Buy LIC Housing, :: Kotak Sec, report link

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LICHSGFIN		12-22-2014
Recommendation: BUY ( + )   Target Price: Rs. 488

Falling interest rate cycle to aid mortgage spread

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 as most of the banks have not cut the base rate.

However, incremental borrowing cost through bonds (~65% of total

borrowings) has seen decline of ~70bps during last three months. As a

result, incremental spread is likely to improve by 30-40bps. We are modeling

NIM to come at ~2.3% in FY15 (limited re-pricing) and 2.4% in FY16 as FY16

is likely to see higher share of LAP as well as developer loans along with

kicker from large chunk of re-pricing from fixed loan products.

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 15.2% CAGR during FY14-16E

with healthy return ratios (RoA at ~1.5%; RoE: 18-19%). At CMP, stock is

trading at reasonable valuation (2.4x its FY16E ABV) and hence we retain

BUY rating on the stock with upward revised TP of Rs.488 (Rs.372 earlier;

2.5x FY16E ABV) based on 2.75x its FY16E ABV on back of improvement in

mortgage spread in falling interest rate cycle.

LINK
http://www.kotaksecurities.com/pdf/pdfs/FUNDLICHSGFIN22122014093810.pdf