A perfect shelter in growing demand

The Indian mortgage finance market has seen some traction in the last one year. A benign interest rate environment, enhanced job security and expectations of firm property prices have aided demand. LIC Housing, one of the leading lenders in the Indian mortgage finance space, has seen its loan book grow swiftly to 38 per cent in the last one year (ahead of the industry average of 13 per cent in 2009-10).

In addition, the company was able to increase its market share to 11 per cent. Not surprisingly, its stock is scaling new highs. Notably, the company aims to increase the share to 14 per cent in 2010-11, indicating a robust performance going ahead.

Margin surprises, robust book
The three-year ‘Fix-o-Floaty’ scheme is giving the housing finance major fuel to grow its disbursements at a fast pace. The scheme charges a fixed interest of 8.9 per cent in the initial three years and a floating rate thereafter. Helped by the scheme, disbursements grew 61 per cent in the March quarter (80-85 per cent coming through the scheme). The management expects overall disbursements to grow 40 per cent in 2010-11.
 

ON SOLID GROUND
In Rs crore	FY10	FY11E
Net Interest Inc	738	900
Pre-prov profit	882	1,150
Net profit	662	900
NIM (%)	2.70	2.80
EPS (Rs)	69.70	94.70
P/BV (x)	2.90	2.40
E: Analyst estimates

Positively, as disbursements grew fast, margins also expanded. On the back of re-pricing of high-cost deposits, the second half of 2009-10 saw an improvement in margins. As much as Rs 3,000 crore of high-cost debt was re-priced lower in the March quarter. This helped in posting a 50-basis-point improvement in net interest margins (NIMs) at 3.3 per cent in the March quarter, which were ahead of market expectations.

However, for the full year, LIC Housing’s NIMs contracted 25 basis points to 2.7 per cent on account of an aggressive pricing of its loans during the first half of last year. Going ahead, the management expects NIMs to be in the range of 2.8-2.9 per cent in 2010-11.

Investment rationale
In spite of growing above the industry average, the asset quality has not seen any significant stress. For 2009-10, gross non-performing assets (NPAs) and net NPAs have declined 45 per cent and 75 per cent, respectively. Overall, NPAs had seen a declining trend in the last seven quarters, gross NPAs stood at 0.7 per cent and net NPAs stood at 0.12 per cent, as of March quarter. While provisioning coverage stood at a comfortable 83 per cent, the management expects to control gross NPAs at 0.5 per cent by the end of the current fiscal.

The company is estimated to require around Rs 20,000 crore to meet its disbursement targets for 2010-11, which should not be an issue. In the long run, its inclination to venture into the banking business should improve access to low-cost funds, provided it gets the Reserve Bank of India’s approval.

Robust disbursement growth, stable margins and low non-performing loans do indicate a favourable trend in its operating metrics. At Rs 1,033.45, the stock is trading at twice its 2011-12 estimated book value and could be added to a portfolio with a two-year perspective.