LIC Housing Finance: Buy For 23% Upside Potential

LIC Housing Finance (LICHF) in Q1 FY13 reported total net income (NII + non-interest income) of Rs.379 cr down 3% YoY (6% QoQ). The fall in total net income was due to increase in interest expenses by 37% YoY (9% QoQ) as against 26% YoY (6% QoQ) increase in interest income led by decline in margins (NIMs declined by 60bps YoY). The pre provision profit for the quarter stood at Rs.327 cr down 6% YoY due to increase in operating expenses by 24% YoY.

Thus, PAT declined by 11% YoY (10% QoQ) to Rs.228 cr.

Strong loan growth led by individual portfolio

Outstanding loan book grew by 24% YoY (4% QoQ) to Rs.65,644 cr led by robust growth of 28% YoY (5% QoQ) in individual loan portfolio. While, in Q1 FY13 project loans declined by 24% YoY (5% QoQ) resulted in increase in Individual: project loan ratio to 95:5 from 92:8 YoY (95:5 QoQ). Management targets to increase the share of project loans in the overall to 6% by March 2013 (v/s 5% as on FY12).

Disbursement grew by 35% YoY (down 28% QoQ) to Rs.4,791 cr led by 29% YoY growth in individual loans disbursement and 317% YoY growth in project loan disbursement. Management targets quarterly disbursements of Rs.500-1,000 cr in project loan segment which should outpace quarterly repayment. Thus, portfolio should grow in next few quarters. Also, guided disbursements of Rs,22,000 cr in the individual segment and Rs,2,000 cr in the developer segment.

NIMs declined led by increase in cost of funds

NIMs declined by 26bps QoQ to 2.18% led by increase in cost of funds. Yield on advances remains flat QoQ at 10.7% while cost of funds increased sharply by 36bps QoQ to 9.58% due to some high cost borrowings done at the end of March 2012. Management targets NIMs in the range of 2.5% – 2.7% by end of FY13 and spread in the range of 1.6% – 1.7% which would be led by increasing developer loan portfolio and re-pricing of teaser loan portfolio.

Asset quality deteriorated – Seasonal phenomenon

Asset quality deteriorated with GNPA in absolute terms increased by 77% QoQ due to seasonal phenomenon as the individual loan portfolio witnesses stress in Q1.. However, GNPA % declined to 0.7% from 0.8% YoY. With decline in PCR to 47% from 67% QoQ, NNPA declined to 0.4% from 0.14% QoQ. With teaser loan provisions of Rs.250 cr available for write back from Q1 FY14 as per NHB requirement, PCR would move back to 70%.

Processing fees remain subdued

Processing fees declined to Rs.29 cr from Rs.34 cr QoQ due to abolishment of pre payment charges and lower share of developer loans. We believe as the developer portfolio grows, fee income should improve to that extent (LICHF charges 0.5-1.0% processing fees on builder loans on a case-to-case basis).

Teaser loan re-pricing schedule

 Q1 FY13 – Rs.800 cr (got over during the quarter)
 Q2 FY13 – Rs.2,500 cr
 Q3 FY13 & Q4 FY13 – Rs.5,500 cr
 Q1 FY14 – balance to be re-priced
Loans are expected to re-priced at 11.5% – 11.9% from 8.9%.

Outlook & Valuation

LICHF reported better disbursement growth in developer loans and better individual loan portfolio growth in high interest rates environment. Also, Management guided improvement in margins led by re-pricing of of fixed loan disbursed 3 year back, which are currently at 8.9% interest rate, to floating rate of 11.5% – 11.9% from July 2012. The higher yield Developers’ loan currently stands at close to 5% of the total loan portfolio, with the revival of the real estate market in various cities (eg. Chennai, Coimbatore, Pune) the management expects strong growth in Developers’ loan segment and has guided that the share will increase to close to 6% by FY13. This will further boost the NIMs for LICHF.

At CMP of Rs.245 LICHF is trading at 1.8x its FY13E BV of Rs.134 and 1.5x its FY14E BV of Rs.162. We value LICHF at its P/BV of 1.9x its FY14E BV of Rs.162 and maintain our target price of Rs.302. We reiterate BUY for LIC Housing finance with an investment horizon of 12 months and upside potential of 23%.