Buy LIC Housing Finance; target Rs 330: Sushil Finance

Sushil Finance is bullish on LIC Housing Finance (LICHF) and has recommended buy rating on the stock with a target price of Rs 330 in its February 25, 2013 research report.

"LICHF, business growth momentum continued to be strong for LICHFL despite aggressive competition from Banks. The prime focus remains on individual home loans (96% of total loan mix) which has been main driver for growth, while it is now seeing good number of projects being launched, so is now tilting its focus towards increasing mix of project loans and take it back to its historical levels of 8-10% from current 4% in the next 2-3 years which is high yielding in nature but without compromising on the quality of loan. Its loan book grew by 24% YoY with individual loan portfolio growing at 27% YoY and project loan portfolio de-growing by 20%. Currently, total outstanding portfolio stands at Rs.727 bn o/w individual portfolio at Rs.698.9 bn and project loan portfolio at Rs.28 bn. It expects its loan book momentum to continue at ~23% levels in FY13 & FY14 with individual loans growing at ~22%, while Project loans expected to pick up as it saw traction in disbursements in Q3FY13.

LICHF's processing fees continues to remain tepid mainly on impact of abolishment from prepayment charges (contributed Rs.25-30 mn every quarter) and lower share of project loans (processing fees are higher in this segment than individual loans). Net Profit showed de-growth during the quarter as it had to make higher provisions of Rs.318 mn, mainly on slippages in project loan portfolio (made 15% provisions). During Q3FY13, the PAT stood at Rs.2.36 bn, de-growing 23% YoY and 8% QoQ.

Asset quality disappointed as Gross NPAs increased 30% QoQ to Rs.5.4 bn or 0.6% of advances, albeit individual loan improving to 0.12%. Three project loans of around Rs.1.65 bn turned NPAs, of which, one project loan of Rs.1 bn to be recovered in Q4FY13 on selling collateral property and other two loans to be recovered over 2 quarters under SARFAESI act. Overtime, LICHF has shifted its loan mix to individual loans (o/w 90% salaried class) and reduced exposure to project loans which has helped to improve its asset quality significantly. The project loan NPAs were from legacy book and new loans have no visible sign of stress and also are collateral funding (2x assets with escrow accounts) rather than balance sheet funding, so going ahead, we expect asset quality to remain healthy as it makes additional provisions than required by the RBI with adequate collaterals. We also note that provision cover remains reasonably high at ~130% (including teaser & standard asset provisioning).

NIMs settled at 2.09% down 1bps QoQ which remained largely stable against our expectation of improvement. Interest reversal on project loan NPAs impacted NIMs by 5-6bps, while cost of funds remained sticky and stable during the quarter. Individual loan yields improved in Q3FY13 as teaser loan product “fix-o-floaty” (fixed interest rate for 3 years and then shift to the floating rate) continued to reprice upwards (from 8.7% to 11.25%-11.35%). The teaser loans coming for re-pricing is Rs.30 bn in Q4FY13 & Rs.27 bn in Q1FY14, adding to incremental yields. LICHFL has started reducing reliance on Bank borrowing (29% mix) and escalating wholesale debt with larger thrust on ECBs. It expects NIMs to be at 2.2% in Q4FY13 as the recent Base rate cut in Feb (not passed by LICHF) will reflect in reducing cost of funds moving ahead. We have reduced our NIM estimate as expansion is more prolonged than expected but we believe NIMs have bottomed out at 2.09% in Q3FY13 and could see possible reversal. We expect NIMs to be at 2.16% in FY13E against 2.46% in FY12.

LICHFL has grown at a healthy pace in the past few years driven by strong growth in loan book coupled with improved asset quality and high return ratios. We have reduced our NII resulting in reduction of PAT by 12% for FY13E & 10% for FY14E. Going forward, we believe its loan book could grow at 23% & 22%, while NII could grow at 9% & 40% in FY13E & FY14E respectively. Asset re-pricing coupled with strong disbursement growth to result in reversal of NIMs which in turn would lead to PAT growth of 9% in FY13E & 45% in FY14E. On the back of overall growth in the housing finance industry, downward bias on interest rates, high return ratios & comfortable asset quality are the key value drivers for the stock. At CMP, the stock trades at attractive valuation of 1.9x FY13E ABV & 1.6x FY14E ABV. We thus recommend buy with a revised target price of Rs.307," says Sushil Finance research report.

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