Buy LIC Housing Finance Ltd. - TP Rs.333 - Nirmal Bang

Resting on Strong Fundamentals

LIC Housing Finance Ltd. (LICHF) is one of the largest Housing Finance Company in India promoted by LIC. The main objective of the company is to provide long term finance to individuals for purchase/reconstruction of new / existing flats. We are positive on the company owing to the fundamental improvement in earnings from FY13E onwards benefiting from re-pricing and higher developer loan build up. We expect net profit to grow at 30.8% CAGR over FY12-14E.

Increasing market share in the mortgage market

LICHF's market share has consistently witnessed an improvement over the past 5 years. The company has been able to increase its market share from 5% in FY07 to 10% in FY12 benefiting from the good distribution network of the company. The company has been witnessing healthy growth in its disbursements and going forward, Management expects the loan book to grow at 20-25% for FY13E vs 23.5% in FY12.

Increasing share of high yielding developer loan

The share of developer loans declined sharply from 10.9% in FY10 to 5% in FY12. Going forward, Management expects to increase the loan book back to its historical levels given the high yields which the business generates and the improving conditions in the mortgage market. This increase in the portfolio is expected to lead to an increase in the company's margins. Developer loans are high yielding loans (~15% rate) higher by almost 300-400 bps offered on individual loans (~11-12%).

Re-pricing of loans remains a major catalyst

As on 31st March 2012, the total teaser loan portfolio of the company stood at ~Rs 12,000 crs which is expected to be re-priced in FY13E and FY14E. The repricing of the loan book from fixed (~9%) to floating rate (~11%) will act as a major catalyst for the company to report an improvement in the net interest income.

Healthy asset quality

LICHF has shown an improvement in its asset quality with shift in focus towards salaried customers. Almost 90% of the company's customers are salaried class reaffirming the confidence of less chances of default. LIC housing has reported a significant decline in its gross NPAs from the levels of 4.4% in FY05 to almost 0.42% in FY12. Going forward we have factored in higher delinquencies. However, we believe that the asset quality would remain reasonably healthy as compared to its peer banks operating in the same environment.

Valuation & Recommendation

Driven by strong disbursement and focus on asset quality LIC Housing is well positioned to deliver sustainable and profitable growth. We believe that the current valuations of 2.02x FY13E and 1.69x FY14E BV are attractive. We recommend BUY on the stock with a target price of Rs 333 (2.5x FY13E BV) implying an upside of 23.7% from current levels.

Source : Equity Bulls

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