LIC Housing Finance. CMP: INR520 TP: INR627 (+21%) Buy

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1 BSE SENSEX S&P CNX 27, Motilal Oswal values your support in the Asiamoney Brokers Poll 2016 for India Research, Sales and Trading team. We request your ballot. Bloomberg LICHF IN Equity Shares (m) M.Cap.(INRb)/(USDb) 263.6/ Week Range (INR) 603 / 367 1, 6, 12 Rel. Per (%) 5/-3/12 Avg Val, INRm 1087 Free float (%) 59.7 Financials & Valuations (INR b) Y/E Mar E 2018E NII PPP Adj. PAT Adj. EPS (INR) EPS Gr. (%) BV/Sh (INR) RoAA (%) RoE (%) Payout (%) P/E (x) P/BV (x) Div. Yield (%) July QFY17 Results Update Sector: Financials LIC Housing Finance CMP: INR520 TP: INR627 (+21%) Buy LIC Housing Finance s (LICHF) 1QFY17 net profit grew 6.7% YoY to INR4.1b, (8% miss). While net income was in line with estimates, higher one-off provision of INR920m due to ageing corporate accounts and one-off provision of INR300m in opex led to lower-than-expected PAT. Loan growth of 15.4% YoY (+1.8% QoQ) was led by non-core assets. While retail mortgage grew 9% YoY and 1% QoQ, LAP book growth stood at +100% YoY due to a lower base and continued traction in the segment, and the share of LAP stood 9.3% (+50bp QoQ). Developer loans grew at a healthy rate of +38%, with their share in overall loans increasing to 2.95% from 2.45% in the year-ago period. Overall disbursements grew 23% YoY to INR75.4b. Provisions for the quarter increased to INR1.16b, led by one-off provision of INR920m toward ageing developer loans; LICHF does not expect further provision on this, as 70% of the developer book is now provided for. Higher operating expenses can be attributed to: a) INR200m of one-off employee expenses toward salary arrears, and b) INR100m on account of pension provisions. NIM of 2.61% was up 20bp YoY, whereas incremental spread improved 24bp YoY to1.98%. We expect NIM (calculated) to expand marginally in FY2017 to 2.64% as borrowing cost benefit continues to play out and loan mix shift toward non-retail housing loans limits the decline in average loan yields. Valuation and view: The mortgage market remains in a hyper-competitive mode, which is affecting growth. However, given the continuous decline in wholesale rates and stable yields (supported by strong growth in high-yielding LAP), LICHF is able to report superior spread and margins, resulting in strong earnings growth. Meanwhile, the spreads and margin performance remains the key monitorable. We largely maintain our estimates; the stock is trading at 2.1x FY18 BV. Maintain Buy. (INR Million) LICHF: Quarterly Performance Y/E March FY16 FY17 FY16 FY17E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Interest Income 29,174 30,260 31,018 32,057 33,263 35,002 36,463 37, , ,750 Interest Expenses 22,585 23,091 23,549 23,843 25,018 26,144 27,059 27,349 93, ,570 Net Interest Income 6,589 7,169 7,469 8,214 8,245 8,858 9,404 9,672 29,441 36,180 YoY Growth (%) Fees and other income ,346 2,814 Net Income 7,069 7,803 8,018 8,897 8,780 9,558 10,004 10,651 31,787 38,994 YoY Growth (%) Operating Expenses 835 1,060 1,214 1,578 1,382 1,281 1,281 1,616 4,687 5,560 Operating Profit 6,234 6,743 6,804 7,319 7,399 8,277 8,723 9,035 27,100 33,434 YoY Growth (%) Provisions and Cont , ,465 2,400 Profit before Tax 5,790 6,442 6,460 6,943 6,234 7,777 8,223 8,799 25,636 31,034 Tax Provisions 1,969 2,325 2,271 2,463 2,156 2,683 2,837 3,186 9,028 10,862 Net Profit 3,821 4,117 4,189 4,480 4,078 5,094 5,386 5,613 16,608 20,172 YoY Growth (%) Adj PAT (Post Tax) 3,821 4,117 4,189 4,480 4,078 5,094 5,386 5,613 16,401 19,964 YoY Growth (%) Loan Growth (%) Borrowings Growth (%) Cost to Income Ratio (%) Tax Rate (%) E: MOSL Estimates Sunesh Khanna (Sunesh.Khanna@MotilalOswal.com); Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Exhibit 1: Operating performance v/s our estimates and reasons for deviation (INR m) Y/e March 1QFY17A 1QFY17E Var. (%) Comments Interest Income 33,263 32,592 2 Interest Expenses 25,018 24,677 1 Net Interest Income 8,245 7,915 4 NIMs of 261bp; up 20bp YoY YoY Gr. (%) Fees and other income Net Income 8,780 8,565 3 In-Line YoY Gr. (%) Operating Expenses 1,382 1,281 8 INR300m of one-off in employees expenses Operating Profit 7,399 7,284 2 YoY Gr. (%) Provisions and Cont. 1, Ageing of developer NPLs, led to higher provisions Profit before Tax 6,234 6,784-8 Tax Provisions 2,156 2,341-8 Tax Rate 34.6% Net Profit 4,078 4,444-8 YoY Gr. (%) One-offs in provision and opex led to PAT miss Loan growth driven by non-core assets Loan growth of 15% YoY (+1.8% QoQ) in line with our estimate; Individual loans grew 14.8% YoY and 1.6% QoQ to INR1.24t; however ex LAP the retail home loan grew 9.3% YoY. The growth in individual segment was largely driven by loan against property, which grew +100% YoY and 7%QoQ. LAP book s share has grown 50bp sequentially to 9.3% v/s 8.8% in 4QFY16 and 4.8% in 1QFY16. Developer loans grew at a healthy rate of 39%, continuing the momentum from the last quarter, and its share in overall loans increased to 2.95% v/s 2.45% a year ago. Overall disbursements grew 23% YoY to INR75.4b and individual disbursement grew 19% YoY to INR70.6b; largely driven by LAP. Margins improve as borrowing cost benefits play out Net interest income stood at INR8.2b (4% above est.) due to increase in margins by 20bps YoY; Calc. book spreads improved 24bp YoY to 1.6% whereas incremental spreads were at 1.98% v/s 1.74% in 1QFY16, whereas margins stood at 2.61% up 20bp YoY. Strong growth in high yielding LAP segment coupled with decline in cost of funds continues to drive spreads improvement. Prepayments rate seemed to have stabilized (led by management s efforts to retain customers by offering them reset at lower levels) but still remains elevated (11.5% of the opening book v/s 9.8% in 1QFY16) signifying LICHF losing some business to competition and exerting pressure on the company to reduce lending rates in-line with banks and other HFCs. Asset quality stable; Spike in provision led by ageing corporate NPLs GNPA increased sequentially from 0.45% in 4QFY16 to 0.59% in1qfy17 while NNPA increased from 0.22% to 0.28% over the same time period. However, this is a seasonal trend. Asset quality has been largely stable on a YoY basis. The company incurred a one-time provision charge of INR920mn on one developer loan 18 July

3 Barring one account, all developer loans that are NPA have been fully provided for. Management does not expect further provision on this, as 70% of the developer book is now provided for. Additional provision charge on that account to be in the range of INR mn. Higher opex on account of wage arrears The company incurred an additional expense of INR200mn due to wage arrears accrued over the past five years. This is expected to impact opex in 2QFY17 too, albeit to a much smaller extent. The company also incurred an additional provision expense of INR100mn in the quarter. Other highlights a) LTV and installment to net income ratio on incremental sanctions stood at 46.8%/31.7%. c) Customer profile constitutes 82% salaried borrowers (down from 84% in FY16) and 18% self-employed borrowers. d) 46% of business originates from the outskirts of top 7 cities. e) Incremental average ticket size is INR1.9m (largely unchanged YoY). f) 56% of the outstanding portfolio is on floating rate, up from 47% in the last quarter, due to introduction of a new pure floating rate loan product. Valuation and view Mortgages markets are in hyper competitive mode which is leading to moderation in retail loan segment. However, LICHF earnings growth is likely to remain at +21% for FY17. The strong growth is on back of continuous decline in wholesale rates and stable yields -supported by +100% growth in high yielding loan against property segment. However, sharp decline in retail loan growth (at 10% YoY) and continuously increasing pre-payment rates (at 11.5% v/s 8.4% in FY15) is worrisome. Lower retail loan growth and such sharp surge in pre-payments are indicating immense competitive pressure on LIHF and most probably it is losing some business to competition in its core segment. While earnings trajectory is likely to remain healthy supported by declining funding costs and strong growth in high yielding LAP segment; such strong growth in this segment could be a potential risk going ahead. We largely maintain our earnings estimates for FY17/18 respectively. We expect LICHF to post earning CAGR of 22.3% over FY16-18E and RoAs/RoEs of 1.55%/21%. Maintain Buy with a target price of INR627 (2.5x FY18E BV). 18 July

4 Exhibit 2: We largely maintain our earnings estimates INR B Old Est. Revised Est. % Change FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 NII Other Income Net Income Operating Expenses Operating Profits Provisions PBT Tax PAT Adj. PAT* Spreads (%) RoAA (%) RoAE (%) Source: MOSL LICHF 1QFY17 Concall Highlights Focus on core mortgage product from hereon; LAP book growth to slow down Increase focus on core individual home loans to drive loan book growth. Expect to grow total loan book at 15% YoY with individual home loans growing at 17-18%+ YoY in FY17. Target LAP + Developer loans at 13% of the total loan book from existing +12% Introduced a new pure floating rate product during the quarter; 70% of incremental disbursements happened were pure floating loans. Disbursements in individual home loan segment increased 14% YoY from INR52bn in 1QFY16 to INR59bn in 1QFY17. Growth in individual home loan disbursements in FY16 was 10%. The pickup has been led primarily by Southern and Western India. Moreover there has been a good uptick in customer inquiries. Disbursements in LAP segment in 1QFY17 was INR11.42bn, of which 40-45% was from the top 10 cities. LIC agents account for 66% of LAP disbursements while DSAs account for another 20%. Margins improved despite reduction in lending rates NIMs were up 20bps YoY, driven by changing product mix towards high yielding LAP and developer loans as well as 30bpYoY reduction in cost of funds. No change in borrowing mix. Expect share of bank borrowings to be ~10% of total borrowings. The company intends to borrow INR400bn in FY17, of which 80% would be from NCDs. Margins will be sustained due to the impact of rapid growth in the LAP + developer loans portfolio last year. Incremental yield on the LAP book is 11.5% while that for developer loans is 13-14%. Incremental yields for pure floating rate product is 9.5% while that for the other mortgage products is around 10%. Pure floating product will comprise 70% of total individual home loan disbursements. 18 July

5 INR150bn worth of loans is expected to be re-priced in FY17, under the fixed-tofloating conversion product. Management expects reduction in cost of funds and build-up of LAP book in last 2 years to drive margin expansion. Opex during the quarter increased due to wage arrears and pension provisions LICHF incurred an extra expense of INR200mn due to wage arrears. While the company expects an impact in 2QFY17 also, it is expected to be small. Incurred an additional provision expense of INR100mn during the quarter towards pension provisions. Higher provisions towards ageing developer loan portfolio; Developer portfolio now largely provided GNPA increased sequentially from 0.45% in 4QFY16 to 0.59% in1qfy17 while NNPA increased from 0.22% to 0.28% over the same time period. However, this is a seasonal trend. Asset quality has been largely stable on a YoY basis. The company incurred a one-time provision charge of INR920mn on one developer loan. Barring one account, all developer loans that are NPA have been fully provided for. Management expects the incremental provision charge on that account to be in the range of INR mn. GNPA in the individual loan segment amounts to INR4.34bn while that for the developer loans segment amounts to INR3.22bn. Provisions held against NPAs in the LAP + Developer loans segment is around INR2.2bn on a portfolio of INR 3.2b. Other highlights Average ticket size of LAP is INR1.2mn. Interest rate on reset is for existing customers is 9.9%. 18 July

6 Exhibit 3: Quarterly Snapshot FY15 FY16 FY17 Variation,% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q QoQ YoY Profit and Loss (INR m) Interest Income 24,826 25,961 26,678 28,002 29,174 30,260 31,018 32,057 33, Individual 24,013 24,918 25,829 27,117 28,291 29,362 30,050 31,076 32, Projects 813 1, , Interest Expenses 19,764 20,643 21,192 21,504 22,585 23,091 23,549 23,843 25, Net Interest Income 5,062 5,318 5,486 6,498 6,589 7,169 7,469 8,214 8, Fees and others Net Income 5,672 5,944 6,166 7,102 7,069 7,803 8,018 8,897 8, Operating Expenses , ,060 1,214 1,578 1, Employee Others , Operating Profits 4,973 4,980 5,283 5,763 6,234 6,743 6,804 7,319 7, Provisions , PBT 4,882 5,170 5,215 5,753 5,790 6,442 6,460 6,943 6, Taxes 1,659 1,756 1,772 1,971 1,969 2,325 2,271 2,463 2, PAT 3,223 3,414 3,443 3,782 3,821 4,117 4,189 4,480 4, Asset Quality GNPA (INR m) 7,534 6,110 5,795 4,947 6,591 6,830 6,820 5,678 7, NNPA (INR m) 4,570 3,167 3,166 2,344 2,581 3,690 3,740 2,705 4, Gross NPAs (%) Individual Projects Net NPAs (%) PCR (Calculated, %) Margins (%) - (calculated) Yield on loans Cost of funds Spreads NIMs (reported) Other Details Cost to Income (%) Tax Rate (%) July

7 Story in charts Exhibit 4: Individual disbursements grew 19% YoY (INR b) Exhibit 5: Project loan disb. picks up sharply at +160% (INR b) FY14 FY15 FY16 FY FY14 FY15 FY16 FY Q 2Q 3Q 4Q Exhibit 6: Loan growth continues to moderate 1Q 2Q 3Q 4Q Exhibit 7: Reported margins improve 20bp YoY (%) Loans (INR b) YoY Gr. (%) QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Exhibit 8: Asset quality remains stable YoY (%) GNPA (%) NNPA (%) Exhibit 9: Project loans showing signs of pick up (%) Individual Home Loan (%) Developer Loan (%) QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 18 July

8 Exhibit 10: Financials: Valuation Metrics Rating 66 CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%) (INR) (USDb) FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 ICICIBC* Buy HDFCB Buy 1, AXSB Buy KMB* Buy YES Buy 1, IIB Buy 1, IDFC Bk Buy FB Neutral DCBB Buy JKBK Neutral SIB Buy Private Aggregate SBIN (cons)* Buy PNB Neutral BOI Neutral BOB Buy CBK Neutral UNBK Buy OBC Neutral INBK Buy ANDB Buy Public Aggregate Banks Aggregate HDFC* Buy 1, LICHF Buy IHFL Buy GRHF Buy REPCO Buy DEWH Buy Housing Finance RECL Neutral POWF Neutral Infra Finance SHTF Buy 1, MMFS Buy BAF Buy 8, ,631 1, MUTH Buy SKSM Buy Asset Finance NBFC Aggregate Financials *Multiples adj. for value of key ventures/investments; For ICICI Bank & HDFC Ltd BV is adjusted for investments in subsidiaries Source: MOSL 18 July

9 Financials and valuations Income Statement (INR Million) Y/E March E 2018E Interest Income 44,697 59,827 74,591 90, , , , ,692 Interest Expense 30,977 45,911 59,246 71,744 83,102 93, , ,071 Net Interest Income 13,719 13,916 15,345 18,990 22,364 29,441 36,180 41,622 Change (%) Fee Income 1,501 1,322 1,549 1,080 1,227 1,453 1,821 2,163 Income from Investments , ,093 Other Income 1, Net Income 17,710 16,240 17,343 21,603 24,749 31,787 38,994 44,878 Change (%) Operating Expenses 2,162 2,371 2,819 3,133 3,885 4,688 5,560 6,508 Operating Income 15,548 13,870 14,524 18,470 20,864 27,099 33,434 38,370 Change (%) Provisions/write offs 2,609 1, ,463 2,400 1,825 PBT 12,939 12,309 13,736 18,255 20,884 25,635 31,034 36,545 Tax 3,197 3,167 3,504 5,083 7,158 9,028 10,862 12,425 Tax Rate (%) PAT 9,743 9,142 10,232 13,172 13,727 16,608 20,172 24,120 Change (%) Adjusted PAT 10,285 10,011 10,232 12,017 13,466 16,401 19,964 23,909 Change (%) Proposed Dividend 1,932 2,112 2,244 2,657 3,022 3,386 4,113 4,917 Balance Sheet (INR Million) Y/E March E 2018E Capital 950 1,010 1,010 1,010 1,010 1,010 1,010 1,010 Reserves & Surplus 40,741 55,812 63,803 74,319 77,174 90, , ,712 Net Worth 41,691 56,822 64,813 75,329 78,184 91, , ,722 Borrowings 451, , , , ,319 1,109,360 1,374,642 1,639,115 Change (%) Total Liabilities 493, , , ,685 1,043,503 1,200,820 1,482,162 1,765,837 Investments 14,032 13,750 18,673 1,993 2,371 2,609 2,869 3,099 Change (%) Loans 510, , , ,410 1,083,610 1,251,730 1,494,177 1,781,647 Change (%) Net Fixed Assets Net Current Assets -31,949-27,481-44,963-20,474-43,275-54,368-15,776-19,834 Total Assets 493, , , ,685 1,043,503 1,200,820 1,482,162 1,765,837 E: MOSL Estimates 18 July

10 Financials and valuations Ratios Y/E March E 2018E Spreads Analysis (%) Avg. Yield on loans Avg. Yield on Earning Assets Avg. Cost-Int. Bear. Liab Int. Spread on Hsg. Loans Net Int. Margin on Hsg. Loans Profitability Ratios (%) Adj RoAE Adj RoAA Int. Expended/Int.Earned Other Inc./Net Income Efficiency Ratios (%) Fees/Operating income Op. Exps./Net Income Empl. Cost/Op. Exps Asset-Liability Profile (%) Loans/Borrowings Ratio Debt/Equity (x) Gross NPAs (Rs m) 2,420 2,652 4,712 6,090 4,947 5,489 6,114 6,712 Gross NPAs to Adv Net NPAs (Rs m) ,953 3,534 2,344 2,744 3,057 3,356 Net NPAs to Adv CAR Valuation Book Value (INR) Growth (%) Price-BV (x) Adjusted BV (INR) Price-ABV (x) EPS (INR) Growth (%) Price-Earnings (x) Adj. EPS (INR) Growth (%) Price-Earnings (x) Dividend Per Share Dividend Yield (%) E: MOSL Estimates 18 July

11 Corporate profile Company description LIC Housing Finance (LICHF) is the second largest housing finance company which 10% mortgage market share in India. LIC is promoted by government owned largest insurance company the LIC of India. LICHF individual housing loans, loan against property and loans to developers as project finance. LICHF operates through a network of 234 marketing offices and a large number of DSAs and Home Loan Agents. It also has representative office in Dubai and Kuwait and has loan book of INR1.1t as on Jun 15. Exhibit 10: Sensex rebased Exhibit 11: Shareholding pattern (%) Mar-16 Dec-15 Mar-15 Promoter DII FII Others Note: FII Includes depository receipts Exhibit 12: Top holders Holder Name % Holding Bank Muscat S A O G A/C Bankmuscat 2.3 Mawer International Equity Fund 1.8 Government Of Singapore - E 1.7 Hdfcsl Shareholders Solvency Margin 1.7 Birla Sun Life Trustee Company Private 1.2 Exhibit 13: Top management Name Designation Exhibit 14: Directors Name Name S K Roy Chairman S K Roy Savita Singh* Sunita Sharma Managing Director & CEO Sunita Sharma Jagdish Capoor* S Ravi* K Narasimha Murthy* T V Rao* S B Mainak B N Shukla* Dharmendra Bhandari *Independent Exhibit 15: Auditors Name Chokshi & Chokshi Shah Gupta & Co Statutory Statutory Type Exhibit 16: MOSL forecast v/s consensus EPS (INR) MOSL forecast Consensus forecast Variation (%) FY FY July

12 PRODUCT GALLERY Our recent reports on LICHF Our recent reports on Financial sector Our recent reports on other Financial companies

13 N O T E S 18 July

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