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Buoyant earnings trajectory to drive performance
We initiate coverage on LIC Housing Finance (LICHF) with a BUY rating and a
target price of Rs 1,575/sh. LICHF has reported a remarkable turnaround in the
last three years marked by a sharp improvement in asset quality and in market
share (to ~9% in FY10 from ~4.5% in FY07 led by a 43% CAGR in loan
disbursals). Profitability of the business has also improved significantly with
ROA and ROE increasing from 1.3% and 13% respectively in FY05 to 2% and
24% in FY10. Fuelled by the strong operating performance, the stock has
re-rated sharply in the last 18 months and is currently trading at 2.5x BV and
11.4x EPS on FY12E. We are positive on LICHF despite the sharp re-rating due
to its above-industry loan growth, robust earnings momentum (27.5% CAGR
projected through FY13) and strong ROE profile (24–25%). At our target price,
the stock would trade at 3x BV and 13.7x EPS on FY12E.
Expect above-industry growth rates: LICHF is likely to sustain above-industry
growth rates in loan book and disbursals due to higher utilisation of direct selling
agents/LIC agents, aggressive rollout of branch network and competitive product
offerings. The company has launched Advantage 5, a product wherein home loans
are being offered at a fixed rate of 9.25% for the first five years and on floating rate
thereafter. We expect this product to garner a strong response in the market and to
boost disbursals for the company. We factor in a 23% CAGR in disbursements and
a 28% CAGR in loan book through FY13.
NIMs likely to decline by FY12: We expect loan spreads to come under pressure
as interest rates rise, since the proportion of fixed rate loans is increasing. We note
that incremental spreads on the Advantage 5 product could be as low as 1.25%
(as against 2.3% on the outstanding book in Q1FY11; this product currently
constitutes ~5% of the total loan book). We are factoring in ~17bps decline in
NIMs to 2.7% through FY12.
Asset quality set to remain strong: Despite robust business growth in the last three
years, we do not foresee any pressure on asset quality as defaults on mortgages
remain low and collateral cover on the corporate loan portfolio is more than 2x.
We expect provisions of just 7bps in FY11 and 12bps in FY12.
Initiate with BUY: Strong loan growth and low credit costs would drive a 27.5%
CAGR in earnings through FY13, even as spreads come under pressure. ROE is
likely to remain at 24–25%. While valuations are not cheap after the sharp
re-rating in the last 18 months, we believe that stock performance would be
supported by strong business and earnings growth. We initiate coverage on the
stock with a BUY rating and a target price of Rs 1,575/sh.
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