Strong performance, but loan growth key to sustainability in earnings July 18, 2016 R Sreesankar rsreesankar@plindia.com / +91 22 66322214 Pritesh Bumb priteshbumb@plindia.com / +91 22 66322232 Vidhi Shah vidhishah@plindia.com / +91 22 66322258 Rating Accumulate Price Rs520 Target Price Rs535 Implied Upside 2.9% Sensex 27,747 Nifty 8,509 (Prices as on July 18, 2016) Trading data Market Cap. (Rs bn) 262.4 Shares o/s (m) 505.0 3M Avg. Daily value (Rs m) 1177.8 Major shareholders Promoters 40.31% Foreign 31.75% Domestic Inst. 5.87% Public & Other 22.07% Stock Performance (%) 1M 6M 12M Absolute 9.5 10.6 9.3 Relative 5.3 (4.2) 11.9 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 38.6 39.0 0.9 2018 46.1 45.8 0.6 Price Performance (RIC: LICH.BO, BB: LICHF IN) (Rs) 600 500 400 300 200 100 0 Jul 15 Sep 15 Nov 15 Source: Bloomberg Jan 16 Mar 16 May 16 Jul 16 LICHF reported net earnings of Rs4.1 bn (PLe: Rs4.7 bn) on back of increased provision on wage arrears/pension liability and ageing of NPLs from developer book. Core operations remained strong with NII growth of 25% YoY at Rs8.24 bn (PLe: Rs8.39 bn) as NIMs remained resilient at 2.61%, but loan growth remained modest at 15% YoY as core loan portfolio growth has remained slower at 9% YoY. With LICHF shifting its strategy to growing core mortgage portfolio which is at a lower yield, we believe this will keep spreads stable to dilutive as large part of the reduction in cost of funds will likely be passed on to lending rates or will have to face higher balance transfers. We downgrade to Accumulate from BUY with a PT of Rs535, based on 2.0x Mar 18E ABV. Core performance remains strong: LICHF reported 25% YoY growth in NII at Rs8.24 bn (~1.8% miss from PLe) as margins remains resilient at 2.61% (up 20bps YoY; down 10bps QoQ) mostly led by better spreads in non core individual portfolio which has seen increase in share to ~9.5% from ~4.5% in Q1FY16. PPOP missed estimates on higher opex as LICHF provided for wage arrears and change in actuarial valuation on pension liability and expects some slip over to happen in Q2/Q3FY17, though nominal. We believe, spreads have small room for improvement as incremental benefit from lowering CoF will have to be passed onto lending yields on competitive pressures along with yield pressure in LAP. Core mortgage portfolio pick up slower: Loan growth remained modest at ~15% YoY, while core retail mortgage portfolio remained slow at ~9% YoY, while LAP & developer loan grew at a faster pace of 122% and 39% respectively. Management expects overall loan growth of 15% with individual loan growth at 15 16% in FY17 as focus has shifted back to growing core mortgage. Asset quality remains stable adjusting to seasonality: Asset quality remained stable on YoY basis, while deteriorated slightly sequentially on seasonality. GNPAs were at 0.59%, up 10bps YoY, flat QoQ and NNPAs at 0.28%, up 10bps QoQ, 10bps down YoY. Credit cost increased on one off Rs920 mn provisions due to ageing of two developer loan NPAs. We do not foresee any asset quality issues from the unseasoned non core mortgage book in the near term. Key Financials (Y/e March) 2015 2016 2017E 2018E Net interest income (Rs m) 22,658 29,674 35,782 42,552 Growth (%) 18.3 31.0 20.6 18.9 Non interest income (Rs m) 1,227 1,453 2,030 2,496 Operating Profit (Rs m) 20,093 26,441 31,678 37,717 PAT (Rs m) 13,862 16,608 19,514 23,285 EPS (Rs) 27.5 32.9 38.6 46.1 Growth (%) 5.2 19.8 17.5 19.3 Net DPS (Rs) 5.0 5.5 6.0 6.5 Profitability & valuation 2015 2016 2017E 2018E Spreads / Margins (%) 2.2 2.4 2.5 2.5 RoAE (%) 18.1 19.6 18.9 18.6 RoAA (%) 1.3 1.4 1.4 1.4 P/E (x) 18.9 15.8 13.4 11.3 P/BV (x) 3.4 2.9 2.3 1.9 P/ABV (x) 3.5 3.0 2.3 2.0 Net dividend yield (%) 1.0 1.1 1.2 1.3 Source: Company Data; PL Research Q1FY17 Reuslt Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Core business remains strong but earnings impacted by one offs P&L (Rs m) Q1FY17 Q1FY16 YoY gr. (%) Q4FY16 QoQ gr. (%) Interest Income 33,263 29,174 14.0 32,057 3.8 Interest Expense 25,018 22,585 10.8 23,843 4.9 Net Interest Income 8,245 6,589 25.1 8,214 0.4 Other operating Inc. 334 285 17.1 407 (18.1) Other Income 202 196 3.1 275 (26.8) Total Income 8,780 7,069 24.2 8,897 (1.3) Employee Expense 683 317 115.3 393 73.6 Other Expenses 699 518 34.8 1,185 (41.0) Operating Profit 7,399 6,234 18.7 7,319 1.1 Provisions 1,165 443 162.6 376 209.5 Tax 2,156 1,650 30.7 2,463 (12.5) Net Profit 4,078 3,821 6.7 4,480 (9.0) Balance Sheet (Rs m) O/S Loans 12,74,370 11,04,120 15.4 12,51,732 1.8 Individual loans 12,36,810 10,77,040 14.8 12,17,310 1.6 Retail Home Loans 11,18,294 10,23,821 9.2 11,07,158 1.0 Retail LAP / Non Core 1,18,516 53,219 122.7 1,10,152 7.6 Corporate loans 37,560 27,080 38.7 34,422 9.1 Individual loans (%) 97.1 97.5 97.3 Retail Home Loans 87.8 92.7 88.5 Retail LAP / Non Core 9.3 4.8 8.8 Corporate loans (%) 2.9 2.5 2.7 Incr. Disbursements 75,420 61,240 23.2 1,32,160 (42.9) Individual loans (%) 93.7 97.0 95.2 Corporate loans (%) 6.3 3.0 4.8 Asset quality Gross NPL 7,570 6,590 14.9 5,678 33.3 Gross NPL (%) 0.59 0.6 0.45 Net NPL 3,560 3,597 (1.0) 2,705 31.6 Net NPL (%) 0.28 0.33 0.22 Coverage ratio (%) 53.0 45.4 7.6 52.4 0.6 Others / Ratios (%) Yield on Loans 10.5 10.7 10.6 Cost of Borrowings 9.1 9.4 9.1 Spread 1.64 1.46 1.79 NIMs 2.61 2.41 2.71 Cost/ Income Ratio 15.74 11.82 17.73 July 18, 2016 2
Key Q1FY17 Concall Highlights Assets pricing/growth/outlook: Outlook LICHF targets overall loan growth of 15% for FY17 and is on track, while targeting individual loan growth of 15 16% (incl. LAP book). Core loan growth outlook Have been focusing on core loan portfolio from Q1FY17 v/s last year focus on growing the non core book. Management expects core loan growth to pick up from Q2FY17. South & West markets have been leading growth. Non core loan portfolio LAP portfolio continues to be from salaried segment with average ticket size of Rs1.25mn. 63% of sourcing of LAP has been from existing sales force and 40 45% business is from top 10 cities. Outlook Currently, LAP/LRD portfolio is at ~9.3% of loans, up from 4.5% in Q1FY16 and LICHF expect the share to remain at these levels as focus has shifted towards core mortgage and management believes non core portfolio is self sustaining to keep margins higher. Floating portfolio Pure floating portfolio has increased to 56% from 47% in FY16. Re pricing Have re priced Rs30 bn of loans. Rs150 180bn of loan is likely to come for re pricing in FY17, while ~Rs150bn was re priced in FY16. Liabilities pricing/growth/outlook: Bank borrowing has come down further to ~10.8% from 12.7% in Q4FY16 and increased NCD proportion of to ~80% from ~77% in Q4FY16. Have further room to reduce cost of funds especially from NCDs which have in last few years have been raised at higher rates. Margins/Yields: Margins should see some improvement (i) further room in lowering cost of funds (ii) sustainable non core individual book (LAP/LRD) which has been on basis of quality build up. Incremental origination yields on core portfolio is at 9.5%, while re pricing of loans from fixed to floating are likely to happen at ~9.9 10% in FY17. On LAP book incremental origination has been happening at 11.5% and developer book origination yields remain stable at 13 14%, thereby maintaining or even improving margins. July 18, 2016 3
Asset Quality: Have provided Rs900 mn on ageing of NPLs in the developer portfolio (2 a/c) and now is 100% provided. Have 1 more a/c in developer book which will fall in ageing of NPLs going ahead. Others: Employee expenses increased on back of wage arrears back dated for 5 years of Rs200mn and Rs100mn on back actuarial value change on employee benefits (pension/gratuity). With some arrears flowing in reminder of the year, management expect lower provisioning in Q2/Q3FY17. Exhibit 2: Loan book growth led by non core loan book with LAP growing at lower base Loan Growth Project Loan growth Individual loan growth 45% 30% 15% 0% 15% 30% 45% 1Q12 2Q12 3Q12 4Q12 Exhibit 3: Individual disbursement continues to grow at steady pace Exhibit 4: Project loan disbursements also remains upbeat 90,000 70,000 50,000 30,000 10,000 Individual Disbursements (Rs m) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Project Disbursements (Rs m) July 18, 2016 4
Exhibit 5: Loan mix continues to be tilted towards core portfolio, while non core portfolio mix has been improving led by LAP book % of Individual Loans excl LAP % of LAP loans % of corporate Loans 3% 3% 3% 3% 3% 3% 2% 3% 3% 2% 3% 3% 3% 3% 4% 5% 5% 6% 6% 9% 9% 97% 97% 97% 97% 97% 97% 98% 93% 93% 93% 92% 91% 88% 88% Exhibit 6: Seasonally adjusted spreads remains resilient as cost of funding continues to moved down 9.8% 9.6% 9.4% 9.2% 9.0% 8.8% 8.6% Cost of Funds Spread Profile (RHS) 3Q12 4Q12 1.90% 1.80% 1.70% 1.60% 1.50% 1.40% 1.30% 1.20% 1.10% 1.00% Exhibit 7: Margins continue to hold up good on back of loan mix and spreads 2.7% 2.5% 2.3% 2.1% 1.9% 2.27% 2.44% 2.10% 2.18% 2.09% 2.45% 2.22% 2.30% NIMs (%) 2.16% 2.40% 2.19% 2.23% 2.20% 2.47% 2.41% 2.56% 2.58% 2.71% 2.61% 1.7% 3Q12 4Q12 July 18, 2016 5
Exhibit 8: Asset quality slips on account of seasonality Gross NPLs (%) Net NPLs (%) Coverage ratio RHS(%) 0.90% 0.80% 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 2Q12 3Q12 4Q12 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% Exhibit 9: ROE to remains stable on improvement in margins but offset by higher opex and credit cost over FY17 FY18 RoE decomposition (%) FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Interest income 9.65 10.13 10.21 10.31 10.19 10.16 9.88 9.59 Interest expenses 6.68 7.76 8.10 8.14 8.00 7.71 7.35 7.03 Net interest income 2.97 2.37 2.11 2.17 2.18 2.46 2.54 2.56 Other income 0.85 0.38 0.26 0.28 0.21 0.17 0.22 0.22 Total income 3.82 2.75 2.37 2.45 2.40 2.63 2.76 2.78 Employee expenses 0.15 0.12 0.12 0.12 0.12 0.12 0.14 0.15 Other operating expenses 0.32 0.28 0.26 0.24 0.24 0.26 0.29 0.30 Operating profit 3.35 2.34 1.99 2.09 2.03 2.24 2.32 2.34 Provisions for NPA/ others 0.56 0.26 0.11 0.02 0.01 0.12 0.17 0.17 Taxes 0.69 0.54 0.48 0.58 0.69 0.75 0.76 0.77 ROAA 2.10 1.55 1.40 1.49 1.34 1.38 1.38 1.40 ROAE 25.79 18.56 16.82 18.80 18.06 19.58 18.88 18.63 Exhibit 10: We slightly tweak our estimates to adjust for higher margins, employee expenses and credit costs (on back of ageing of NPLs) (Rs mn) Old Revised % change FY17E FY18E FY17E FY18E FY17E FY18E Net interest income 34,403 41,626 35,782 42,552 4.0 2.2 Operating profit 32,666 39,492 32,713 38,856 0.1 (1.6) Net profit 19,836 23,904 19,514 23,285 (1.6) (2.6) EPS, Rs. 39.3 47.3 38.6 46.1 (1.6) (2.6) BVPS, Rs. 222.5 261.9 222.7 261.3 0.1 (0.3) Price target, Rs. 535 545 1.8 Recommendation BUY Accumulate July 18, 2016 6
Exhibit 11: We downgrade to Accumulate but retain our PT of Rs535 based on 2.1x Mar 18E ABV on ROE of ~19% over FY18 PT calculation and upside Fair price EVA 529 Fair price P/ABV 541 Average of the two 535 Target P/ABV 2.0 Target P/E 11.6 Current price, Rs 520 Upside (%) 3% Dividend yield (%) 1% Total return (%) 4% Exhibit 12: LICHF One year forward P/ABV trend 3.5 3.0 P/ABV 3 yr avg. avg. + 1 SD avg. 1 SD 2.5 2.0 1.5 1.0 0.5 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 July 18, 2016 7
Income Statement (Rs m) Int. Inc. / Opt. Inc. 105,761 122,742 139,348 159,596 Interest Expenses 83,102 93,068 103,566 117,044 Net interest income 22,658 29,674 35,782 42,552 Growth (%) 18.3 31.0 20.6 18.9 Non interest income 1,227 1,453 2,030 2,496 Growth (%) 13.5 18.4 39.7 22.9 Net operating income 23,885 31,127 37,812 45,048 Expenditure Employees 1,293 1,503 2,030 2,415 Other expenses 2,405 3,086 4,012 4,814 Depreciation 94 97 92 101 Total expenditure 3,792 4,687 6,134 7,331 PPP 20,093 26,441 31,678 37,717 Growth (%) 17.5 31.6 19.8 19.1 Provision 73 1,465 2,460 2,756 Other income 999 660 1,035 1,140 Exchange Gain / (Loss) Profit before tax 21,019 25,635 30,253 36,101 Tax 7,158 9,028 10,740 12,816 Effective tax rate (%) 34.1 35.2 35.5 35.5 PAT 13,862 16,608 19,514 23,285 Growth (%) 5.2 19.8 17.5 19.3 Quarterly Financials (Rs m) Y/e March Q2FY16 Q3FY16 Q4FY16 Q1FY17 Int. Inc. / Operating Inc. 30,260 31,018 32,057 33,263 Income from securitization Interest Expenses 23,091 23,549 23,843 25,018 Net Interest Income 7,169 7,469 8,214 8,245 Growth 34.8 36.2 26.4 25.1 Non interest income 633 549 683 535 Net operating income 7,803 8,018 8,897 8,780 Growth 31.3 30.0 25.3 24.2 Operating expenditure 1,060 1,214 1,578 1,382 PPP 6,743 6,804 7,319 7,399 Growth 35.4 28.8 25.0 18.7 Provision 301 344 376 1,165 Exchange Gain / (Loss) Profit before tax 6,442 6,460 6,943 6,234 Tax 2,325 2,271 2,463 2,156 Prov. for deferred tax liability Effective tax rate (%) 36.1 35.2 35.5 34.6 PAT 4,117 4,189 4,480 4,078 Growth 20.6 21.7 18.5 6.7 Balance Sheet (Rs m) Sources of funds Equity 1,010 1,010 1,010 1,010 Reserves & Surplus 77,174 90,450 114,294 133,630 Networth 78,184 91,460 115,304 134,640 Growth (%) 3.8 17.0 26.1 16.8 Loan funds 941,189 1,071,642 1,248,185 1,452,633 Growth (%) Others 24,130 37,718 50,672 95,489 Minority Interest 75,258 96,049 108,409 122,360 Deferred Tax Liability 6,690 8,109 9,406 10,911 Total 1,125,451 1,304,978 1,531,976 1,816,033 Application of funds Net fixed assets 797 920 1,012 1,113 Advances 1,083,607 1,251,732 1,481,544 1,760,269 Growth (%) 18.6 15.5 18.4 18.8 Net current assets 8,152 8,948 1,689 2,128 Investments 31,703 42,036 46,256 50,900 Growth (%) (1.6) 32.6 10.0 10.0 Other Assets 1,193 1,341 1,475 1,622 Total 1,125,451 1,304,977 1,531,976 1,816,033. Key Ratios CMP (Rs) 520 520 520 520 Eq. Shrs. O/s. (m) 505 505 505 505 Market Cap (Rs m) 262,414 262,414 262,414 262,414 Market Cap to AUM (%) 23.3 20.1 17.1 14.4 EPS (Rs) 27.5 32.9 38.6 46.1 Book Value (Rs) 154.8 181.1 228.3 266.6 Adjusted Book Value (Rs) 150.2 175.8 222.7 261.3 P/E (x) 18.9 15.8 13.4 11.3 P/BV (x) 3.4 2.9 2.3 1.9 P/ABV (x) 3.5 3.0 2.3 2.0 DPS (Rs) 5.0 5.5 6.0 6.5 Dividend Yield (%) 1.0 1.1 1.2 1.3 Asset Quality Gross NPAs (Rs m) 4,947 5,678 7,556 9,329 Net NPAs (Rs m) 2,344 2,705 2,860 2,705 Gross NPAs to Gross Adv. (%) 0.5 0.5 0.5 0.5 Net NPAs to Net Adv. (%) 0.2 0.2 0.2 0.2 NPA Coverage (%) 52.6 52.4 62.1 71.0 Profitability (%) NIM 2.2 2.4 2.5 2.5 RoAA 1.3 1.4 1.4 1.4 RoAE 18.1 19.6 18.9 18.6. July 18, 2016 8
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 47.0% 37.4% 15.7% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. R Sreesankar (B.Sc ), Mr. Pritesh Bumb (MBA, M.com), Ms. Vidhi Shah (CA), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. 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