LIC Housing Finance Ltd BUY. Sector - BFSI. Microsec Research. Investment Rationale

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1 LIC Housing Finance Ltd BUY Sector - BFSI We rate LIC Housing Finance Ltd (LICHFL) a BUY. LICHFL is one of the leading players in the mortgage market. The company which has been in existence since 1989 is promoted by Life Insurance Corporation (LIC). The main objective of the company is to provide long term finance to individuals for purchase/construction/repair and renovation of new/existing flats. Investment Rationale Robust Business Growth: Despite high inflation coupled with high cost of capital scenario, LIC Housing has maintained its earnings growth. The company s total income stood at INR crores in FY12, registered a YoY growth of 27.65%. LICHF registered CAGR growth of 29.88% on total income over the period of Moreover, the company has reported a YoY growth of ~26% in the quarter ended June Robust Growth in Profitability: LICHF s strong sustainable business structure along with strong parent and thoughtful business activities has helped the company to absorb the opportunity in the industry, which has boosted its topline and bottomline growth. Operating profit has grown at a CAGR of 30.08% over the period of Whereas, Profit After Tax (PAT) grew at a CAGR of 23.81% over the same period. Increasing Market Share in Mortgage Market: Despite an overall slowdown in industry due to high mortgage rates and high price level specially in Tier 1 cities, LIC Housing has still been able to grow at higher rate than industry and increased its market share. The outstanding mortgage portfolio of the company in FY12 was INR crores as against INR crores in FY11, registered a growth of 23.47%. Moreover, as of Q1FY13, company s individual loan portfolio stood INR62361 crores whereas, project loan stood at INR3283 crores, which is in the proportion of 19:1. Increasing Share of High Yielding Developer Loan: The share of developer loan has declined to 5% in FY12 from 10.9% in FY10. However, management expects to bring its loan book back to its historical level. We expect, company s move is likely to improve business margins. Generally, developer loans yield are 3-4% higher as compared with the individual loans. A Analyst: Sanjeev Jain Phone: Id: sjain@microsec.in

2 Industry Background After years of unprecedented price rise, property markets experienced some moderation in demand in the higher segment. High property prices and high interest rates scenario coupled with slowing economy have resulted in some slowdown in housing demand. However, the mid and small segment housing continues to demand. Also, the renewed effort from the government to priorities low cost housing construction and improve the enabling conditions, demand of low cost housing is likely improve, positively impacting LICHF. Also, the industry itself may see revival if interest rates decline. However, with an expectation of economic recovery in near term, Housing finance industry is all set for a strong growth in coming years. Valuation and Recommendation LIC Housing Finance is well positioned to deliver sustainable and profitable growth backed by strong disbursement in the mid and small housing segment. At the CMP of INR249.90, the stock is trading at FY12 PE of 13.02x and P/BV of 2.22x. The current valuation of 1.87x FY13E and 1.59x FY14E Book Value looks attractive. We recommend a BUY on the stock with a target price of Rs.317 (2.02x FY14E BV) with an upside of ~27% from the current level with an investment horizon of 18 months. Key Risks Competition from Banks Banks are dominant players in the housing finance segment having more than ~60% market share. Presently, banks have increased focus on housing loan retail segment and offering attractive rates. LIC Housing may loose its market share in case banks become more aggressive in the home loan segment. Increasing Lending Rate may Hurt Credit Growth Interest rates remain high due to elevated interest rates. This has somewhat decreased the purchasing power of the masses, impacting housing demand. If interest rates continue to remain high, growth housing demand may be affected.

3 : Phone No.: Ajay Jaiswal: President, Investment Strategies, Head of Research: Fundamental Research Name Sectors Designation ID Nitin Prakash Daga IT, Telecom & Entertainment AVP-Research Naveen Vyas Midcaps, Market Strategies AVP-Research Gargi Deb Agriculture & Pharma Research Analyst Sutapa Roy Economy Research Analyst Sanjeev Jain BFSI Research Analyst Anik Das Mid Cap Research Analyst Neha Majithia Mid Cap Research Analyst Soumyadip Raha Mid Cap Executive Research Saroj Singh Mid Cap Executive Research Technical & Derivative Research Vinit Pagaria Derivatives & Technical VP Ranajit Saha Technical Research Sr. Manager Institutional Desk Dhruva Mittal Institutional Equities Sr. Manager Puja Shah Institutional Desk Dealer PMS Division Siddharth Sedani PMS Research AVP Research: Financial Planning Division Shrivardhan Kedia FPD Products Manager Research Research-Support Subhabrata Boral Research Support Asst. Manager Technology Recommendation Expected absolute returns (%) over 12 months Strong Buy >20% Buy between 10% and 20% Hold between 0% and 10% Underperform between 0% and -10% Sell < -10% MICROSEC RESEARCH IS ALSO ACCESSIBLE ON BLOOMBERG AT <MCLI>

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