CMP Rs265, Target Rs304, Upside 14.6%
Leading housing financier; brisk loan growth to continue
Driven by macro drivers of rising affordability and increasing urbanization and indigenous advantages of wide distribution, superior service quality, product improvisation and competitive pricing, LIC Housing Finance (LICHF) has witnessed an impressive 31.6% loan CAGR over FY09-12. It is one of the leading housing finance companies currently with outstanding book at Rs691bn and market share of ~10%. Individual loan portfolio comprises 96% of the book and has witnessed robust 33.4% CAGR over FY09-12. The residual 4% book is loans to project developers having shorter maturities but carrying significantly higher rates. Strong loan growth would likely continue underpinned by persistent traction in individual home loans and revival in project loan disbursals.
NIM to rebound in the medium term
LICHF’s NIM has declined by 135bps over the past six quarters and stood at a multi-quarter low of 2.1% in Q2 FY13. Margin compression was driven by steep increase in funding cost, partial inertia in loan yield (a large portion of disbursals over FY10-12 came from products having fixed rate in initial years) and significant decline in contribution of project loans. We believe NIM is near its cyclical bottom and is set to improve in ensuing quarters aided by upward re-pricing of Rs100-120bn Fix-o-Floaty loans (by at least 200bps), cyclical decline in funding cost and increase in the share of project loans. Recent capital raising (Rs8.1bn) from parent and planned QIP (~Rs12bn) would also support margin.
Asset quality intact; RoA delivery to improve
LICHF enjoys superior asset quality with Gross NPA ratio at 0.6% at end-Q2 FY13. In the individual loan segment, granularity in loan book (average ticket size of Rs1.5-1.6mn), substantial exposure to salaried class/end-user segment, lower average LTV (50-60%) and stringent credit assessment underscore lower delinquency rates. Even in the developer portfolio, gross NPAs of LICHF are lower than the banking industry. Based on our presumption of brisk loan growth, material improvement in margin and stable operating and credit costs, we believe that RoA delivery would start improving from H2 FY13.