Housing Financials - Earnings downgrade cycle may be nearing an end - Avendus

Loan growth for HFCs outpaced the home loan portfolio of banks over the past nine months, amid concerns on rising competition. However, subdued NIMs due to higher funding costs, despite asset re-pricing, has been the key concern, in particular for LICHF. This drove sharp earnings downgrades for LICHF over the past nine months. While incremental yields may be low due to competitive pricing, a likely moderation in funding costs may offset the impact. Thus, a gradual improvement in NIMs may mark an end to the earnings downgrade cycle. We forecast a CAGR of up to 26% in net profit for both leading housing financials over FY13f-FY15f, driven by a CAGR of up to 20% in NII. Retain Buy on LICHF and upgrade HDFC to Add with a revised Mar14 TP of INR321 and INR911, respectively.

Positive signs may support valuations

Growth in loans for HFCs has outpaced growth in the home loan portfolio of banks over the past nine months, amid concerns on rising competition. NIMs for both leading housing financials remained stable q-o-q, as at the end of Dec12, driven by lower yields. Subdued NIMs due to higher funding costs, despite asset re-pricing, has been the key disappointment for LICHF over the past three quarters. However, lower funding costs are likely to offset lower incremental yields, driving a gradual improvement in NIMs for LICHF.

Earnings downgrade cycle may be nearing an end; EPS CAGR up to 26%

LICHF has witnessed sharp earnings downgrades, largely driven by subdued NIMs over the past nine months. Consensus earnings downgrades of up to 26% for FY13f during Mar12-Dec12 led to the growth in the consensus one-year forward NP declining to 26% as at end Aug12 from 37%, as at the end Mar12. However, Dec12 saw it recovering to 30%. With a gradual recovery in NIMs during FY14f aided by lower funding costs, the trend of earnings downgrades may be nearing an end. We lower our net profit estimates by 2%-12% for HFCs, driven by lower spreads. Despite the cut, earnings are likely to increase at a healthy CAGR of 26% for LICHF and 17% for HDFC, supported by a CAGR of 20% for each in NII over FY13f-FY15f.

Valuation gap with banks narrows close to two-year low

The P/B discount of HFCs (excluding HDFC) to the Bankex fell to nearly a twoyear low of 32%, as at the end Feb13. The discount has been widening since Mar12, led by concerns on NIMs and asset quality, particularly for LICHF. The rally in May09-Sep10 contracted the P/B discount to banks from a low of 35% during May09 to a premium of 10%, as at the end Aug10. The likelihood of a further fall may be alleviated, as the earnings downgrade cycle nears its end.

Maintain Buy for LICHF and upgrade HDFC to Add

Our final TP is a weighted average, where we assign a weightage of 50% to our DCF/SOTP-based fair values and 25% each to our P/B- and P/E-based fair values. We lower our Mar14 TP for LICHF to INR321 and raise it for HDFC to INR911. We retain a Buy on LICHF and upgrade HDFC to Add. Slower growth in loans and a further decline in NIMs are the key risk factors.

Source : Equity Bulls

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