LIC Housing Finance - Q1 disappoints, improvement from hereon - Prabhudas Lilladher

LICHF's Q1FY13 PAT of Rs2.27bn was much lower than our initial expectation of +Rs3.0bn but in line with company's recent guidance. Margin performance disappointed but we believe funding costs at ~9.6% have peaked and repricing of the 'fix-o-floaty' portfolio (Rs25bn every qtr) should lead to an improvement in margins from Q2FY13. We cut estimates by 5% for FY13 for LICHF as improvement related to builder mix will get pushed to FY14. Despite the 5% PAT cut, ROEs will be ~20-21% (pre-dilution) and 18-19% (post dilution). Maintain 'BUY' with a PT of Rs310/share.

- How should we read Q1FY13 margin performance? Margin performance was disappointing, with reported margins down ~25bps QoQ. We would like to highlight that there is seasonality in Q4 margins for HFCs and adjusted for that spread contraction was lower in Q1FY13. We expect ~40bps improvement in core spread (FY13), with ~Rs80bn of repricing over FY13 and further 20bps in FY14 again due to repricing and some improvement in loan mix.

- Individual growth strong; Builder portfolio still muted: Individual mortgages continue to grow at a rapid clip, with ~29% growth in individual disbursements and with no unusual increase in repayments, individual loan growth was strong at ~28% YoY. Builder portfolio disbursements continue to lag repayments and we expect a build up only in H2FY13 and material improvement in loan mix only in FY14.

- LIC's valuation at 1.7x Sep-13 (1.55x ep-13 diluted book) book seems reasonable for +19-20% ROEs and limited asset quality and regulatory risk. Given limited avenues for fund deployment, we believe that competition from banks will not be easy but we don't expect disruptive pricing from PSUs banks (as after FY08-09 crisis) as liquidity environment is significantly different from 08-09 now and credit costs of PSU banks are much higher than HFCs/private banks.

Source : Equity Bulls

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