High prepayment remains a drag; earnings momentum to sustain April 20, 2016 Nitin Kumar nitinkumar@plindia.com / +91 22 66322236 Pritesh Bumb priteshbumb@plindia.com / +91 22 66322232 Vidhi Shah vidhishah@plindia.com / +91 22 66322258 Rating BUY Price Rs467 Target Price Rs515 Implied Upside 10.3% Sensex 25,844 Nifty 7,915 (Prices as on April 20, 2016) Trading data Market Cap. (Rs bn) 235.8 Shares o/s (m) 505.0 3M Avg. Daily value (Rs m) 1092.9 Major shareholders Promoters 40.31% Foreign 28.89% Domestic Inst. 6.13% Public & Other 24.67% Stock Performance (%) 1M 6M 12M Absolute 0.7 (1.3) 5.7 Relative (2.9) 4.3 14.8 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 39.3 46.9 16.2 2018 47.3 57.6 17.8 Price Performance (RIC: LICH.BO, BB: LICHF IN) (Rs) 600 500 400 300 200 100 0 Apr 15 Jun 15 Aug 15 Source: Bloomberg Oct 15 Dec 15 Feb 16 Apr 16 LICHF reported 18.5% YoY growth in profits (slightly below our estimate) led by 3% miss in NII growth and higher commission expenses for sourcing LAP. Loan growth remained modest at 15.5% YoY despite strong disbursements while lending spreads improved further (22bps QoQ increase). Asset quality improved with GNPAs at 0.45% from 0.58% in Q3FY16 led by improvement in both individual & developer loan portfolio. We believe that LICHF will continue to report healthy earnings momentum on the back of improved spread on changing loan mix as well as benign interest rate scenario, stable asset quality and decent loan growth trend. Maintain BUY with revised PT of Rs515 (from Rs535) based on 2.1x Sep 17E ABV. Core performance slightly lower than expected: LICHF reported 26% YoY growth in NII at Rs8.21 bn (~2.5% miss from PLe) impacted by modest 15.5% growth in loan portfolio despite spreads profile witnessing strong improvement of 22bps QoQ to 1.79%. Other income was also tepid on lower returns from liquid mutual fund investments, while fees remained robust on likely prepayment charges and processing fees from high growth in non core book. We expect LICHF s margin profile to remain largely stable in FY17 after improving 30bps YoY to 2.52% in FY16 as it will be difficult to replicate growth in high yield LAP book and as fixed rate loans reprice to floating rate. Individual loan impacted by higher prepayments; LAP growing smartly: Individual Loan growth excl LAP/LRD moderated to 10% YoY (15% YoY in Q3FY16) and was impacted by continued rise in prepayment trend. Non core loan portfolio continues to grow strongly mainly on back of LAP and now forms ~11.6% (8.8% LAP/LRD share) to total loan book. Management informed it will be comfortable to improve non core loan portfolio share to 13 14% in FY17. Asset quality improves; outlook remains positive: Asset quality improved mainly from both individual and developer portfolio with GNPAs at 0.45% and NNPAs at 0.22% improving by 10bps QoQ. While we remain wary on high growth in non core portfolio, but remain positive on stable asset quality aided by continuous improvement in LTV ratio and improved funding profile. Maintain BUY with revised a PT of Rs515 (from Rs535) based on 2.1x Sep 2017E ABV. Key Financials (Y/e March) 2015 2016E 2017E 2018E Net interest income (Rs m) 22,658 29,674 34,403 41,626 Growth (%) 18.3 31.0 15.9 21.0 Non interest income (Rs m) 1,227 1,453 2,030 2,496 Operating Profit (Rs m) 20,093 26,441 31,012 37,672 PAT (Rs m) 13,862 16,608 19,836 23,904 EPS (Rs) 27.5 32.9 39.3 47.3 Growth (%) 5.2 19.8 19.4 20.5 Net DPS (Rs) 5.0 5.5 6.0 6.5 Profitability & valuation 2015 2016E 2017E 2018E Spreads / Margins (%) 2.2 2.4 2.4 2.5 RoAE (%) 18.1 19.6 19.2 19.0 RoAA (%) 1.3 1.4 1.4 1.4 P/E (x) 17.0 14.2 11.9 9.9 P/BV (x) 3.0 2.6 2.0 1.7 P/ABV (x) 3.1 2.7 2.1 1.8 Net dividend yield (%) 1.1 1.2 1.3 1.4 Source: Company Data; PL Research Q4FY16 Result 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 growth moderates on higher repayments but spreads & asset quality improves P&L (Rs m) Q4FY16 Q4FY15 YoY gr. (%) Q3FY16 QoQ gr. (%) Interest Income 32,057 28,002 14.5 31,018 3.3 Interest Expense 23,843 21,504 10.9 23,549 1.2 Net Interest Income 8,214 6,498 26.4 7,469 10.0 Other operating Inc. 407 323 26.2 375 8.7 Other Income 275 281 (2.0) 175 57.5 Total Income 8,897 7,102 25.3 8,018 11.0 Employee Expense 393 356 10.5 432 (8.9) Other Expenses 1,185 890 33.1 782 51.5 Operating Profit 7,319 5,856 25.0 6,804 7.6 Provisions 376 103 264.7 344 9.3 Tax 2,463 1,666 47.8 2,271 8.4 Net Profit 4,480 3,782 18.5 4,189 7.0 Balance Sheet (Rs m) O/S Loans 1,251,732 1,083,610 15.5 1,173,960 6.6 Individual loans 1,217,310 1,056,300 15.2 1,143,050 6.5 Individual loans (%) 97.3 97.5 97.4 Corporate loans 34,422 27,310 26.0 30,910 11.4 Corporate loans (%) 2.7 2.5 2.6 Incr. Disbursements 132,160 99,380 33.0 97,210 36.0 Individual loans (%) 95.2 96.1 83.0 Corporate loans (%) 4.8 3.9 17.0 Asset quality Gross NPL 5,678 4,947 14.8 6,820 (16.7) Gross NPL (%) 0.5 0.5 0.6 Net NPL 2,705 2,344 15.4 3,757 (28.0) Net NPL (%) 0.2 0.2 0.3 Coverage ratio (%) 52.4 52.6 44.9 Others / Ratios (%) Yield on Loans 10.6 10.7 10.7 Cost of Borrowings 9.1 9.5 9.2 Spread 1.79 1.17 1.57 NIMs 2.71 2.47 2.58 Cost/ Income Ratio 17.73 17.54 15.14 April 20, 2016 2
Exhibit 2: Overall loan book growth was led by non core portfolio Loan Growth Project Loan growth Individual loan growth 45% 30% 15% 0% 15% 30% 45% 1Q12 2Q12 3Q12 4Q12 Exhibit 3: Individual disbursement growth trends remains steady Exhibit 4: Project loans disbursement picks up, best in many quarters 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) Exhibit 5: Core loan portfolio share has come off rapidly on back of robust growth in LAP % of Individual Loans excl LAP % of LAP loans % of corporate Loans 3% 3% 3% 3% 3% 3% 2% 3% 3% 2% 3% 3% 3% 4% 5% 5% 6% 6% 9% 97% 97% 97% 97% 97% 97% 98% 93% 93% 93% 92% 91% 88% April 20, 2016 3
Exhibit 6: Rising share of LAP (high yielding) and benefit from cost of funds has helped improve incremental spreads further 9.8% 9.6% 9.4% 9.2% 9.0% 8.8% Cost of Funds Spread Profile (RHS) 1.90% 1.80% 1.70% 1.60% 1.50% 1.40% 1.30% 1.20% 1.10% 1.00% 3Q12 4Q12 Exhibit 7: Margins improve further on changing loan mix and improving 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% 1.7% 3Q12 4Q12 Exhibit 8: Asset quality improves from both individual and developer portfolio 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% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 2Q12 3Q12 4Q12 April 20, 2016 4
Exhibit 9: ROA Tree ROAs likely to improve further as funding environment remains benign RoA decomposition (%) FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E Interest income 9.65 10.13 10.21 10.31 10.19 10.16 9.74 9.54 Interest expenses 6.68 7.76 8.10 8.14 8.00 7.71 7.30 7.04 Net interest income 2.97 2.37 2.11 2.17 2.18 2.46 2.44 2.50 Other income 0.85 0.38 0.26 0.28 0.21 0.17 0.26 0.26 Total income 3.82 2.75 2.37 2.45 2.40 2.63 2.70 2.76 Employee expenses 0.15 0.12 0.12 0.12 0.12 0.12 0.13 0.13 Other operating expenses 0.32 0.28 0.26 0.24 0.24 0.26 0.26 0.26 Operating profit 3.35 2.34 1.99 2.09 2.03 2.24 2.32 2.37 Provisions for NPA/ others 0.56 0.26 0.11 0.02 0.01 0.12 0.14 0.15 Taxes 0.69 0.54 0.48 0.58 0.69 0.75 0.77 0.79 Net profit (ROA) 2.10 1.55 1.40 1.49 1.34 1.38 1.41 1.44 Exhibit 10: We slightly tweak our estimates to adjust for loan growth and credit costs (Rs mn) Old Revised % change FY17E FY18E FY17E FY18E FY17E FY18E Net interest income 33,435 40,755 34,403 41,626 2.9 2.1 Operating profit 31,940 39,068 32,666 39,492 2.3 1.1 Net profit 20,545 24,781 19,836 23,904 (3.5) (3.5) EPS, Rs. 40.7 49.1 39.3 47.3 (3.5) (3.5) BVPS, Rs. 222.4 263.3 222.5 261.9 0.1 (0.5) Price target, Rs. 535 515 (3.8) Recommendation BUY BUY Exhibit 11: We maintain our BUY rating and revised PT of Rs515/share based on 2.1x Sep 17E ABV PT calculation and upside Fair price EVA 511 Fair price P/ABV 520 Average of the two 515 Target P/ABV 2.1 Target P/E 11.9 Current price, Rs 485 Upside (%) 6% Dividend yield (%) 1% Total return (%) 8% April 20, 2016 5
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 Apr 10 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 April 20, 2016 6
Income Statement (Rs m) Int. Inc. / Opt. Inc. 105,761 122,742 137,355 158,810 Interest Expenses 83,102 93,068 102,952 117,184 Net interest income 22,658 29,674 34,403 41,626 Growth (%) 18.3 31.0 15.9 21.0 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 36,433 44,122 Expenditure Employees 1,293 1,503 1,774 2,111 Other expenses 2,405 3,086 3,642 4,334 Depreciation 94 97 5 5 Total expenditure 3,792 4,687 5,421 6,450 PPP 20,093 26,441 31,012 37,672 Growth (%) 17.5 31.6 17.3 21.5 Provision 73 1,465 1,913 2,431 Other income 999 660 1,654 1,820 Exchange Gain / (Loss) Profit before tax 21,019 25,635 30,753 37,060 Tax 7,158 9,028 10,917 13,156 Effective tax rate (%) 34.1 35.2 35.5 35.5 PAT 13,862 16,608 19,836 23,904 Growth (%) 5.2 19.8 19.4 20.5 Quarterly Financials (Rs m) Y/e March Q1FY16 Q2FY16 Q3FY16 Q4FY16 Int. Inc. / Operating Inc. 29,174 30,260 31,018 32,057 Income from securitization Interest Expenses 22,585 23,091 23,549 23,843 Net Interest Income 6,589 7,169 7,469 8,214 Growth 30.2 34.8 36.2 26.4 Non interest income 481 633 549 683 Net operating income 7,069 7,803 8,018 8,897 Growth 24.6 31.3 30.0 25.3 Operating expenditure 835 1,060 1,214 1,578 PPP 6,234 6,743 6,804 7,319 Growth 25.3 35.4 28.8 25.0 Provision 443 301 344 376 Exchange Gain / (Loss) Profit before tax 5,790 6,442 6,460 6,943 Tax 1,650 2,325 2,271 2,463 Prov. for deferred tax liability (319) Effective tax rate (%) 28.5 36.1 35.2 35.5 PAT 3,821 4,117 4,189 4,480 Growth 18.6 20.6 21.7 18.5 Balance Sheet (Rs m) Sources of funds Equity 1,010 1,010 1,010 1,010 Reserves & Surplus 77,174 90,450 114,616 134,571 Networth 78,184 91,460 115,626 135,581 Growth (%) 3.8 17.0 26.4 17.3 Loan funds 941,189 1,071,642 1,256,174 1,499,806 Growth (%) Others 24,130 37,718 42,361 47,375 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) 467 467 467 467 Eq. Shrs. O/s. (m) 505 505 505 505 Market Cap (Rs m) 235,776 235,776 235,776 235,776 Market Cap to AUM (%) 20.9 18.1 15.4 13.0 EPS (Rs) 27.5 32.9 39.3 47.3 Book Value (Rs) 154.8 181.1 229.0 268.5 Adjusted Book Value (Rs) 150.2 175.8 222.5 261.9 P/E (x) 17.0 14.2 11.9 9.9 P/BV (x) 3.0 2.6 2.0 1.7 P/ABV (x) 3.1 2.7 2.1 1.8 DPS (Rs) 5.0 5.5 6.0 6.5 Dividend Yield (%) 1.1 1.2 1.3 1.4 Asset Quality Gross NPAs (Rs m) 4,947 5,678 7,556 9,329 Net NPAs (Rs m) 2,344 2,705 3,243 3,315 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 57.1 64.5 Profitability (%) NIM 2.2 2.4 2.4 2.5 RoAA 1.3 1.4 1.4 1.4 RoAE 18.1 19.6 19.2 19.0. April 20, 2016 7
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