September 5, 2012 LIC Housing Finance Built on a solid edifice CMP Rs. 241 Target Rs. 298 Initiating Coverage - Buy Key Share Data Face Value (Rs.) 2 Equity Capital (Rs. bn.) 57 M. Cap (Rs. bn.) 121 52-wk High / Low (Rs.) 290 / 200 Avg. Daily Volume (qtrly) 181,858 BSE code 500253 NSE code LICHSGFIN Reuters code LICH Bloomberg code LICHF Shareholding Pattern (as on 30 th June, 2012) Source: BSE DII's 9.1% Others 20.9% FII's 29.7% Promoter 40.3% Financials (Rs. bn.) FY11 FY12 FY13E FY14E NII 13.8 14.0 19.7 25.3 NIMs (%) 3.1 2.5 2.8 2.9 Op. Profit 15.5 13.9 19.2 24.6 PAT 9.7 9.1 12.9 16.7 PAT Gr (%) 47.3 (6.2) 41.5 29.2 EPS (Rs.) 20.5 18.1 25.6 33.1 BVPS (Rs.) 87.8 112.5 131.9 156.9 ABVPS (Rs.) 87.5 110.8 129.3 153.9 Key Ratios FY11 FY12 FY13E FY14E P/E (x) 11.7 13.3 9.4 7.3 P/BV (x) 2.7 2.1 1.8 1.5 P/ABV (x) 2.8 2.2 1.9 1.6 RoAA (%) 2.2 1.6 1.9 2.0 RoAE (%) 25.8 18.6 21.0 22.9 NNPA% 0.0 0.1 0.2 0.2 I year Performance LICHFL v/s Bank Nifty LICHF Bank Nifty 40% 20% 0% -20% -40% Analyst: Vikesh P. Mehta Tel No.:+91 22 2281 9012, Mob: +91 9819 602 602 Email: vikesh.mehta@skpmoneywise.com COMPANY PROFILE Incorporated in 1989, LIC housing finance Limited (LICHFL) is promoted by Life Insurance Corporation of India (40.3% stake). The company operates in the middle class user segment and provides loans for homes, construction activities and also for corporate housing schemes. Around 94.9% (FY12) of the loan portfolio is derived from the retail segment and the rest from large corporate clients. The company has a strong pan India presence through 7 regional offices, 13 back offices, 188 marketing offices and 1 customer service point. INVESTMENT RATIONALE Loan book to grow at 23% CAGR between FY12-FY14E LICHFL s loan book has grown by 29% over the last 5 years. We expect its loan book to grow by 23% CAGR through FY12-FY14E. This growth is expected to be backed by the increase in developer loans disbursements. At its peak in FY10 these loans contributed 10.9% of total loans but as of Q1FY13 it constituted merely 4%. We expect the share of these loans to increase to ~10% in 3 years, given the low loan-to-value (LTV) of ~40% as compared to ~55% in case of individual housing loans and also due to higher yields of ~400-450 bps as compared to individual loans given their risky nature. We expect this share to increase to 5.5% in FY13E and 6.6% by FY14E. Repricing of loans and favorable borrowing mix to aid NIMs In Q1FY11 LICHFL had introduced a new home loan product called New Fix-O-Floaty it offered loans at a competitive fixed rate of 8.9% upto 31.03.2012 and then its takers would be charged on the prevailing floating rate. These loans form ~19% (~Rs.120 bn) of the total loan book as of FY12. In FY13E ~Rs.100 bn are to be reprised, off which ~Rs. 8 bn have already been reprised at sub 12% floating rate in Q1FY13 (reprised ~ 250 bps above). The remaining loans are to be reprised in FY14E. In FY13E LICHFL plans to borrow Rs.150 bn, the company intends to borrow these funds in 68:32 ratio (NCD s : bank borrowings) depending on the market scenario. Preferably it determines to raise more of NCD s (i.e if the scenario permits) as these are cheaper anywhere between 55-85 bps. VALUATION We initiate coverage on LICHFL with Buy rating and a TP of Rs. 298/share based on residual income model yielding a potential upside of 24% (18 months). At our TP, LICHFL will trade at an implied P/BV of 1.9x on Q1FY13 BV. SKP Securities Ltd www.skpmoneywise.com Page 1 of 13
COMPANY PROFILE Promoted by Life Insurance Corporation of India (40.3% stake), LIC Housing Finance Limited (LICHFL) was incorporated in 1989. The company operates in the middle class user segment and provides loans for homes, construction activities and also corporate housing schemes. Around 94.9% (FY12) of the loan portfolio is derived from the retail segment and the rest from large corporate clients. LICHFL operates on a distribution network business model as against Deewan Housing Finance (branch business model) or HDFC (in-house sourcing model). Apart from wide marketing network comprising Direct Selling Agents (DSAs), Home Loan Agents (HLAs) and Customer Relationship Associates (CRAs), a wholly owned subsidiary LICHF Financial Services (LICHFLFS) also distributes the company s product. Exhibit 1: Loan origination by source CRA's 12% LICHFLFS 2% Direct 2% HLA's 26% DSA's 58% The company has strong pan India presence through 7 regional offices, 13 back offices, 188 marketing offices and 1 customer service point. It has a well established presence in Tier I cities in the North and Southern India viz Hyderabad, Chennai, Bangalore, Delhi NCR, Mumbai, and Pune. SKP Securities Ltd www.skpmoneywise.com Page 2 of 13
LICHFL has four subsidiary companies namely LICHFL Care Homes Ltd, LICHFL Financial Services Ltd, LICHFL Trustee Company Ltd and LICHFL Asset Management Company Ltd. INVESTMENT ARGUMENTS Loan book to grow at 23% CAGR between FY12-FY14E LICHFL s loan book has grown by 29% over the last 5 years. We expect its loan book to grow by 23% CAGR through FY12-FY14E. This growth is expected to be backed by the increase in developer loans disbursements. At its peak in FY10 these loans contributed 10.9% of total loans but as of Q1FY13 it constituted merely 4%. We expect the share of these loans to increase to ~10% in 3 years, given the low LTV of ~40% as compared to ~55% in case of individual housing loans and also due to higher yields of ~400-450 bps as compared to individual loans given their risky nature. We expect this share to increase to 5.5% in FY13E and 6.6% by FY14E. Exhibit 2: Bifurcation of loans 100% Individual Loans Developer Loans 96% 92% 88% 84% 80% FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E SKP Securities Ltd www.skpmoneywise.com Page 3 of 13
Repricing of loans and favorable borrowing mix to aid NIMs LICHFL s total loan book as on FY12 stood at Rs. 630.8 bn and ~68% of its loan book is fixed. Exhibit 3: Nature of loan book Floating Loans 32% Fixed Loans 68% In Q1FY11 LICHFL had introduced a new home loan product called New Fix-O-Floaty it offered loans at a competitive fixed rate of 8.9% upto 31.03.2012 and then its takers would be charged on the prevailing floating rate. These loans form ~19% (~Rs.120 bn) of the total loan book as of FY12. In FY13E ~Rs.100 bn are to be reprised, off which ~Rs. 8 bn have already been reprised at sub 12% floating rate in Q1FY13 (reprised ~ 250 bps above). The remaining loans are to be reprised in FY14E. Moreover, on the liabilities front ~68% of its borrowings are fixed in the form of NCD s. SKP Securities Ltd www.skpmoneywise.com Page 4 of 13
Exhibit 4: Borrowings funding profile NCD 57% LIC 1% NHB 3% Sub. Bonds & Deposits 1% Upper Tier II 5% Misc 1% Banks 32% LICHFL enjoys a very good rating in the wholesale debt market as it has been rated AAA by Crisil due to the strong parental brand name it carries. In its recent rating rationale dated 22 nd May, 2012, it commented: The ratings continue to reflect the support that LIC Housing receives from its largest shareholder, Life Insurance Corporation of India (LIC), the public-sector insurer and a dominant player in the Indian life insurance space. The ratings also reflect LIC Housing s diversified resource profile, comfortable capitalisation, and adequate earnings profile. These rating strengths are partially offset by the threat to LIC Housing s market position because of intense competition in the housing finance segment.. Exhibit 5: The composition of outstanding borrowings as on 31st March, 2012 & the ratings assigned by rating agencies Debt facility Amt (Rs. bn) Rating Loans from Scheduled Banks 178.23 CRISIL AAA / Stable \ CRISIL A1+ Refinances from NHB 18.43 Term loans from LIC of India 7.53 Non Convertible Debentures 320.66 CRISIL AAA / Stable \ CARE AAA Subordinated Bonds (Tier II) 15.00 CRISIL AAA / Stable \ CARE AAA Upper Tier II Bonds 15.00 CRISIL AAA / Stable \ CARE AAA Public Deposits 2.69 CRISIL FAAA / Stable Commercial Paper 0.49 CRISIL A1+ Others 2.85 Source: Company reports SKP Securities Ltd www.skpmoneywise.com Page 5 of 13
In FY13E LICHFL plans to borrow Rs.150 bn, the company intends to borrow these funds preferably in 68:32 ratio (NCD s : bank borrowings) depending on the market scenario. But if situation permits it determines to raise more of NCD s as these are cheaper anywhere between 55-85 bps. On an aggregated basis, the cost of raising NCDs for the company ranging typically around 2 to 5 years and in some cases slightly more than that in terms of tenure, has hovered between 9.60% to 9.95%. On the other hand bank borrowings are available to LICHFL in 10.50% to 10.65% range, thus the preconceived notion to raise more of NCD s. We admit to the fact that given their nature of being a fixed rate debt instrument NCD s may turn out to be counterproductive and could risk squeezing out margins in a declining interest rate scenario, but given the run-rate at which loans switch from fixed to floating we believe the increase in the yield on advances should more than offset the rise in cost of funds. We expect NIMs to improve from 2.46% in FY12 to 2.80% in FY13E and 2.92% in FY14E. Moreover NII is expected to grow at +40% in FY13E and 28.3% in FY14E. Exhibit 6: Improving NII and NIMs on the back of loan repricing and better funding NII (Rs. mn) NIMs (%) 30,000 25,000 20,000 15,000 10,000 5,000 - FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E 3.5 3.0 2.5 2.0 1.5 1.0 0.5 - SKP Securities Ltd www.skpmoneywise.com Page 6 of 13
Adequately Capitalised LICHFL s capital adequacy ratio and tier-i ratio as on Q1FY13 stood at +16% and +11% respectively, as against NHB mandate for capital adequacy ratio for housing finance companies at 12%. With incremental capital requirement for incremental assets decreasing over a period of time and ROAE of +21%, the company can comfortably grow its risk weighted assets (RWA) at 23% CAGR with the earnings retained and maintain a healthy Tier-1 ratio at ~10%-11%. Exhibit 7: Enough capital generated to sustain growth-lichhfl s internal capital generation estimated schedule Internal Capital Generation FY11 FY12 FY13E FY14E Equity (Rs. mn) 41,691 56,822 66,599 79,227 Asset (Rs. mn) 493,319 617,695 760,746 934,860 Asset / Equity (x) 11.8 10.9 11.4 11.8 Incremental Asset to Equity (x) 14.3 8.2 14.6 13.8 ROAE 25.8% 18.6% 21.0% 22.9% Incremental capital generated (Rs. mn) 9,745 9,142 12,933 16,705 Payout Ratio 17.0% 19.9% 21.0% 21.0% Internal Capital generated ex-payout (Rs. mn) 8,084 7,325 10,217 13,197 Implied incremental assets 111,861 124,375 143,051 174,114 Implied asset growth 29.3% 25.2% 23.2% 22.9% Tier 1 capital (Rs. mn) 41,691 56,822 66,599 79,227 RWA (Rs. mn) 483,655 515,159 632,254 778,090 Tier 1 ratio (%) 9% 11% 11% 10% Exhibit 8: Trend in capital adequacy ratio 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Tier I (%) Tier II (%) FY10 FY11 FY12 FY13E FY14E SKP Securities Ltd www.skpmoneywise.com Page 7 of 13
Limited Concerns on asset quality Over 85% of LICHFL s loan portfolio is exposed to prime salaried customers vis-à-vis self employed with low reported incomes, ~50% off which are employed with various public sector units thus ensuring nominal possibility of default. Apart from this the other thing which keeps the asset quality under check is the prudent lending policies that the company maintains like: LTV of ~55% for individual housing loans. LTV of ~40% for developer loans. Lower income to installment ratio of ~30% for individuals. Adequate mortgage life. We do believe that asset quality could virtually erode due to the increasing exposure towards risky developers loans given the concentrated cash flows of these developers and their helplessness to service debt during tough times. But, most of these loans are secured with an underlying asset cover of ~2.5x. Further land values have been going up consistently in India despite the slowdown and thus it normally would make sense for developers not to default here and lose the asset. Moreover, considering that LICHFL is solely into housing finance and its expertise in managing the assets for more than two decades gives us enough confidence to expect a sound asset quality going forward. Furthermore, individual loans shall continue to dominate its loan book and as mentioned earlier these customers are largely individuals who borrow to create an asset over their life time and have an emotional content attached towards the asset hence are less likely to default. We expect gross NPA s to increase to 0.58% in FY13E and Net NPA s to increase to 0.17% in FY13E despite higher provision coverage ratio. SKP Securities Ltd www.skpmoneywise.com Page 8 of 13
Exhibit 9: Trend in asset quality 3.00 Gross NPA's (%) Net NPA's (%) 2.50 2.00 1.50 1.00 0.50 0.00 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E Managing its operating costs well LICHFL s cost-to-income ratio has come down from as high as 23.5% in FY05 to 12.2% in FY11. In FY12 it went up to 14.6% due to higher commission and brokerage paid on loan disbursals and on higher staff cost due to implementation of an incentive plan. Going forward we expect the company to manage its costs well, thus the incremental increase in operating expenses should be reasonable. Exhibit 10: LICHFL s efficiency ratio 24.0 Cost to income ratio (%) 22.0 20.0 18.0 16.0 14.0 12.0 10.0 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E SKP Securities Ltd www.skpmoneywise.com Page 9 of 13
KEY CONCERNS Continued tight liquidity scenario will compel banks to compete intensely for deposits and other sources of funds thus, pushing up their base rates. This will have an impact on the cost of funds of housing finance companies. Moreover, an economic slowdown is also likely to lower the loan off take for housing finance companies. VALUATIONS We initiate coverage on LICHFL with Buy rating and a target price of Rs. 298 per share based on residual income model yielding a potential upside of 24% (18 months). At our target price, LICHFL will trade at a implied P/BV of 1.9x on Q1FY13 BV. We believe that LICHFL is worthy of such valuations as we derive comfort from the company s ability to retain one of the top slots in the industry. Moreover, We believe valuations are justified given sub 15% cost to income ratio, sub 0.15% Net NPA s, strong parental brand image and augmenting ROAE and ROAA. Our valuation assumptions call for risk free rate of 8.5%, risk premium of 5.5%, five year average beta of 1.15, surmising to a discount rate of 14.8%, we have modeled terminal growth rate at 5% and factored back of the envelope calculated company s latest networth (Q1FY13). SKP Securities Ltd www.skpmoneywise.com Page 10 of 13
Exhibit 11: PBV standard deviation band 3.5 PBV Avg PBV +2sd +1sd -1sd -2sd 3.0 2.5 2.0 1.5 1.0 0.5 - Mar-06 Mar-08 Mar-10 Mar-12 Over the last five years, LICHFL has traded in the P/BV range of 0.48x 2.92x deriving an average of 1.41x. Exhibit 12: One year forward PABV band 400 1.00x 1.50x 2.00x 2.50x 3.00x 300 200 100 - SKP Securities Ltd www.skpmoneywise.com Page 11 of 13
FINANCIALS (All data in Rs. bn unless specified, Y/e March) Income Statement FY11 FY12 FY13E FY14E Ratios FY11 FY12 FY13E FY14E Net Interest Income 13.8 14.0 19.7 25.3 NIM (%) 3.1 2.5 2.8 2.9 Non Interest Income 3.9 2.2 2.3 2.9 Cost to income (%) 12.2 14.6 12.9 12.5 Net Total Income 17.7 16.2 22.0 28.1 Gross NPA (%) 0.5 0.4 0.6 0.6 Non Interest Expenses 2.2 2.4 2.8 3.5 Net NPA (%) 0.0 0.1 0.2 0.2 Operating Profit 15.5 13.9 19.2 24.6 ROAA (%) 2.2 1.6 1.9 2.0 Other Provisions 2.6 1.6 1.5 1.7 ROAE (%) 25.8 18.6 21.0 22.9 Pre-tax Income 12.9 12.3 17.7 22.9 CAR (%) 14.9 16.7 15.1 13.9 Tax Provisions 3.2 3.2 4.8 6.2 Tier I (%) 8.6 11.0 10.5 10.2 Post-tax Income 9.7 9.1 12.9 16.7 P / BV (x) 2.7 2.1 1.8 1.5 P / ABV (x) 2.8 2.2 1.9 1.6 Balance Sheet FY11 FY12 FY13E FY14E P / E (x) 11.7 13.3 9.4 7.3 BVPS (Rs.) 87.8 112.5 131.9 156.9 Shareholders' funds 41.7 56.8 66.6 79.2 ABVPS (Rs.) 87.5 110.8 129.3 153.9 Borrowings 451.6 560.9 694.1 855.6 EPS (Rs.) 20.5 18.1 25.6 33.1 Total sources of funds 493.3 617.7 760.7 934.9 Du Pont Analysis FY11 FY12 FY13E FY14E Loan Book 510.9 630.8 778.2 956.0 Housing Loans 467.3 598.9 735.2 893.2 Net Interest Income 3.2 2.5 2.9 3.0 Developer Loans 43.6 31.9 43.0 62.8 Non Interest Income 0.9 0.4 0.3 0.3 Investments 14.0 13.8 13.8 13.8 Net Total Income 4.0 2.9 3.2 3.3 Net other Assets (31.6) (26.9) (31.2) (34.9) Non Interest Expenses (0.5) (0.4) (0.4) (0.4) Total application of funds 493.3 617.7 760.7 934.9 Other Provisions (0.6) (0.3) (0.2) (0.2) Tax Provisions (0.7) (0.6) (0.7) (0.7) ROAA 2.2 1.6 1.9 2.0 Leverage (x) 11.6 11.3 11.2 11.6 ROAE 25.8 18.6 21.0 22.9 SKP Securities Ltd www.skpmoneywise.com Page 12 of 13
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