Buy LIC Housing Finance - Microsec

We rate LIC Housing Finance Ltd (LICHFL) a BUY. LICHFL is one of the leading players in the mortgage market. The company which has been in existence since 1989 is promoted by "Life Insurance Corporation (LIC)". The main objective of the company is to provide long term finance to individuals for purchase/construction/repair and renovation of new/existing flats.

Investment Rationale

Robust Business Growth:

Despite high inflation coupled with high cost of capital scenario, LIC Housing has maintained its earnings growth. The company's total income stood at INR6215.12 crores in FY12, registered a YoY growth of 27.65%. LICHF registered CAGR growth of 29.88% on total income over the period of 2008-12. Moreover, the company has reported a YoY growth of ~26% in the quarter ended June 2012.

Robust Growth in Profitability:

LICHF's strong sustainable business structure along with strong parent and thoughtful business activities has helped the company to absorb the opportunity in the industry, which has boosted its topline and bottomline growth. Operating profit has grown at a CAGR of 30.08% over the period of 2008-12. Whereas, Profit After Tax (PAT) grew at a CAGR of 23.81% over the same period.

Increasing Market Share in Mortgage Market:

Despite an overall slowdown in industry due to high mortgage rates and high price level specially in Tier 1 cities, LIC Housing has still been able to grow at higher rate than industry and increased its market share. The outstanding mortgage portfolio of the company in FY12 was INR63080.15 crores as against INR51089.84 crores in FY11, registered a growth of 23.47%. Moreover, as of Q1FY13, company's individual loan portfolio stood INR62361 crores whereas, project loan stood at INR3283 crores, which is in the proportion of 19:1.

Increasing Share of High Yielding Developer Loan:

The share of developer loan has declined to 5% in FY12 from 10.9% in FY10. However, management expects to bring its loan book back to its historical level. We expect, company's move is likely to improve business margins. Generally, developer loans yield are 3-4% higher as compared with the individual loans.

Valuation and Recommendation

LIC Housing Finance is well positioned to deliver sustainable and profitable growth backed by strong disbursement in the mid and small housing segment.

At the CMP of INR249.90, the stock is trading at FY12 PE of 13.02x and P/BV of 2.22x. The current valuation of 1.87x FY13E and 1.59x FY14E Book Value looks attractive. We recommend a BUY on the stock with a target price of Rs.317 (2.02x FY14E BV) with an upside of ~27% from the current level with an investment horizon of 18 months.

Key Risks

Competition from Banks

Banks are dominant players in the housing finance segment having more than ~60% market share. Presently, banks have increased focus on housing loan retail segment and offering attractive rates. LIC Housing may loose its market share in case banks become more aggressive in the home loan segment.

Increasing Lending Rate may Hurt Credit Growth

Interest rates remain high due to elevated interest rates. This has somewhat decreased the purchasing power of the masses, impacting housing demand. If interest rates continue to remain high, growth housing demand may be affected.

Source : Equity Bulls

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