LIC Housing Finance - Healthy growth; margins compression bottoming out - Nirmal Bang

LIC Housing Finance (LICHF) reported PAT below estimates primarily due to lower Net Interest Income resulting in margin compression (due to higher cost of funds) and higher provisions. We have fine tuned our estimates to incorporate the below expected Q1FY13 results. However, our view on the stock remains unchanged as the margin expansion benefit which was expected to kick in from Q1FY13 has been postponed and is expected to start from Q2FY13 onwards with the chunk of repricing coming up from Q2FY13. Moreover, we remain confident that the current momentum in loan growth will continue with increase in share of developer loans. We expect PAT to grow at a CAGR of 28% over FY12-FY14E.

Strong growth seen in individual loan portfolio

LICHF's loan portfolio continued to remain healthy at 24% YoY to Rs 65,644 cr of which retail disbursements increased almost 29% YoY in Q1FY13. Disbursements to the developer's loan segment increased 17% QoQ to Rs 321 cr from Rs 274 cr in Q4FY12. However, repayments from the developer segment continued to be more than fresh disbursements resulting in overall decline in the outstanding developer loan portfolio. Management has guided for fresh disbursements to developers to be ~Rs 2000 cr for FY13E, resulting in share of developer portfolio improving to ~6-7% for FY13E.

NIMs compress: however expected to improve from hereon

NIMs for Q1FY13 stood at 2.18% against 2.44% in Q4FY12 mainly on account of lower income from Developer Loans and higher cost of funds. Going forward as per the Management, the easing NCD rates and lowering of base rate should result in lower cost of funds. Moreover, with the repricing of the teaser loan portfolio and the increasing developer loan portfolio NIMs are expected to improve going forward. Management targets NIMs to be in the range of 2.5%-2.7% for FY13E. We expect that the margins have bottomed out and will only improve from here on, given repricing of teaser rate loans, possible reduction in rates and increase in developer loan book.

Seasonal impact on asset quality; Adequate provisioning maintained

Gross NPA increased 5% YoY to Rs 468 cr whereas Net NPA 20.6% YoY to Rs 248.7 cr in Q1FY13. Gross NPA and Net NPA ratios stood at 0.71% and 0.38% respectively. Management highlighted that deterioration in asset quality in Q1 is a seasonal phenomenon as the individual loan portfolio witnesses' stress in Q1. Recoveries are expected to remain high in the coming quarters of FY13E.

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 1.86x FY13E and 1.57x FY14E BV are attractive. We recommend BUY on the stock and maintain our target price of Rs 333 implying an upside of 35.9% from current levels.

Source : Equity Bulls

Keywords