Lic Housing Finance Company Update May 09 Edel

` India Equity Research

| Banking and Financial Services

Company Update

LIC HOUSING FINANCE

INR 447

Due for structural re-rating

BUY

May 26, 2009

Delivering quarter after quarter; building a strong track record

Vishal Goyal, CFA

LIC Housing Finance (LICHF) is delivering strong operating performance quarter after

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quarter on all key parameters (refer chart 1). It has been consistently reporting - (1)

[email protected]

20% plus loan growth; (2) sharp reduction in NPLs; and (3) margins of ~2.8-3.2% despite weak real estate sentiments and intense competition from PSU banks (with

Kunal Shah

lower lending rates). Moreover, the outlook on mortgage growth and asset quality has

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improved since January with change in macro environment and increased availability

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of capital. Also, margins are expected to be sustained due to sharp decline in wholesale funding cost, which will help LICHF sustain this strong performance. Significant improvement in market share LICHF is estimated to have improved its market share to 9% plus in FY09 from ~6% in FY08. After muted disbursements over FY05-07, LICHF has been gaining market share (due to internal restructuring), growing its disbursements by 38% in FY08 and 24% in FY09. We expect the company’s loan book to grow at 22% CAGR over FY09-11E.

Reuters

:

LICH.BO

Bloomberg

:

LICHF IN

:

453 / 151

Concerns on corporate developers abating with improved capital availability LICHF’s exposure to corporate developers has gone up to 8.8% in FY09 (from 3% in FY07). However, NPL risk on the corporate developer book has abated (compared with

Market Data

December 2008) with improved capital availability as reflected in fund raising by

52-week range (INR)

Unitech and DLF (and more QIPs in pipeline). Moreover, with anticipated economic

Share in issue (mn)

:

84.9

recovery and increased property deals in the second half of FY10, we expect gross

M cap (INR bn/USD mn)

:

38.0 / 804.0

Avg. Daily Vol. BSE/NSE (‘000) :

921.6

NPAs to remain below 2% over FY09-11E. Its gross NPAs declined sharply to 1.07% in FY09 and with provision coverage of 80%, net NPAs declined to 0.2% (refer chart 2).

Share Holding Pattern (%)

Outlook and valuations: Due for structural re-rating; upgrading to ‘BUY’ LICHF is consistently delivering strong profitability quarter after quarter and concerns

Promoters*

:

40.8

over stability in business growth, earnings and asset quality are gradually getting

MFs, FIs & Banks

:

18.8

diluted. The company has constantly improved RoEs from 16% in FY06 to 26% in

FIIs

:

21.6

FY09 (refer chart 3), and even post equity dilution (of say 15%) it will continue to

Others

:

18.8

* Promoters pledged shares (% of share in issue)

:

Nil

Stock

Stock over Sensex

generate RoEs in the range of 21-22%. We had downgraded the stock in January due to increased risks on developers’ loan. However, we believe on the back of sustained operating metrics and improving real estate environment (when NPL risk on developer book is lower), the stock has potential for a re-rating. Over the next one year, we

Relative Performance (%) Sensex

expect the stock to get re-rated and trade in the range of 1.8-2.0x book value, which gives a target price of INR 610 per share. We are revising our earnings estimate

1 month

22.8

25.3

2.5

upwards by 4% for FY10 to INR 73.5 per share and by 5% for FY11 to INR 84.7 per

3 months

25.3

108.9

51.2

share. It is currently trading at 1.4x FY10E book and 6x earnings, and we are upgrading it from ‘ACCUMULATE’ to ‘BUY’.

12 months

(14.9)

31.5

46.4

Financials FY08

FY09

FY10E

4,970

7,190

8,948

10,530

15.3

44.7

24.5

17.7

Net interest income(INR mn)

3,976

5,644

7,315

8,778

Net profit (INR mn)

2,792

3,872

5,319

6,246

Shares outstanding (mn)

85.0

85.0

85.0

85.0

EPS (INR)

32.9

45.6

62.6

73.5

EPS growth (%)

33.8

38.7

37.3

17.4

PE (x)

13.6

9.8

7.1

6.1

2.5

2.1

1.7

1.4

19.3

22.9

26.2

25.3

Rev growth (%)

Price to book (x) ROE (%)

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600

4,200

400

2,800

200

1,400

0

('000)

FY07

(INR)

Year to March Revenues (INR mn)

0

May-08 Nov-08 May-09 Edelweiss Securities Limited 1

LIC Housing Finance

3.0

30.0

2.4

26.0

1.8

22.0

1.2

18.0

0.6

14.0

0.0

10.0

(%)

(INR bn)

Chart 1: PAT growth of 38% in FY08 and FY09; loan book grew by 20% plus

Q108

Q208

Q308

Q408

Revenues

Q109

Profits

Q209

Q309

Q409

Loan growth Source: Company

100.0

4.0

80.0

3.0

60.0

2.0

40.0

1.0

20.0

0.0

0.0

(%)

(%)

Chart 2: NPLs declining significantly 5.0

Q108

Q208

Q308

Gross NPAs

Q408

Q109

Q209

Net NPAs

Q309

Q409

Prov coverage Source: Company

30.0

10

26.0

8

22.0

6

18.0

4

14.0

2

10.0

(%)

(INR bn)

Chart 3: RoEs on an uptrend 12

FY06

FY07 Revenues

FY08 Profits

FY09 Loan growth

FY10E RoEs

Source: Company, Edelweiss research

Edelweiss Securities Limited 2

LIC Housing Finance Significant improvement in market share LICHF is estimated to have improved its market share to 9% plus in FY09 from ~6% in FY08. Of the estimated disbursements of ~INR 685 bn in FY09 of the top four players - namely HDFC, ICICI Bank, SBI and LIC Housing (accounting for ~75% of the mortgage space) LICHF has disbursed ~INR 88 bn. After muted disbursements over FY05-07, LICHF has been gaining market share (due to internal restructuring) in the past two years, growing its disbursements by 38% in FY08 and 24% in FY09. Its focus on the salaried class (which forms 80% of its individual loan segment), and particularly public sector entities (~50-60% of salaried class), has enabled to post better-than-industry growth; these segments have benefited from implementation of Sixth Pay Commission recommendations and no job losses. The company is now planning to increase its presence in the mid-ticket size segment and add 26 new offices in Q1FY10. We expect the company’s loan book to grow at 22% CAGR over FY09-11E.

60.0

32

48.0

24

36.0

16

24.0

8

12.0

(%)

(INR bn)

Chart 4: Strong disbursement growth—Higher than industry average 40

0.0

0 Q108

Q208

Q308

Individual

Q408 Project

Q109

Q209

Q309

Q409

Disbursement growth Source: Company

Wholesale funding cost dipping; margins to sustain The wholesale funding cost has come down significantly and, incrementally, the company is raising funds at the rate of ~7.0-7.5%; there is further scope of reduction in average funding cost, going forward. Taking this into account, the company has reduced its lending rates further by 75bps with effect from April 2009 (besides 75bps reduction in January). The spreads (calc) during FY09 were maintained at ~2.3% and the outlook on spreads is positive in the near term considering shift in favour of the high-yielding corporate developer space and sharp correction in wholesale funding cost.

Edelweiss Securities Limited 3

LIC Housing Finance Company Description LICHF is the fourth-largest mortgage finance company in India. It provides loans for homes, construction activities, and corporate housing schemes. Almost 91% of the company’s loans are to retail customers and the balance 9% to large ticket commercial sector companies. It is fourth in terms of market share (including banks), with ~8% market share in home loan disbursements in FY08. The company has loan outstanding of INR 277 bn as at March 31, 2009. It has 130 offices and 100 camps across the country. The company has a marketing network of over 6,000 direct sales agents, home loan agents, and associates. LIC India is its majority shareholder with 41% equity holding, followed by FIIs at 22%.

Investment Theme Internal restructuring and intense pricing war resulted in LICHF’s disbursals growing a paltry 9% (below industry average of 36%) over FY04-06. Post internal restructuring, defying the concerns of slowdown in mortgages, and expectations of margin compression, LICHF reported robust disbursals in FY07-08. We expect the company to grow its disbursement at higher-than-historical growth rates. With the change in competitive landscape in favour of HFCs, we expect LICHF to gain market share and report margin improvement. Historically, asset quality for LICHF has not been highly impressive; however, with adoption of better and strict risk management process and concerted efforts on NPA recoveries, the company has reported significant improvement in its net NPAs. LICHF also holds 39% stake in LIC Mutual Fund.

Key Risks Loss of market share to commercial banks and HFCs and pressure on spread due to inability to raise lending rates amidst stiff competition. Real estate lending is becoming more challenging due to a high interest-rate background and weak property prices. Deterioration of asset quality can increase NPA provisioning and affect profitability.

Edelweiss Securities Limited 4

LIC Housing Finance

Financial Statements Income statement

(INR mn)

Year to March

FY07

FY08

FY09

FY10E

FY11E

Interest income

15,054

20,587

27,476

32,629

38,582

Interest expended

11,079

14,943

20,162

23,851

28,189

Net interest income

3,976

5,644

7,315

8,778

10,393

Non interest income

817

1,248

1,470

1,581

1,728

- Fee & forex income

583

655

789

915

1,024

29

24

24

24

24

- Investment profits - Misc. income

205

568

658

642

680

4,792

6,892

8,785

10,358

12,120

Other income

177

299

163

171

180

Net revenues

4,970

7,190

8,948

10,530

12,300

Operating expenses

1,244

1,467

1,542

1,694

1,863

267

345

407

470

543

38

37

50

52

54

939

1,085

1,085

1,172

1,266

3,725

5,723

7,406

8,835

10,437

188

400

139

263

739

3,538

5,323

7,267

8,573

9,698

Income from operations

- Employee exp - Depreciation /amortisation - Other opex Preprovision profit Provisions PBT Taxes PAT Basic number of shares (mn) Basic EPS (INR) Diluted number of shares (mn) Diluted EPS (INR) DPS (INR)

746

1,451

1,948

2,327

2,501

2,792

3,872

5,319

6,246

7,197

85

85

85

85

85

32.9

45.6

62.6

73.5

84.7

85

85

85

85

85

32.9

45.6

62.6

73.5

84.7

8.0

10.0

13.0

14.7

16.9

28.0

25.7

24.3

23.4

23.4

FY07

FY08

FY09

FY10E

FY11E

17.0

42.0

29.6

20.0

18.4

Net revenues growth

15.3

44.7

24.5

17.7

16.8

Opex growth

18.1

17.9

5.1

9.9

10.0

Dividend pay out (%) Growth metrics (%) Year to March Net interest income

PPP growth Provisions growth PAT growth

14.5 (70.6)

53.6 113.3

29.4

19.3

18.1

(65.3)

89.2

181.2

33.8

38.7

37.4

17.4

15.2

FY07

FY08

FY09

FY10E

FY11E

Operating ratios (%) Year to March Yield on assets

9.2

10.3

11.1

10.6

10.3

Yield on advances

9.3

10.3

11.1

10.6

10.3

Cost of funds

7.4

8.1

8.8

8.4

8.1 2.2

Spread

1.9

2.2

2.3

2.2

Net interest margins

2.4

2.8

2.9

2.8

2.8

Cost-income

25.0

20.4

17.2

16.1

15.1

Tax rate

21.1

27.3

26.8

27.1

25.8

Edelweiss Securities Limited 5

LIC Housing Finance

Balance sheet As on 31st March

(INR mn) FY07

FY08

FY09E

FY10E

FY11E

LIABILITIES Equity capital

850

850

850

850

850

2,533

2,533

2,533

2,533

2,533

Reserves & surplus

12,056

14,934

18,960

23,744

29,258

Net worth

15,438

18,317

22,343

27,127

32,641

157

1,630

3,141

5,199 352,186

Share premium

Total deposits Secured Loans

146,770

191,134

237,776

292,116

Unsecured Loans

16,557

12,153

16,195

19,237

22,630

Total liabilities

178,764

221,761

277,943

341,621

412,656

175,635

219,364

276,784

340,410

410,013

2,061

7,746

6,119

5,423

4,576

ASSETS Loans Investments Current assets

9,074

5,214

6,819

8,976

7,689

Current liabilities

9,076

11,792

13,102

14,618

11,091

(6,578)

(6,282)

(5,642)

(3,402)

Net current assets

(2)

Fixed assets (net block)

236

300

277

245

134

Other assets

834

929

1,046

1,185

1,335

178,764

221,761

277,943

341,621

412,656

Loan growth

19.6

24.9

26.2

23.0

20.4

EA growth

18.3

24.1

25.4

23.0

20.9 1.3

Total assets Balance sheet ratios (%)

Gross NPA ratio

2.6

1.7

1.1

1.1

Net NPA ratio

1.3

0.6

0.2

0.3

0.5

51.2

62.2

80.9

70.0

62.0

FY07

FY08

FY09

FY10E

Sanctions (INR mn)

61,050

86,179

108,984

130,780

154,321

Disbursements (INR mn)

51,210

70,715

87,619

105,143

124,069

83.9

82.1

80.4

80.4

80.4

4.6

38.1

23.9

20.0

18.0

19.4

41.2

26.5

20.0

18.0

Provision coverage Sanctions and disbursements Year to March

Disbursements to sanction ratio (%) Disbursements growth (%) Sanctions growth (%)

Edelweiss Securities Limited 6

(INR mn) FY11E

LIC Housing Finance

RoE decomposition (%) Year to March

FY07

FY08

FY09

FY10E

FY11E

Net interest income/assets

2.4

2.8

2.9

2.8

2.8

Non interest income/assets

0.6

0.8

0.6

0.6

0.5

Investment gains/assets

0.0

0.0

0.0

0.0

0.0

Net revenues/assets

3.0

3.6

3.6

3.4

3.3

Operating expense/assets

0.8

0.7

0.6

0.5

0.5

Provisions/assets

0.1

0.2

0.1

0.1

0.2

Taxes/assets

0.5

0.7

0.8

0.8

0.7

Total costs/assets

1.3

1.7

1.5

1.4

1.4

ROA

1.7

1.9

2.1

2.0

1.9

Equity/assets ROAE

8.8

8.5

8.2

8.0

8.0

19.3

22.9

26.2

25.3

24.1

FY07

FY08

FY09

FY10E

FY11E

Valuation metrics Year to March Diluted EPS (INR)

32.9

45.6

62.6

73.5

84.7

EPS growth (%)

33.8

38.7

37.3

17.4

15.2

Book value per share (INR)

181.6

215.5

262.9

319.1

384.0

Adjusted book value per share (INR)

163.4

203.9

258.2

310.1

367.8

13.6

9.8

7.1

6.1

5.3

2.5

2.1

1.7

1.4

1.2

Diluted P/E (x) Price/ BV (x) Price/ Adj. BV (x)

2.7

2.2

1.7

1.4

1.2

Dividend yield (%)

1.8

2.2

2.9

3.3

3.8

Valuation metrics (considering 15% equity dilution) FY07

FY08

FY09

FY10E

FY11E

Diluted EPS (INR)

Year to March

32.9

45.6

62.6

65.7

77.4

EPS growth (%)

33.8

38.7

37.3

5.0

17.8

Book value per share (INR)

181.6

215.5

262.9

337.6

396.9

Adjusted book value per share (INR)

163.4

203.9

258.2

329.7

382.8

13.6

9.8

7.1

6.8

5.8

Price/ BV (x)

2.5

2.1

1.7

1.3

1.1

Price/ Adj. BV (x) Dividend yield (%)

2.7 1.8

2.2 2.2

1.7 2.9

1.4 2.9

1.2 3.5

Diluted P/E (x)

Edelweiss Securities Limited 7

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected]

Naresh Kothari

Co-Head

Institutional Equities

[email protected]

+91 22 2286 4246

Vikas Khemani

Co-Head

Institutional Equities

[email protected]

+91 22 2286 4206

Nischal Maheshwari

Head

[email protected]

+91 22 6623 3411

Research

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Nov-08 Dec-08

Sep-08 Oct-08

Aug-08

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May-08

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Edelweiss Research Coverage Universe

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