Buy LIC Housing Finance - shah investor's home Ltd.

Re-pricing of fixed rate loans (lower rate) to floating (higher rate) and 100% growth in developer loan to drive margins

Q4 FY12 Result Update

LIC Housing Finance (LICHF) in Q4 FY12 reported total net income (NII + non-interest income) of Rs.405 cr (lower than our est. of Rs.460 cr) down from Rs.458 cr YoY. The fall in total net income was due to increase in interest expenses by 44% YoY as against 26% YoY increase in interest income led by decline in margins (NIMs declined by 100bps YoY). However, total net income grew by 13% QoQ due to improvement in margins (NIMs improve by 17bps QoQ). The pre provision profit for the quarter stood at Rs.320 cr down 18% YoY due to increase in operating expenses by 22% YoY. Thus, Pat declined by 19% YoY (17% QoQ) to Rs.254 cr (below our expectations of Rs.286 cr).

Strong loan growth led by individual portfolio

Outstanding loan book grew by 23% YoY (7% QoQ) to Rs.63,080 cr led by robust growth of 28% YoY (9% QoQ) in individual loan portfolio. While, in Q4 FY12 project loans declined by 27% YoY (10% QoQ) resulted in increase in Individual: project loan ratio to 95:5 from 94:6 in Q3FY12. Disbursement grew by 40% QoQ (19% YoY) led by 78% QoQ growth in project loans disbursement and 39% QoQ growth in individual loan disbursement. The growth was driven by the southern region (>20%), eastern and central region (35%) however, single digit growth observed in Mumbai. Management guided to double loan amount to developers in FY13E.

NIMs improved QoQ led by decline in cost of funds

NIMs improved by 17bps QoQ to 2.44% led by decline in cost of funds. The decline in cost of funds was attributed to (a) borrowings came at end of Dec'11 when NCD yields were not too high, (b) term loans from banks were replaced by NCD's, (c) preferential allotment to LIC. Management guided NIMs to be in the range of 2.75% - 3.00% in FY13. We expect NIMs to improve led by (a) conversion of fixed rate loans into floating rate, (b) developers loans disbursement to double (developer loan yield is approximately 400bps premium to individual loan) and (c) re-pricing of liabilities at comparative lower interest rates to the extent of 15% of borrowings.

Improvement in asset quality

Asset quality improved with GNPA % declined to 0.42% in Q4 FY12 from 0.63% QoQ (0.47% YoY). With increase in PCR to 67% from 51% QoQ, NNPA improved to 0.14% from 0.31% QoQ.

Operating expenses increased sharply

Operating expenses increased by 60% QoQ (22% YoY) led by robust increase in commissions which was led by robust growth in disbursements by 40% QoQ. Thus, cost to income ratio increased to 21% in Q4 FY12 from 15% QoQ (15% YoY).

Outlook & Valuation

With the re-pricing of close to Rs.9,000 cr of fixed loan disbursed 3 year back, which are currently at 8.9% interest rate, to floating rate of 11.9% from July 2012 will lead to higher yields. Management has targeted NIMs in the range of 2.75% to 3% and loan growth of close to 20 to 25% in FY13. 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 10 to 12% by FY13. This will further boost the NIMs for LICHF.

At CMP of Rs.260 LICHF is trading at 1.9x its FY13E BV of Rs.134 and 1.6x its FY14E BV of Rs.162. We value LICHF at its three year average forward P/BV of 1.9x its FY14E BV of Rs.162 and arrive at our target price of Rs.302 (earlier 280). We recommend BUY for LIC Housing finance with an investment horizon of 12 months and upside potential of 16%.

Source : Equity Bulls

Keywords