In troubled waters

The arrest of LIC Housing Finance’s (LIC HF) erstwhile CEO Ramachandran Nair last week in the alleged loans for bribes case has seen its stock fall almost 24 per cent (from Rs 1,308 on November 23) to Rs 998.85 on Tuesday. While the company has been quick in its attempt to control the damage — including the appointment of VK Sharma as the new CEO effective Monday (November 29), analysts believe the impact of the case will take some time to fade.

Performance likely to be hit
The outstanding loans to the real estate companies in question by LIC HF stood at Rs 380 crore, forming 0.6 per cent of the latter’s balance sheet. According to the LIC HF management, all these loans are secured and are performing loans, thereby not threatening the asset quality of the company.

However, analysts believe the event will have a double whammy impact on the company. Edelweiss Securities’ analysts noted the CBI investigation on corporate loan cases of LIC HF would have negative implications for the company, both from a financial as well as sentimental perspective.” Their concerns stem from the fact that in the past two years, the stock has re-rated from less than one time its book value to as high as three times on the back of consistently improving operating metrics under the regime of its erstwhile CEO.”

Also, though the impact on credit quality of LIC HF may be muted (as these loans form a meagre 0.6 per cent of its total loan book), a lower proportion of high yielding corporate loans will impact margins to the tune of 15-20 basis points. This, coupled with falling interest spreads in the individual loan segment (owing to stiff competition), will further suppress the company’s margins.

LIC HF’s loan book growth is now estimated to be lower at 30 per cent versus earlier estimates of 34 per cent over FY10-13. While the individual loans segment is poised to grow at 25 per cent, a conservative approach in disbursing developer loans would limit the growth trajectory. Overall, analysts have trimmed their earnings estimate for FY11 6-8 per cent, factoring in lower disbursement growth, compression in margins and higher provisioning.
 

SLOWDOWN EXPECTATIONS
	FY11E	FY12E
Revenues	1,499.0	1,679.0
% chg y-o-y	39.6	12.0
Net profit	895.0	964.0
EPS (Rs )	94.2	101.4
% chg y-o-y	35.2	7.7
P/BV (x)	2.3	1.9
Source: Edelweiss Securities

Valuations
While the bad news has largely been discounted by the markets, there could be more pain left for the LIC HF stock. The legal proceedings could be protracted and prove to be a hangover on the stock.

Given the qualitative headwinds as well as the business slowdown likely to follow, the current valuations may be difficult to sustain.

Till the time the market regains confidence in the company as well as the quality of its loan portfolio, LIC HF’s stock is likely to remain under pressure, believe analysts.

Most brokerages have cut their target price estimates for the stock as much as 50 per cent and expect it to range Rs 800-1,000 in the near-term.

Analysts believe a 10 per cent correction in the stock could be a good entry point for long-term investors.