Further re-rating likely

The National Housing Board’s decision last week to keep the capital adequacy ratio unchanged at 12 per cent (as against the Usha Thorat Committee’s recommendations of raising it to 15 per cent) removes a significant regulatory overhang on housing finance companies such as LIC Housing Finance (LIC HF). Even otherwise, the company’s business prospects remain healthy, with possibilities of a further re-rating for the stock, which is currently hovering at Rs 244 levels.

Over the past few years, LIC HF has addressed key issues such as worsening asset quality and falling loan growth, resulting in a re-rating of its stock’s valuation. The stock’s historical average one-year forward price to adjusted book value ratio has moved up from 1.4 times to 1.9 times in the past three years. Analysts believe there is more to come, driven by improving fundamentals. In a post-results report, Manish Chowdhary, Aditya Narain and Pooja Kapur, analysts at Citigroup, had noted, “We believe a re-rating is warranted, given LIC HF’s significant improvements in its market position, asset quality and return profile”.

Strong traction in individual loan book, consistent market share gains (over four-five years) and leverage from LIC’s distribution network is likely to drive loan growth of 22-24 per cent in the next couple of years. Further, a pick-up in high-margin developer loans could rub off positively on the company’s profitability as well. The management is looking to tap into the demand for smaller ticket loans in tier-2 cities to expand its developer portfolio and expects its share to rise. 

IMPROVING OUTLOOK
In Rs crore	FY12	FY13E	FY14E
Net interest income	1,391	1,957	2,445
% change y-o-y	1.0	40.7	24.9
NIM (%)	2.3	2.7	2.8
Bps change y-o-y	-60	40	10
Net profit	990	1,399	1,737
% change y-o-y	-4.8	41.2	24.2
RoE (%)	20.1	22.3	22.6
Book value (Rs)	112.5	135.8	168.1
Loan growth (%)	23.5	23.5	22.0
Gross NPA(%)	0.4	0.3	0.3
E: Estimates                                                                        Source: Analyst reports

LIC HF CEO and director V K Sharma said in a post-results conference call in May, “We target to double our developer loans share to 10 per cent at the end of this fiscal from five per cent.” These along with likely NIM expansion and stable operating costs should enable the company to post 30 per cent earnings growth over FY12-14. On the flip side, given the relatively lower asset quality risks and strong demand in this segment, more and more banks are scaling up their home loans portfolio. This may reflect on the company’s profitability.

Improving NIMs, healthy outlook
While the size gap between HDFC (FY12 loan book of Rs 140,422 crore) and LIC HF (Rs 63,080 crore) remains significant, LIC HF has been gradually closing in to the market leader on the asset quality front. The key issue around LIC HF, namely its volatile margins and inconsistent financial (earnings growth) performance, is also likely to improve in the future.

Going forward, LIC HF’s net interest margins (NIMs) are likely to improve driven by the re-pricing of about Rs 12,000 crore worth of teaser loans over the next 15 months. This will be accompanied by fall in overall borrowing costs. Thus, its NIMs are likely to expand by 35-50 basis points to 2.7 per cent in FY13, believe analysts. Rising share of high margin developer loans will also aid this margin expansion, though the segment is perceived to involve more risk. Overall, the management expects to hold margins in the narrow range of 2.7-3.0 per cent this financial year.

Further, the company is likely to write back provisions made on teaser loans (estimated at about Rs 1,800 crore) in FY14, which will boost earnings in that year. Put together, these should help sustain healthy growth and lead to higher stock valuations for LIC HF in the medium term, say analysts.

Ravikant Bhat, Divyanshi Dayan and Aayush Dureha of SBICap Securities, say they believe LIC HF will remain in a strong growth trajectory and therefore continue to command premium valuations. While the stock is trading at 1.8 times FY13 estimated book value, our FY13 estimated adjusted book value discounts target price (of Rs 315) at 2.37 times, they add.