LIC Housing Finance - Growth levers in place, uncertainty over - Phillip Capital

LIC Housing Finance (LICHF) is a strong incumbent in the low-risk, stable-return housing finance industry with a market share of more than 10%. While it has been growing faster than the industry by drawing on the strong franchise of its parent, we see its growth tapering off a bit, but still above-industry, enabling further market share. Lower bank borrowings will lead NIM improvement in FY15 while asset repricing and growing share of high-yield segment will drive NIMs in FY16. Better spreads, stable asset quality, lower credit costs, and comfortable capital position over FY15-16 makes a promising case for investment with a fair value of Rs295 per share for LICHF, translating into a valuation of 1.5x FY16e ABVPS of Rs196.

Business will continue to outpace industry growth rates: Despite competitive pressures in retail home loans, we believe LICHF's disbursements will be higher than peers, given its access to its parent's strong franchise. We have built in a disbursements growth of 16%/18% for FY15/16. This will result in a loan book growth of 17% over FY15-16. It will be able to scale up its developer book only by FY16.

NIMs will improve a bit in FY15, a lot in FY16: Better borrowing flexibility, asset repricing, and increasing proportion of high-yield book will augment NIMs in FY15-16. LICHF's spreads and NIM are near lows driven by rising funding costs and its inability to pass these on (because of higher competition). NIMs and spreads can improve driven by: a) flexibility to shift to bond markets for borrowings ( = lower bank borrowings), b) Rs 310bn asset repricing in FY16, and c) gradual change in portfolio mix towards high-yielding products. We see NIMs rising by only ~5 bps in FY15 (largely driven by a change in borrowing mix), but in FY16 they will rise by a substantial ~20bps driven by asset repricing and scaling up of the developer book.

Asset quality to remain benign; credit costs to remain stable: With 88% of its customers in the salaried class, LICHF's individual loan segment has seen resilience ù with GNPAs at 0.4% as on 9MFY14. However, the GNPA in its developer book is high at 14.9% due to delinquencies in 4 major accounts. In all these accounts, it has initiated SARFAESI and seized one residential property. As the resolution of these accounts progresses, we expect GNPAs to decline. Against total GNPAs of Rs 7.04bn, LICHF has an outstanding provision of Rs 7.3bn, including Rs 1.4bn for teaser-rate provision (which it will probably reverse in the next 2-3 quarters), resulting in stable credit cost in FY15-16.

Bank foray challenges over: We believe that while LICHF would have benefited from LIC's brand and customer base, however, mobilization of low-cost deposits would have been a major challenge. Thus transformation from HFC to a bank would have pulled down RoAs from 1.4% currently to ~0.7% over the medium term (3-4 Years) mainly because of regulatory requirement and high operating cost.

Valuation: We see earnings growing at a CAGR of 19.5% over FY14E-16, resulting in an ROA of 1.5%/1.6% for FY15/FY16. Based on a two-stage Gordon growth model, we arrive at a fair value of Rs 295 (implied FY16 P/ABVPS of 1.5x) for LICHF. We initiate coverage with a Buy rating.

Source : Equity Bulls

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