (Q3FY15) as compared to 38bps in the
previous quarter. We like LIC Housing amongst NBFC space on back of
strong earnings potential and healthy asset quality. Despite higher tax rate
assumption during FY15/16, net income is likely to grow at 15.7% CAGR
during FY14-17E with healthy return ratios (RoA at ~1.5%; RoE: 18-19%). At
CMP, stock is trading at reasonable valuation (2.1x its FY17E ABV) and hence
we retain BUY rating on the stock with upward revised TP of Rs.562 (Rs.488
earlier) based on 2.5x its FY17E ABV after rolling over to FY17 estimates.

Earnings marginally lower than our expectations due to lower
than expected spread; however, we believe mortgage spread is
likely to expand on faster decline in borrowing cost vis-à-vis cut
in lending rate.
NII (Rs.5.49 bn; 19.9% YoY) came marginally below our estimates largely on back
of lower than expected improvement in spread. Spread improved marginally to
1.21% in Q3FY15 as compared to 1.15% witnessed during H1FY15 largely driven by
lower cost of funds (14bps QoQ as compared to 7bps decline in yield on assets).
Although reported NIM saw decline of 3bps QoQ (2.20% in Q3FY15), adjusting for
interest reversal (Rs.240 mn in Q2FY15; inflated NIM by 8-9bps), NIM saw improvement
of 6bps QoQ.
PAT (Rs.3.44 bn) grew at moderate pace (5.4% YoY) due to sharp rise in employee
expense (51.3% YoY) on back of provisions on higher pension liabilities along with
Rs.340 mn of provisions as DTL on special reserves.
LIC housing has high share of fixed loan product in overall loan portfolio (~65% of
loans; excluding products like Advantage 5, Super 3, Super Choice and
Bhagyalakshmi etc) but the quantum of re-pricing is relatively small during FY15
while a large chunk of re-pricing is scheduled during FY16.
Being a wholesale funded entity, LIC Housing Finance is more likely to benefit from
decline in interest rate environment. Mortgage lending rate has remained largely
stable (0-10 bps decline in last two quarters) as most of the banks have not cut the
base rate. However, incremental borrowing cost through bonds (~70% of total borrowings)
has seen decline of 70-80bps during last three months. As a result, incremental
spread is likely to improve by 30-40bps, going forward.
We are projecting NIM to come at 2.2% in FY15 and 2.3/2.4% in FY16/17E. We
also believe, FY16 will see higher share of LAP as well as developer loans along with
kicker from large chunk of re-pricing from fixed loan product.
Strong traction in both sanctions as well as disbursements indicates
healthy business momentum
LIC Housing reported strong traction in both sanctions as well as disbursements -
16.3% and 24.5%, respectively. Individual segment continued to report robust disbursement
at 23% YoY, while developer segment also reported robust growth (51%
YoY).
Outstanding home loan book grew at 18.0% to Rs.1019.4 bn (Q3FY15), similar to
previous two quarters. Out of this, retail loan book grew at relatively faster pace
(18.5% YoY) and now constitutes ~97.5% of total portfolio. Although corporate disbursement
picked-up during Q3FY15 (Rs.4.5 bn), higher repayments led to flat YoY
growth.


We are expecting gradual pick-up in the disbursements and hence we are modeling
18-19 % loan growth during next two years. Although management has been emphasizing
to enhance the share of developers loans to 6-8% for last so many quarters,
the trend has been rather opposite. High repayment pressure is impacting the
developer portfolio which has declined to 2.5% of loan book (Q3FY15) as against
~11% reported only three years back.
We believe rise in the share of developer segment is very important to help improve
its asset yields as developer loans are considered to be high yielding products. We
opine that even increase in share of LAP (loan against property) could cushion the
spread going forward.
Stable asset quality; higher growth in employee cost due to
higher pension liabilities
Asset quality has seen marginal improvement (QoQ) for LIC Housing - GNPA and
NNPA improved to 0.57%/0.31% (Q3FY15) as compared to 0.63%/0.33%
(Q2FY15). Developer segment GNPA has remained stable QoQ while individual segment
saw improvement (decline of 5% QoQ) to 33bps (Q3FY15) as compared to
38bps in the previous quarter.

Valuation and recommendation
We have tweaked the earnings estimates for FY15/16E and now expect its net income
to grow 15.7% CAGR during FY14-17E with healthy return ratios (RoA at
~1.5%; RoE: 18-19%). Net income during FY15 is likely to grow at ~8% despite
healthy core performance (NII growth at ~12%) on back of higher tax rate (~32% in
FY15/16 as against 28% in FY14).
We like LIC Housing amongst NBFC space on back of strong earnings potential and
healthy asset quality. At CMP, stock is trading at reasonable valuation (2.1x its
FY17E ABV) and hence we retain BUY rating on the stock with upward revised TP of
Rs.562 (Rs.488 earlier) based on 2.5x its FY17E ABV after rolling over to FY17 estimates

LINK
http://www.kotaksecurities.com/pdf/pdfs/FUNDLICHSGFIN16012015101000.pdf