Operational performance sustains well… • LICHF :: ICICI Securities, report

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Operational performance sustains well…
• LICHF’s Q3FY15 PAT of | 344 crore (up 5% YoY) was below our
estimates owing to higher-than-expected provisions & taxes
• However, on the operating profit front, the performance was in line
and remained healthy at | 528 crore, up 18% YoY
• As the bulk of the lending occurred towards the end of the quarter,
NIMs witnessed a decline of 3 bps QoQ to 2.20%. This is despite a 14
bps QoQ decline in CoF. The management indicated that margins
may pick up and should be in the range of 2.25-2.3%, going ahead
• GNPA declined further QoQ to | 580 crore from | 611 crore
Rapid increase in assets seen; expect traction to stay ahead of industry
LICHF’s advances currently stand at | 101944 crore, which makes it the
second largest housing finance company (HFC) in India after HDFC Ltd.
Including banks, it comes at the third position after HDFC and SBI with
each having 15% market share. Since FY07, we observe that LICHF has
increased its loan book at an aggressive pace of >25% CAGR vs. industry
growth of ~15-17%. Consequently, LICHF’s market share has increased
and almost doubled in the last seven years to ~10% now. The growth has
been predominantly led by the individual loan book (retail book), which
accounts for ~97.5% of the total book. The developer portfolio (high
yielding) has shrunk to 2.5% from 10% as on FY10. The management has
guided for loan growth of ~20%, going ahead. We expect a loan book
CAGR of 19% over FY14-16E to | 129619 crore, again mainly led by the
retail portfolio. However, we also factor in a rise in proportion of
developer loans to 4.5% by FY16E from ~2.5% currently.
Margins compress in past few years; expect to improve gradually
As we said, LICHF grew its loan book at a rapid pace, enabling it to raise
its market share. However, it also witnessed its margins declining to
~2.2% from >3% as on FY10. LICHF’s lending rates were one of the
lowest in the industry, in order to be competitive and it had launched
products like Fix-O-Floaty. Further, elevated interest rates for a prolonged
period and dwindling high yielding developer portfolio kept margins
under pressure. The management guidance of an improvement in NIMs
in the last few quarters has not crystallised. However, at 2.2%, we believe
margins have bottomed out and should see some improvement in FY15E
with a major increase by FY16E to 2.4%. An improving developer
portfolio, decline in wholesale rates and conversion of teaser loans to
higher rate floating loans would be catalysts for an increase in NIMs.
Asset quality steady; no major glitch expected
Asset quality for HFCs, in general, and LICHF, in particular, has stayed
benign. This is as a bulk of the exposure is to the salaried class, better
underwriting, lower LTV and increasing property prices. GNPA ratio for
the industry is ~0.8% while LICHF’s FY14 ratio is below industry levels at
0.67% with absolute GNPA at | 609 crore. We expect GNPA to increase to
| 986 crore by FY16E with ratio rising to 0.8%, which remains acceptable.
Margin improvement remains key for further re-rating; recommend BUY
The management has guided for loan traction of 20%, going ahead. We
have factored in 19% CAGR in credit over FY14-16E and expect FY15E
NIM of 2.3% owing to a declining trajectory in money market rates and
enhanced focus on the high yielding book like loan against property (LAP)
and developer loams. We believe NIM improvement is the key catalyst for
the stock to get re-rated higher. We raise our target price higher to | 515
as we roll over to FY17E (valuing at 2.2x FY17E ABV). Recommend BUY.

LINK
http://content.icicidirect.com/mailimages/IDirect_LICHousing_Q3FY15.pdf