BSE SENSEX
27,836
S&P CNX
8,592
LIC Housing Finance
CMP: INR558
Re-rating on the cards
25 August 2016
Update
| Sector:
Financials
TP: INR761 (+36%)
Buy
Falling yields favor LICHF due to liability mix
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
12M Avg Val (INR m)
Free float (%)
Financials Snapshot (INR b)
Y/E Mar
2016
2017E
2018E
LICHF IN
505.0
567 / 389
8/16/21
281.8
4.2
1,108
59.7
LIC Housing Finance (LICHF) stands to benefit significantly from the growing
demand of mortgages coupled with falling interest rates. Over the past two years,
improvement in borrowing profile has led to margin expansion – we expect this to
continue. Its NPA ratio is comparable to the best in the industry. Post an earnings
growth of 22% in FY16, we expect this momentum to sustain and model 23% PAT
CAGR over FY16-19. ROE is set to cross 20% in FY17 which would drive further re-
rating. The stock trades at 2.2x FY18 P/B, a discount to peers.
Buy
with a TP of
INR761 (3x FY18E P/B).
Improving spreads in highly competitive environment
Over the past two years, LICHF diversified its borrowing profile significantly. Share
of bank borrowings declined from ~25% then to ~10% now while the share of
market borrowings increased proportionately. With improving system-wide
liquidity over the past 4-5 months, bond yields have come off significantly (~40-
50bp). This is beneficial for LICHF as market borrowings comprise almost 90% of its
total borrowings. With NCDs worth INR222b (~20% of total outstanding
borrowings) maturing in FY17 and FY18, we believe that LICHF could save ~30bp in
cost of funds over next two years. LICHF is originating pure floating loans at ~9.5%
currently, while other home loans are originated at ~10%. These rates are
competitive with banks and LICHF would not need to reduce rates substantially
further. While incremental spreads have increased over the past few quarters to
~2.0% due to higher mix of LAP, we believe these levels should sustain given
above-mentioned tailwinds, despite stable LAP share.
NII
PPP
Adj. PAT
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh (INR)
RoAA (%)
RoE (%)
P/E (x)
P/BV (x)
29.4
27.1
16.4
32.5
21.8
181.1
1.5
19.3
17.2
3.1
36.8
34.1
20.4
40.4
24.4
213.6
1.5
20.5
13.8
2.6
44.0
40.5
25.3
50.1
24.0
253.8
1.6
21.4
11.1
2.2
Shareholding pattern (%)
As On
Jun-16 Mar-16 Jun-15
Promoter
40.3
40.3
40.3
DII
37.6
6.1
7.3
FII
0.0
27.5
37.4
Others
22.1
26.0
15.1
FII Includes depository receipts
Stock Performance (1-year)
LIC Housing Fin.
Sensex - Rebased
580
520
460
400
340
Robust loan growth to continue
LICHF has a granular loan book with retail home loans comprising ~88% of the total
book and the LAP book comprising an additional ~10% of the total book. Since
around two-thirds of loan sourcing is from LIC agents, the company is able access
the length and breadth of the country. We believe LICHF will be a big beneficiary of
the tax incentives announced in the FY17 Union Budget. We expect loan book Cagr
of 19% over FY16-19E.
Asset quality has remained strong consistently
LICHF has robust asset quality, with GNPA of 0.59% (Individual segment: 0.35%)
and NNPA of 0.29%. This compares very well with its private-sector HFC peers. The
company has sustained good asset quality over the past several years due to its
stringent underwriting discipline. Loan-to-value ratio on incremental
disbursements is 47% while installment-to-income ratio is 32%, down from 34% in
FY15. Management commented that from more than INR2tn disbursed to date, net
credit losses have been only INR600m. Asset quality is expected to remain stable,
which would support RoE and drive re-rating.
Sunesh Khanna
(Sunesh.Khanna@MotilalOswal.com); +91 22 3982 5521
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com)/Piran
Engineer
(Piran.Engineer@MotilalOswal.com); +91 22 6129 1539
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.