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1 April 26, 2016 LIC Housing Finance Ltd (LICHFL) No. of shares (m) Mkt cap (Rs crs/$m) 23056/ Current price (Rs/$) 457/6.9 Price target (Rs/$) 578/ W H/L (Rs.) 524/389 Book Value (Rs/$) 181/2.7 Beta 1.4 Daily volume (avg. monthly) P/BV (FY17e/18e) 2.1/1.8 P/E (FY17e/18e) 11.7/9.9 Cost to Income (FY16/17e/18e) 14.7/15.0/15.3 EPS growth (FY16/17e/18e) 19.8/18.6/18.3 NIM (FY16/17e/18e) 2.6/2.6/2.7 ROE (FY16/17e/18e) 19.6/19.8/19.9 ROA(FY16/17e/18e) 14./1.4/1.5 D/E ratio (FY16/17e/18e) 12.1/11.8/11.3 BSE Code NSE Code LICHSGFIN Bloomberg LICHF IN Reuters LICH.BO Shareholding pattern % Promoters 40.3 MFs / Banks / FIs 15.7 Foreign 35.0 Govt. Holding 0.0 Total Public 9.0 Total As on Mar 31, 2016 Source: LICHFL Recommendation BUY Phone: + 91 (33) E- mail: research@cdequi.com Company Brief LIC Housing provides long term finance to individuals/businesses for purchase or construction of house or flat for residential purpose/repair or renovation of existing flat/houses. It also provides finance on existing property for business/personal needs and also gives loans to professionals. Highlights Government of India s much talked up scheme like "Housing for All by 2022 would doubtlessly boost growth of housing finance industry. Backed by State subsidy, the government proposes to set up 110 million houses. The main focus will be on the slum redevelopment where land will be pooled and given to private real estate developers. With new initiatives like priority sector lending, target is to bring housing loans up to Rs 50 lakhs under affordable housing. To race ahead of the competition, LICHFL increased its focus on the high yield non-core portfolio. In FY16, the share of LAP (loan against property) portfolio increased to 8.8% from 6.4% in FY15. The smaller ticket size on the LAP portfolio keeps the yield to be around 200 bps higher than the home loans. It has also designed a new product called hospital loans which will yield around 12% (yield on home loans 10-11%). LICHFL s healthy margin of 2.7% last quarter was the best the company has reported in the past 19 quarters and the improvement is mainly attributed to the change in product mix, low cost of funds and the conversion of floating rate loans to fixed rate loans. However, stiff competition in the market impacted the yields (10.9% in Q4FY16) as LICHFL had to keep the lending rate at lower levels. LICHFL also made movement towards market instruments improving its borrowing basket by reducing bank borrowings to 12.7% of the total mix (17.6% in FY15) and substituting it by cheaper NCDs, which constitutes 77.3% of the borrowings. This helped the company to keep the cost of funds low thereby supporting the expansion in margins. The stock currently trades at 2.1x FY17e BV (11.7x FY17e EPS) and 1.8x FY18e BV (9.9x FY18e EPS). LICHFL s renewed focus on boosting the high margin yielding LAP portfolio would galvanize its order book over the next few years. Healthy growth in loan book supplemented by marginal rise in NIMs would culminate in over 18% growth (annual) in earnings over the next two years; needless to mention its industry beating return on equity. We therefore assign buy rating with a target of Rs 578 based on 2.3x FY18e BV (average of last three years), over a period of 6-9 months. Figures (Rs crs) FY14 FY15 FY16 FY17e FY18e Net Interest Income Non Interest Income Pre-Provision Profits Net profit EPS(Rs) EPS growth (%)

2 [ Housing Finance Industry The launch of Housing-For-All by 2022 scheme in 2015 heralded a new era in the housing finance sector. It gave a muchneeded boost to the real estate and housing finance industry by creating an enabling and supportive environment for expanding credit flow and increasing home ownership. Under this urban housing mission, the Indian government would provide assistance ranging Rs 1 to 2.30 lakh per house under different components of the scheme including rehabilitation of slum dwellers using land as a resource, promotion of affordable housing in public-private partnership, credit linked subsidy for weaker sections and subsidy for beneficiary led individual house construction or enhancement. India's organized housing finance industry has a portfolio of approximately Rs 10.6 lakh crores. The figure though attractive, still accounts for only 8.4% of our country's GDP, significantly lesser in comparison to 20%-30% in countries like China and Malaysia. This scenario indicates the efforts that still need to be made in this sector. With such potential waiting to be tapped, the housing finance industry can look forward to a brighter future. The keen focus of the housing finance companies is on the affordable housing segment. They are at the forefront in catering to the financial needs of the under-banked masses in the rural and semi-urban areas through strong linkages with these segments. The year 2015 saw launch of new campaigns by HFCs to raise awareness about the home loans and innovative new products for the customers in the low income bracket. Keeping customer benefit and convenience in mind, HFCs added special features to their products such as the Over-Draft facility, enabling borrowers to earn optimal yield on their savings by reducing interest burden on home loans. Dewan Housing launched Wealth2Health an innovative deposit product to meet medical emergency of customers. Such initiatives gave a major fillip to the affordable housing and led to the development of eco-system of developers, customers, regulators and HFCs. Source: Thomas Reuters, Morgan Stanley estimates Source: European Mortgage Federation, ICRA, DHFL With ever increasing demand for housing in both urban and rural areas, policy based efforts are being initiated to encourage and make the sector more transparent, and so almost all the banks and financial institutions have been vigorously active in the arena to grab a bigger share of the market. The government has been at the forefront in pushing India s housing finance sector in Many new initiatives and policies were introduced to bring housing loans up to Rs. 50 lakhs under affordable housing and bringing loans up to Rs 28 lakh in urban and 25 lakhs in other centers under Priority Sector Lending. The increase in LTV (loan to value) ratio to 90% for loans upto 30 lakhs or less was another positive decision made by RBI (in Oct 2015). With the recent notification by the Finance Ministry, 41 housing finance companies are now approved under The Securitization and Reconstruction of Financial and Enforcement of Security Interest Act (SARFESAI) which is a significant step towards bringing HFCs at par with banks by enabling speedier loan recovery. One may also witness closer coordination between NHB and RBI to regulate, develop and meet the capital requirements of HFCs so that the purpose of disbursing finance at affordable rates for housing can be achieved instead of just growing outstanding loan book. 2 2

3 Company Profile LIC Housing Finance Ltd. (LICHFL) is one of the largest housing finance companies in India which was incorporated in June, 1989 under the Companies Act, The Company was promoted by LIC of India and went public in the year The Company launched its maiden GDR issue in 2004 and is listed on the Luxembourg Stock Exchange. The Company is registered with National Housing Bank and its core business is to provide long term finance for various housing needs. Source: LICHFL, CD Equisearch Geographical Presence The main objective of the company is to provide long term finance to individuals for purchase or construction of house or flat for residential purpose / repair and renovation of existing flat / houses. LIC Housing also provides finance on existing property for business / personal needs and also gives loans to professionals for purchase, construction of clinics, nursing homes, diagnostic centre, offices and for purchase of equipments. It also provides long term finance to persons engaged in the business of construction of houses or flats for residential purpose. The Company possesses one of the industry's most extensive marketing networks in India- registered and corporate office in Mumbai, 7 regional offices, 16 back offices, which conduct the credit appraisal and administrative functions and 234 marketing units across India. In addition the company has appointed over intermediaries to extend its marketing reach. It also has representative office in Kuwait and Dubai to cater to the NRIs there. Source: LICHFL Source: LICHFL, CD Equisearch LICHFL primarily lends to the salaried class people who accounts for 84% of the total customer profile (reducing it from 88% on March, 2015) and rest accounted by the self employed and others (see chart). It originates its business from LIC agents (64% of the total), direct sales agents (21%), customer relation associates (8%) and LICHFL Financial Services (see chart). Subsidiaries LICHFL Care Homes Limited: It is a wholly owned subsidiary of LICHFL whose basic purpose was to establish and operate assisted community living centres for the senior citizens. With life expectancy up and number of elderly citizens rising year after year, it is expected that demand for care-homes would also increase. As a result, the company is set on a growth trajectory keeping the vision for fulfillment of corporate social responsibility as the main focus. LICHFL Asset Management Company Limited: It was incorporated for undertaking the business of managing, advising, administering venture/mutual funds, unit trusts, investment trusts set up, formed or established in India or abroad and to act as financial and investment advisor. The Company has been appointed as Investment Manager to raise and manage the maiden Fund LICHFL Urban Development Fund. 3 3

4 LICHFL TRUSTEE Company Private Limited: It was incorporated to undertake the business of trusteeship. In the year 2010 the Company has registered LICHFL Urban Development Fund with SEBI as Venture Capital Fund (VCF) under the SEBI (Venture Capital Funds) Regulations, The Fund launched its maiden Scheme LICHFL Urban Development Fund (Fund) for which 30th March, 2013 was declared as Final Closure Date of the Fund after successfully garnering fund raising of Rs crore as against the target of Rs 500 crore. LICHFL Financial Services Limited: LICHFL Financial Services Limited, a wholly owned subsidiary of LICHFL, was incorporated for undertaking non fund based activities like marketing of housing loans, insurance products (life insurance and general insurance), credit cards, mutual funds, fixed deposits etc. It has become operational in March 2009 and at present has got 38 offices spread over 10 states. Service Profile Retail Home Loans In the current scenario, both banks and HFCs have been thriving on retail lending. Retail lending of banks includes various types of retail residential mortgages, consumer credit cards, automobile and personal loans, loans against securities, and small business loans. However, home loans constitute the largest percentage of retail loans in India. The home loan amount offered to the resident and non resident Indians by LICHFL is of a minimum of Rs 1 lakh. For the resident Indians, the maximum loan term is 30 years for salaried professionals and 20 years for self employed and others. The loan to property cost is 85% (including stamp duty & registration charges) for loan upto 20 lakhs, 80% of the total cost of the property for loan between 20 lakhs-75 lakhs and 75% of the loan above 75 lakhs. In case of loan for purchase of residential plot from statutory authority, the loan to property cost is 75% of the property value and the maximum loan term is 15 years. For the non resident Indians, the loan term is 15 years for the people with professional qualification and 10 years for others. For the pensioners, loans can be availed for purchase, construction, extension of house/flat. The pensioners (before retirement) whose age is 50 or more and having a pension scheme after retirement can apply for the loan. The term of the loan will be 15 years or 70 years of age whichever is earlier. For pensioners (after retirement) having a stable income throughout their life from pension may apply for loans and the loan is to be repaid before the applicant attains the age of 70 years. LIC HOSUING FINANCE Source: CD Equisearch Source: deal4loans.com Developer Funding / Construction Finance / Project Finance It is a unique offering under which funding is directly made to real estate developers for carrying out their projects. Few banks have come up with innovative housing loan schemes in association with developers / builders. These schemes are popularly known as the 80:20, 75:25 Schemes. 4 4

5 LICHFL offers loans to builders and developers for developing and constructing residential/commercial premises. The loan term is for minimum 6 months and maximum 5 years. The security by the developer is the mortgage of the land over which the building is proposed along with super structure. The repayment of the loan is made through escrow account. Loan against property LAP is a loan given or disbursed against the mortgage of property. Loan against property belongs to the secured loan category where the borrower gives a guarantee by using his property as security. Normally a loan is taken against selfoccupied or rented residential property. LICHFL provides loans against mortgage of residential house for the purpose of children s education/marriage, purchase of another property, business expansion etc. The loan amount given for such purpose is minimum of Rs 2 lakhs for a maximum term of 15 years. The security for such loans should be a registered mortgage of residential property of age not more than 35 years. The upfront fee on such loan is 1% of the loan amount plus service tax. Loans to Professionals LICHFL provides loans for purchase, modification, renovation of commercial premises for carrying out own professional practice & purchase of equipments. A person applying for loan should be resident Indian professional and loans can also be sanctioned to limited liability company or partnership firm of such professionals. The loan term is for 10 years and the security for such loans are registered mortgage of the premise for which loan is raised, demand promissory note and personal guarantee of partners. If financed, hypothecation of equipment can also be considered as the additional security. Other Loans LIC Housing also provides loans against fixed deposits of nationalized banks, life insurance policies having surrender value and post office instruments like national savings certificates, Kisan Vikas Patra. For individuals, loan up to 95% of face value of liquid security or surrender value is applicable in case of life insurance policies. The minimum loan for loan against securities is Rs for a maximum term of 20 years. Under the loan against rental securitization scheme, LICHFL provides financial assistance to companies against the security of commercial property-office premises- already owned or to be purchased with the help of the loan. The loan amount may be utilized for repayment of existing loans (including takeovers) or purchase of fixed assets. The maximum term offered for such loans is 10 years. Source: LICHFL 5 5

6 Deposits SANCHAY- Public Deposit Scheme SANCHAY is a public deposit scheme offered by LIC Housing Finance Ltd. The company started accepting deposits from May, 2007 and the scheme is rated FAAA/Stable by CRISIL. The minimum amount that can be invested under this scheme is Rs and thereafter additional deposits can be accepted in multiples of Rs Apart from individuals, HUF, Cooperative societies, private limited companies, LICHFL also accepts deposits from Trusts. The deposits can be placed for duration of 1 year, 18 months, 2 years, 3 years and 5 years at different interest rates (see table below). For NRI, the maximum term of deposit that is allowed is 3 years. Loan can also be availed on fixed deposit which has run for a minimum of 3 years. Maximum permissible limit of loan is 75% of the principal amount; however, the management holds the final decision on the amount of loan to be sanctioned. Source: LICHFL Investment Thesis Government Initiatives The commitment to have Housing for all by 2022 is the vision of the new government dovetailing all affordable housing schemes and slum redevelopment projects. To achieve this mission, India needs to develop about 110 million housing units and investments of more than USD 2 trillion is needed. The main focus is on the urban housing requirement and about 1.7 to 2 lakh hectare of land is required to fulfill urban housing demand by Source: KPMG One of the main components of the mission would be slum redevelopment. Under this, land will be pooled and then given to a private real estate developer. Slum dwellers would be given flats free of cost in multi-storey towers by the developer. The government would allow the developer to generate revenue by developing a portion of land for commercial purposes. Another major component is the upfront assistance given to individual beneficiaries for constructing or upgrading their tenements. The government also plans to increase the interest subsidy of 5% on loans granted to economically weaker sections (EWS) and lower income group (LIG) categories to construct their houses. 6 6

7 Stable Financials Loan Portfolio Backed by robust demand for housing, LICHFL s loan book grew nearly six-fold over FY Rs crores in FY16 compared to Rs crore in FY08. The book size grew to Rs crore as against Rs crore in FY15 registering a growth of 15.5%, tad lower from the 18.6% growth logged in FY15. The growth has been led by the non core products (LAP loans-absolute increase of Rs 6041 crore out of the absolute increase of Rs crore in FY16), thus exceeding the growth in the individual loans. The high yielding developer loans continues to form a trivial part of the total book size shrinking from 8.5% in FY11 to 2.7% in FY16. Though accounting for a small part, it grew by 26.1% in FY16 to Rs 3442 crore (Rs 2731 crore in FY15) while the individual loan portfolio (88.5% of the total book) increased merely by 10% to Rs crore in FY16. Just over one-third of the growth in the loan portfolio was attributed to the LAP portfolio, which rose by 121.5% last fiscal. Source: LICHFL, CD Equisearch Source: LICHFL, CD Equisearch Source: LICHFL, CD Equisearch The main thrust continues to lie on its credit traction with a disbursement growth of 19.2% to Rs crore in FY16 (Rs crore in FY15). LICHFL s disbursement have grown at a sturdy pace in last few years (see chart) but not without its share of pitfalls. For instance, disbursements grew by just 3.7% due to slowdown in the real estate, high interest rate scenario, shrinkage in the developer loan book portfolio and increased competition from banks. During last fiscal, disbursement in the developer loans were up by 51.4% to Rs 1621 crore with major disbursement seen in Q4FY16 (growth of 65% to Rs 640 crore). The disbursement in LAP stood around Rs 7600 crore in FY16 (Rs 2300 crore in FY15). Slowing loan growth has been one of the key investor concerns for LIC Housing with loan growth in recent quarters having fallen to multi-year lows partly due to higher prepayment rates on the existing book. LICHFL continues to focus on increasing the share of the high yielding non-core product portfolio to drive the loan book growth. With increased focus on qualitative growth supplemented by the increase in profitability, we expect the loan portfolio to increase by 14% CAGR over FY16-18e with major stir up in the LAP (around 13% of the total book by FY18) and the developer loans product. Fund Mix LICHFL continues to diversify the borrowing basket with different sources of finance like NCDs, bank borrowings, NHB refinance, LIC term loans, commercial papers and public deposits. It raised funds aggregating to Rs crores in FY16 (Rs in FY15) by improving the borrowing mix replacing bank borrowings with cheaper NCDs. The proportion of bank borrowings in FY16 was further reduced to 12.7% from 17.6% in FY15 (32% in FY12) to keep a check on the cost of funds while issuance of NCDs increased and accounted 77.3% of the basket in FY16 (72.6% in FY15). The NCDs have been assigned highest rating of CRISIL AAA/Stable by CRISIL & CARE AAA by CARE. It also raises funds through public deposits which accounts for 3.4% of the total borrowings. With interest rates south-bound, lenders see strong growth going ahead. LICHFL brought down its weighted cost of funds to 9.1% in FY16 (from 9.5% in FY15) and lending rates to 10.9% (from 11.0% in FY15) in FY16 thus having a spread increase of 36 bps. Bank as a source of finance is the most expensive with the weighted average cost of 10% while commercial paper costs only 8.4% to LICHFL. 7 7

8 Source: LICHFL, CD Equisearch Source: LICHFL, CD Equisearch Source: LICHFL, CD Equisearch Asset Quality The asset quality of the housing finance sector has stayed quite congenial in the recent years with gross NPA ratio of 0.79% (Source: ICRA). At the end of the fiscal, there is no alarm on the asset quality front as the GNPA for LICHFL stood at 0.45% (0.46% in FY15) and the net NPA stood at 0.22% (0.22% in FY15). The asset quality improved for the company back from 2009 when the GNPA stood at 1.07% and net NPA at 0.21%. The overall portfolio vulnerability for HFCs is increasing with an increased focus on riskier products like LAP and builder loans, change in the borrower profile towards the self-employed and low income segment. Thankfully for LICHFL, the asset quality is very much stable with high exposure to the salaried class people (84% of the retail book), individual loans (88% of the total) and conservative loan to value ratio of 46.6% (on incremental sanctions) in FY16 (v/s 50.9% in FY15). Though the riskier developer loans accounts only a small part of loan portfolio, there have been some stressed assets in this area which increased the NPA slightly from low levels in FY12. Source: LICHFL, CD Equisearch Source: LICHFL, CD Equisearch Source: LICHFL, CD Equisearch Performance and Valuation With continuous focus on core retail growth, LICHFL boosted its net interest income last quarter by 26.4% to Rs crore against Rs crore in Q4FY15. Net interest margin at 2.71% registered a 24 bps y-o-y increase (2.47% in Q4FY15) the best the company has posted in the past 19 quarters. With the high provisioning of Rs crore in the last quarter (Rs crore in Q4FY15) the bottom-line growth slowed down to 18.5% as compared to the NII growth of over 26%. In the light of slack in bank credit for personal loans (including mortgage loans) last fiscal, specialized housing financiers like LICHFL striking a balance between asset growth and profitability which helped its NII to grow by 31.7% to Rs crore as against Rs crore in FY15. Healthy margins of 2.6% in the last fiscal (2.3% in FY15) translated into the fastest NII growth in the last five years. Owing to the incessant reduction in the cost of funds and increase in the proportion of developer and LAP loan portfolio, the margins are expected to further increase to around 2.7% in FY18 witnessing the increase in the net interest income to Rs crore (growth of 16.9%) and Rs crore (growth of 18.3%) in FY17 and FY18 respectively. 8 8

9 Source: LICHFL, CD Equisearch Source: LICHFL, CD Equisearch Source: LICHFL, CD Equisearch The operating expense last fiscal was up by 23.6% to Rs crore was mainly due to payments of commission (nearly 1%) on the non core business of the company. Also, due to the non core business, the provisions also increased in FY16 to Rs crore as the company maintains provisioning rate of 1% in the non core and 0.4% in the standard assets. This led to just 19.8% increase in net profit (compared to the NII growth) to Rs crores (Rs crore in FY15). Going ahead, we expect the profits to rise by 18.6% in FY17 to Rs crore and by 18.3% to Rs crore in FY18. The return ratios like ROE (19.6% in FY16) and return on loan assets (1.4% in FY16) also improved owing to increase in the profits. We expect ROE to further increase to around 19.8% current fiscal while return on loan assets to increase to 1.5% in the next two years. The stock currently trades at 2.1x FY17e BV (11.7x FY17e EPS) and 1.8x FY18e BV (9.9x FY18e EPS). LICHFL s renewed focus on boosting the high margin yielding LAP portfolio would galvanize its order book over the next few years. Healthy growth in loan book supplemented by marginal rise in NIMs would culminate in over 18% growth (annual) in earnings over the next two years; needless to mention its industry beating return on equity. We therefore assign buy rating with a target of Rs 578 based on 2.3x FY18e BV (average of last three years), over a period of 6-9 months.. Risks and Concerns Slowdown in Real Estate Sector Adverse developments in the real estate sector causing delay and default in completion of projects may cause a setback to disbursement of new loans. With pressure on both the demand and supply side, residential real estate has gone into a vicious cycle of ever increasing cost, falling demand, liquidity crunch and, delay in approvals adding to the woes of the developers. Margins Pressure Lending is the main activity of housing finance companies requiring maximum prudence on the part of lending financial institutions. Inflationary trends, increased cost of borrowings, narrowing down of margins and intense competition pose big challenge for sustaining profitability on a consistent basis. With interest rates declining and the home loan sector facing declining asset quality, HFCs will face pressure on margins. The volatile macroeconomic environment, more precisely fluctuations in interest rates, makes housing finance institutions more vulnerable to certain risks such as credit risk, liquidity risk, and interest rate risk. Stiff Competition Spurt in competition, coupled with an intensive fight for market share between HFCs and Commercial Banks within the same space can heighten the risk profile with aggressive underwriting standards. Over reliance on aggressively disbursing loans as an easier option to build size and price war, and squeezing margins to undesirable levels are other areas of possible threats. 9 9

10 Cross Sectional Analysis Company Equity* CMP Mcap* NII* Profit* LIC Housing Finance Gruh Dewan Repco GIC housing Can Fin *figures in crores; calculations on ttm basis Data as per published results. ROE (%) ROA (%) P/BV P/E Source: Company, CD Equisearch Source: Company, CD Equisearch Source: Company, CD Equisearch Source: Company, CD Equisearch 10 10

11 Financials Quarterly Results Figures in Rs crs Q4FY16 Q4FY15 % chg. FY16 FY15 % chg. Net Interest Income * * Non Interest Income Total Income Operating Expenses Pre-Provision Profits Provision PBT Tax PAT Basic EPS (F.V.2) Equity *for quarterly data, interest income on fixed deposits and investments included in Non Interest income Income Statement Figures in Rs crs FY14 FY15 FY16 FY17e FY18e Net Interest Income ** Non Interest Income Total Income Operating Expenses Pre-Provision Profits Provision PBT Tax PAT Basic EPS (F.V.2) Equity **estimated on published data 11 11

12 Balance Sheet Figures in Rs crs FY14 FY15 FY16 FY17e FY18e Sources Of Funds Shareholders Funds Share Capital Reserves and Surplus Non Current Liabilities Long Term Borrowings Long Term Provisions Other Long term Liabilities Deferred Tax Liabilities(net) Current Liabilities Short Term Borrowings Trade Payables Other Current Liabilities Short Term Provisions Application of Funds Non- Current Assets Tangible Assets Capital Work in Progress Non-Current Investments Long Term Loans and Advances Other Non Current Assets Current Assets Current Investments Trade Receivables Cash and Cash Equivalents Short term loans and advances Other Current Assets

13 Key Financial Ratios FY14 FY15 FY16 FY17e FY18e Growth Ratios (%) Net Interest Income Total Income Pre Provision Profits Net Profit EPS Loan Book Return Ratios (%) ROE ROA Return on loan assets Margins (%) Cost To Income Ratio Net Interest Margin (% of Loan Book) Asset Quality (%) Gross NPA Net NPA Valuation Ratios P/BV P/E Other Ratios Debt / Equity Current Ratio

14 Financial Summary US dollar denominated million $ FY14 FY15 FY16 FY17e FY18e Equity capital Shareholders funds Total debt Total loans and advances Investments Net current assets Total assets Net Interest Income Pre-provision Profits PBT PAT EPS($) Book value ($) Income statement figures translated at average rates; balance sheet at year end rates; projections at current rates All dollar denominated figures are adjusted for extraordinary items

15 Recommendation The Housing Finance Sector in India can be classified as one of the sunshine sectors as it rides on a host of structural factors that are expected to continue fuelling growth in years to come. The housing finance has managed to grow at an annual rate of 18% during FY11 to FY16, much higher than overall bank credit growth rate. HFCs which initially lost a significant market share to banks, have managed to regain some of their lost ground with a combined market share of 37 per cent in FY16 (Source: ICRA). Housing credit growth picked up from Q2FY16 onwards, supported by disbursements against construction linked loans, growth in small ticket affordable housing segment and renewed demand from Tier II and III cities. To achieve the Housing for all by 2022 mission, India needs to develop about 110 million housing units and investments of more than USD 2 trillion is needed. The main focus is on the urban housing requirement and about 1.7 to 2 lakh hectare of land is required to fulfill urban housing demand by Under the slum redevelopment, land will be pooled and then given to a private real estate developer. Slum dwellers would be given flats free of cost in multistorey towers by the developer. The government also plans to increase the interest subsidy of 5% on loans granted to economically weaker sections (EWS) and lower income group (LIG) categories to construct their houses. The higher cap on lending spread set by NHB, RHF and the UHF from 2% earlier to 3.5% has proved positive for the sector, especially HFCs operating in small ticket housing loans segment. Investor sentiment for the housing sector has been good so far as reflected by the capital infusion of around Rs 45 billion in FY16. In ICRA s estimate, HFCs will require external capital of Rs billion for the mortgage penetration to improve further and achieve an annual growth of 20-22% over the next five years. One of the biggest challenges facing the housing finance industry is the lack of formal credit flow to the lower income segments for their housing needs. This has resulted in a huge shortage of housing for these segments and a multi prolonged effort is required to address the problem in all its dimensions. This broadening gap between the demand and supply of affordable housing units and lack of adequate/appropriate financial solutions needs a prolonged effort. LICHFL, in the past few years, has not only managed to post robust earnings growth but also broadened its product portfolio. With the growth in the individual retail loans, it has also kept the pace of the developer loans and is focusing more on the LAP product in years to come. The loan portfolio is expected to clock Rs crores in FY17 which is a growth of 14.4% and to Rs crores in FY18 with LAP constituting 13% of the total portfolio. The steady improvement in the margins has also translated in robust NII growth in the recent years and is expected to further grow at a CAGR of 17.6% over the next two years. The company expects builder s interest in the affordable housing to gather pace and it would like to cater to this segment. The loan portfolio of LICHFL is expected to grow at a CAGR of 14% for the next two years with stable asset quality. The cost of funds is expected to further come down benefitting the net interest margins for the company. The stock currently trades at 2.1x FY17e BV (11.7x FY17e EPS) and 1.8x FY18e BV (9.9x FY18e EPS). LICHFL s renewed focus on boosting the high margin yielding LAP portfolio would galvanize its order book over the next few years. Healthy growth in loan book supplemented by marginal rise in NIMs would culminate in over 18% growth (annual) in earnings over the next two years; needless to mention its industry beating return on equity. We therefore assign buy rating with a target of Rs 578 based on 2.3x FY18e BV (average of last three years), over a period of 6-9 months

16 Disclosure& Disclaimer CD Equisearch Private Limited (hereinafter referred to as CD Equi ) is a Member registered with National Stock Exchange of India Limited, Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited (Formerly known as MCX Stock Exchange Limited). CD Equi is also registered as Depository Participant with CDSL and AMFI registered Mutual Fund Advisor. The associates of CD Equi are engaged in activities relating to NBFC-ND - Financing and Investment, Commodity Broking, Real Estate, etc. CD Equi is registered under SEBI (Research Analysts) Regulations, Further, CD Equi hereby declares that No disciplinary action has been taken against CD Equi by any of the regulatory authorities. CD Equi/its associates/research analysts do not have any financial interest/beneficial interest of more than one percent/material conflict of interest in the subject company(s). CD Equi/its associates/research analysts have not received any compensation from the subject company(s) during the past twelve months. CD Equi/its research analysts has not served as an officer, director or employee of company covered by analysts and has not been engaged in market making activity of the company covered by analysts. This document is solely for the personal information of the recipient and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved) and should consult their own advisors to determine the merits and risks of such an investment. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. CD Equi or any of its affiliates/group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. CD Equi has not independently verified all the information contained within this document. Accordingly, we cannot testify nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While, CD Equi endeavors to update on a reasonable basis the information discussed in this material, there may be regulatory compliance or other reasons that prevent us from doing so. This document is being supplied to you solely for your information and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Neither, CD Equi nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. CD Equisearch Private Limited (CIN: U67120WB1995PTC071521) Registered Office: 37, Shakespeare Sarani, 1 st Floor, Kolkata ; Phone: +91(33) ; Fax: +91(33) ; Corporate Office: 10, Vasawani Mansion, 2 nd Floor, Dinshaw Wachha Road, Churchgate, Mumbai ; Phone: +91(22) /0653; Fax: +91(22) 2283, 2276 Website: research@cdequi.com buy: >20% accumulate: >10% to 20% hold: -10% to 10% reduce: -20% to <-10% sell: <-20% 16 16