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LIC Housing Finance Ltd
F1Q12: Weak Trends
What's Changed
% EPS Chg F12e/F13e/F14e 0.6%/0%/0.5%
Quick Comment: LICHF reported a profit of Rs2.56 bn
(-19% QoQ and +21% YoY). This compares with our
estimate of Rs2.95 bn. Profit growth was aided by
purchase of LIC staff loans pool – adjusted for the same,
PBT growth was at -22% QoQ and +13% YoY (details
below).
The key reason for the miss was weaker NII progression.
Adjusted margins compressed by 40 bps YoY to 2.61%.
Loan growth was robust at 30% YoY – but saw some
deceleration on account of lack of disbursements in the
developer book.
The stock is currently trading at 10.6x F2012 earnings
and 2.1x F2012 BV. While the multiples prima facie
seem attractive, we believe that revenue growth at
LICHF will remain under pressure in the coming months,
as cost of funds will likely continue to move up even as
asset yields remain sticky.
The key highlights from the results include:
a) Reported NII and profit growth were supported by
LIC staff-loan-related income: LICHF bought a pool of
staff housing loans worth ~ Rs12 bn from its parent LIC
at the end of Feb-11. The interest income is being
accrued, but the interest expense has only been booked
on Rs2.5 bn (out of the total Rs12 bn). This, in effect,
has helped support both NII and profit growth this
quarter.
Reported NII growth in QE Jun-11 was +26% YoY –
adjusted for the above, underlying NII growth was at
+19% YoY. Similarly, reported profit growth for the
quarter was +21% YoY – adjusted profit growth was at
+13% YoY.
b) Adjusted margins were down 77 bps QoQ and 40 bps
YoY at 2.61%: Reported margins were down 67 bps QoQ and
23 bps YoY
LICHF’s margins have historically exhibited a seasonal
tendency wherein they are lower in QE June versus QE March.
However, even if look at the YoY change – margins have
declined by 40 bps (see Exhibit 4).
The key reason for the YoY decline is increasing cost of funds
(up 118 bps YoY, on our computations). Asset yields were
sticky and increased less than cost of funds (despite a 125 bps
YoY increase in PLR). The reason for the same was that:
i) The increase in PLR is not applicable to the fixed-rate loan
book, which has increased to ~46% of total loans from 21% as
of Mar-10.
ii) The proportion of higher yielding developer loans portfolio
has fallen YoY – its currently at 7.8% of total loans vs. 10.5% a
year back.
c) Loan growth was robust; but showed some signs of
deceleration: Outstanding loan book (adjusted for LIC staff
loans) grew by 30% YoY / 4% QoQ – slowing from the 31%
YoY / 8% QoQ registered in QE Mar-11.
Retail loans: The retail loan book grew 36% YoY and 5% QoQ.
Disbursements growth slowed from 39% YoY in QE Mar 11 to
15% YoY. However, management has indicated that growth in
June picked up to 21% YoY.
Developer loans: The developer loan book was down 8% QoQ
and 4% YoY as LICHF disbursed only Rs0.8 bn under this
segment. Disbursements were down 79% YoY.
d) LICHF recorded a provision of Rs334 mn. This compares
with Rs189 mn recorded in the previous quarter.
The key reason for the increase in provisions was the pick-up in
GNPLs (up 84% QoQ and 21% YoY). LICHF’s GNPLs tend to
see a seasonal uptick in QE June. Hence, the relevant metric to
focus on is the YoY growth. The GNPLs have grown on a YoY
basis after five consecutive quarters of decline (see Exhibit 14).
Since the growth at 21% is still lagging loan growth, it is not a
big cause for concern. However, we will continue to watch the
trend in the coming quarters.
e) Reported Tier I ratio at 8.5-8.75% as of Jun-11.
Management indicated that they will consider an equity raise
sometime during F2012, depending upon growth trends and
market conditions.
Price Target Discussion – LIC Housing Finance
We arrive at a price target of Rs181 per share using a
probability-weighted residual income model. We assign
weightings of 60% to our base case value, 10% to our bull case
value and 35% to our bear case value.
We value LIC Housing Finance shares using a three-phase
residual income model – a five-year period of high growth and a
10-year transition period followed by a terminal growth period.
We use a cost of equity of 14%, assuming a beta of 1.0, a
risk-free rate of 8.0% (the current 10-year Indian government
bond yield), and a market risk premium of 6.0%.
Risks to our price target
Key risks to achieving our price target include greater-than-
expected competition from the banking system, a sharp rise in
short interest rates, asset quality issues, and a slowdown in
macro growth.
Exhibit 15
LICHF: Valuation calculation
Base Bear Bull
Weights 60% 30% 10%
Ke 13.9% 13.9% 13.9%
RI Based Value 200 110 280
BVPS (F2012e) 104
Implied Target P/BV 1.9 1.1 2.7
Weighted Price Target 181
Source: Company data, Morgan Stanley Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
LIC Housing Finance Ltd
F1Q12: Weak Trends
What's Changed
% EPS Chg F12e/F13e/F14e 0.6%/0%/0.5%
Quick Comment: LICHF reported a profit of Rs2.56 bn
(-19% QoQ and +21% YoY). This compares with our
estimate of Rs2.95 bn. Profit growth was aided by
purchase of LIC staff loans pool – adjusted for the same,
PBT growth was at -22% QoQ and +13% YoY (details
below).
The key reason for the miss was weaker NII progression.
Adjusted margins compressed by 40 bps YoY to 2.61%.
Loan growth was robust at 30% YoY – but saw some
deceleration on account of lack of disbursements in the
developer book.
The stock is currently trading at 10.6x F2012 earnings
and 2.1x F2012 BV. While the multiples prima facie
seem attractive, we believe that revenue growth at
LICHF will remain under pressure in the coming months,
as cost of funds will likely continue to move up even as
asset yields remain sticky.
The key highlights from the results include:
a) Reported NII and profit growth were supported by
LIC staff-loan-related income: LICHF bought a pool of
staff housing loans worth ~ Rs12 bn from its parent LIC
at the end of Feb-11. The interest income is being
accrued, but the interest expense has only been booked
on Rs2.5 bn (out of the total Rs12 bn). This, in effect,
has helped support both NII and profit growth this
quarter.
Reported NII growth in QE Jun-11 was +26% YoY –
adjusted for the above, underlying NII growth was at
+19% YoY. Similarly, reported profit growth for the
quarter was +21% YoY – adjusted profit growth was at
+13% YoY.
b) Adjusted margins were down 77 bps QoQ and 40 bps
YoY at 2.61%: Reported margins were down 67 bps QoQ and
23 bps YoY
LICHF’s margins have historically exhibited a seasonal
tendency wherein they are lower in QE June versus QE March.
However, even if look at the YoY change – margins have
declined by 40 bps (see Exhibit 4).
The key reason for the YoY decline is increasing cost of funds
(up 118 bps YoY, on our computations). Asset yields were
sticky and increased less than cost of funds (despite a 125 bps
YoY increase in PLR). The reason for the same was that:
i) The increase in PLR is not applicable to the fixed-rate loan
book, which has increased to ~46% of total loans from 21% as
of Mar-10.
ii) The proportion of higher yielding developer loans portfolio
has fallen YoY – its currently at 7.8% of total loans vs. 10.5% a
year back.
c) Loan growth was robust; but showed some signs of
deceleration: Outstanding loan book (adjusted for LIC staff
loans) grew by 30% YoY / 4% QoQ – slowing from the 31%
YoY / 8% QoQ registered in QE Mar-11.
Retail loans: The retail loan book grew 36% YoY and 5% QoQ.
Disbursements growth slowed from 39% YoY in QE Mar 11 to
15% YoY. However, management has indicated that growth in
June picked up to 21% YoY.
Developer loans: The developer loan book was down 8% QoQ
and 4% YoY as LICHF disbursed only Rs0.8 bn under this
segment. Disbursements were down 79% YoY.
d) LICHF recorded a provision of Rs334 mn. This compares
with Rs189 mn recorded in the previous quarter.
The key reason for the increase in provisions was the pick-up in
GNPLs (up 84% QoQ and 21% YoY). LICHF’s GNPLs tend to
see a seasonal uptick in QE June. Hence, the relevant metric to
focus on is the YoY growth. The GNPLs have grown on a YoY
basis after five consecutive quarters of decline (see Exhibit 14).
Since the growth at 21% is still lagging loan growth, it is not a
big cause for concern. However, we will continue to watch the
trend in the coming quarters.
e) Reported Tier I ratio at 8.5-8.75% as of Jun-11.
Management indicated that they will consider an equity raise
sometime during F2012, depending upon growth trends and
market conditions.
Price Target Discussion – LIC Housing Finance
We arrive at a price target of Rs181 per share using a
probability-weighted residual income model. We assign
weightings of 60% to our base case value, 10% to our bull case
value and 35% to our bear case value.
We value LIC Housing Finance shares using a three-phase
residual income model – a five-year period of high growth and a
10-year transition period followed by a terminal growth period.
We use a cost of equity of 14%, assuming a beta of 1.0, a
risk-free rate of 8.0% (the current 10-year Indian government
bond yield), and a market risk premium of 6.0%.
Risks to our price target
Key risks to achieving our price target include greater-than-
expected competition from the banking system, a sharp rise in
short interest rates, asset quality issues, and a slowdown in
macro growth.
Exhibit 15
LICHF: Valuation calculation
Base Bear Bull
Weights 60% 30% 10%
Ke 13.9% 13.9% 13.9%
RI Based Value 200 110 280
BVPS (F2012e) 104
Implied Target P/BV 1.9 1.1 2.7
Weighted Price Target 181
Source: Company data, Morgan Stanley Research
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