LIC Housing Finance - Traction in loan book growth, developer loans momentum picks up - Cholamandalam Securities

- PAT of INR 2,362mn (down 22.7% y-o-y)
- NIM was down by 18 bps y-o-y at 2.09%
- Loan book was up 23.8% y-o-y at INR 727.04bn
- Disbursements up 20.6% y-o-y; projects segment disbursements at INR 4.97bn
- Slippage in developer loans of INR 1.6bn

Business picks up momentum in project segment

Business picked up pace with both disbursements and sanctions in the developer loans space returning to normal. Individuals loans (its bread and butter business) chipped in with a healthy growth to contribute to a 27.2% y-o-y rise in aggregate disbursements (INR 60.05bn). Loan book was led by a 26.7% rise in the individual loan book. Asset quality continued to be better off than that of most banks; quality of the loan book continued to remain robust with gross NPLs at 0.74% However, slippage in the projects loan book, INR 1.6bn had seen an uptick in gross NPAs on a y-o-y basis. Gross NPAs are expected to trend lower on a sequential basis in the March quarter.

Lower margins, topline growth of 10.5% y-o-y backed by loan growth

Net interest income was up 13.5% y-o-y, lower spreads were amongst the dampeners. Spreads dropped by ~25 bps (y-o-y); higher cost of funds dented margins while yields remained sticky. Interest reversal also had a negative impact on yields and spreads. Intense competition in the retail segment and lower project loans composition had seen flat yields. Fee income (INR 297.1mn) was down, albeit marginally by INR 34.5mn. Topline was up by 10.5% y-o-y, largely driven by loan growth. Driven by higher staff costs (21.6% y-o-y) and other operating expenses (26.1% y-o-y), cost/income ratio was up by 198 bps at 16.1%. Provisions at INR 318.6mn as against a write-back of INR 796.9mn (reversal of provisions to the tune of INR 789 in 3Q FY12) was the key dampener.

Valuation: The stock is currently trading at P/BV of 1.7X, P/E of 9.9X FY14E estimates. With FY12 - FY14E Earnings growth CAGR expected at 18.1%, traction in loan book growth and healthy asset quality; we assign a target P/BV of 1.9 X to its FY14E book value. We recommend an OUTPERFORMER with a target price of Rs 279.

Risks: Slower ramp up in the loan book, delinquencies in the developer loan book and a compression in spreads are amongst the key downside risks.