Buy LIC Housing Fin; target of Rs 568: KRChoksey

KRChoksey's research report on LIC Housing FinCharacterized by elevated margins (record high at 2.7%) and higher disbursements (33% y/y growth) coupled with best-in-class asset quality (gross NPAs down to 0.45%), Q4FY16 earnings stood strong for LICHF. PAT at INR 4.48 bn stood tad below our expectations (on account of higher provisions) but grew healthy 18.5% Y-o-Y. Surge in LAP disbursements aided margins expansion for the quarter. However, the overall loan portfolio growth was restricted to 15.5% Y-o-Y due to higher repayments during the quarter. Consequently, NII rose robust 26.4% Y-o-Y. Provisions, however, stood higher at INR 3.8 bn primarily due to lower base given the teaser loan provisions benefits derived in Q4FY15. Also, non-employee costs stood elevated on account of higher DSA expenses; cost-income ratio spiked to 17%+ levels.While higher repayments should limit the loan growth expansion ahead and given the anemic property markets, we trim the target price for LICHF to INR 568 (earlier INR 580). That said, we reckon healthy loan mix (with loan re-pricing benefits), margin uptick and stable asset quality should translate into superior earnings CAGR (20%+ FY16-18E) and better return profile (RoE at 20% and RoA at 1.5% for FY18E) prompting us to maintain BUY recommendation on the stock.LICHF is favorably placed in the lower interest rate regime with 53% of its portfolio being of fixed cum floating nature, 54% of the branch network being positioned in top 7 cities, robust loan mix, focus on higher margin products, stable asset quality and robust earnings visibility that continues to reinforces our confidence in the company. However, the elevated repayments trends and increased LAP should remain an overhang,therefore, we trim our target price to INR 568 (earlier INR 580) valuing the company at 2.3x P/ABV FY18E. At CMP, the stock is trading at 1.9x FY18E. We maintain BUY rating on the stock.

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