LIC Housing Finance: Buy

>> Tuesday, September 1, 2009

Investors can consider accumulating the LIC Housing Finance stock, given the scope for better growth and easing margin pressures as the housing market revives and interest rates head higher over the medium term.

LIC Housing Finance (LIC Housing) has continued to display strong growth in disbursements in recent quarters, despite a slowing housing market and PSU banks aggressively growing this business by offering lower rates.

At the current price of Rs 653, the stock trades at nine times its estimated earnings and two times its estimated book value for 2009-10.

This valuation (price-book value) positions LIC Housing at a steep discount to HDFC, but at a premium to other financing companies such as GIC Housing Finance and Dewan Housing Finance.

Strong profitability ratios (return on assets of 2 per cent and return on equity of 23.8 per cent), improving asset quality over the years (Gross NPAs down from 4.7 per cent in 2005 to 1.5 per cent currently), strong marketing network (with more than 9000 agents covering 450 centres), credit rating (AAA from CRISIL) and strong parentage which helps it source funds at a lower cost than most other NBFCs are key investment arguments for the stock.

However, investors may have to bear in mind that the stock has risen 276 per cent from its 2009 lows in March due to a significant re-rating driven by internal restructuring.

LIC Housing, promoted by Life Insurance Corporation, is the fourth largest mortgage financing company after HDFC, SBI and ICICI Bank with a market share of a little over 8 per cent in home loans.

More than 90 per cent of LIC Housing’s portfolio is made up of individual home loan borrowers while the rest is financing for home developers. Despite getting higher yields on project financing, the company continues to cap this segment at 10 per cent of the total portfolio.

The average ticket size of loans disbursed has risen from Rs 10 lakh to Rs 12.05 lakh in a year with just 58 per cent of the loans originating from top cities.

LIC Housing has around 158 marketing offices and a strong distribution network of more than 9,000 agents in the form of direct-selling agents, home loan agents and customer relationship associates across India. The company’s borrowing profile is skewed towards non-convertible debentures and term loans which forms over 80 per cent of the fund base.

As of June 30, the loan book stood at Rs 29,254 crore, a 29 per cent growth in a year. The company missed the bus during the housing boom, growing by 22 per cent in 2002-07, at a time when new housing loans grew by 30 per cent compounded annually.

Nevertheless, it has caught up in the last couple of years and has grown 28 per cent even as the industry saw growth moderating to 9 per cent.

LIC Housing has managed to grow its net profit by nearly 39 per cent during the period 2005-09 on a compounded annual basis, owing to strong growth in disbursements, coupled with fall in operating expenses.

The net profit for the latest June quarter grew by a modest 18 per cent despite a strong loan book growth of 29 per cent due to fall in net interest margins.

Net interest margins fell by 0.21 percentage points in a year, despite interest rates falling, due to aggressive pricing done in the housing portfolio to compete with its peers.

Though LIC Housing has managed to moderate costs through floating rate borrowings and incremental borrowings at lower rates, margin pressures may continue given the expanding portfolio of new loans which offer a fixed rate for the initial three years. These loans may put pressure on incremental yields; however, the existing loans which are reset every quarter may benefit from rising yields.

The disbursement-to-sanctions ratio of 80 per cent is quite good for the company given its retail focus.

Asset quality in the housing portfolio has improved over years as the company has a strong credit-appraisal mechanism and stringent loan-to-value criteria. The gross NPA ratio is at 1.51 per cent, a slight deterioration over the previous quarter. The net NPA at 0.65 per cent is flat compared to last year.

On the capital raising front, it has raised NCDs and term loans worth Rs 6000 crore this fiscal. LIC Housing also plans a QIP by selling around 1 crore shares to improve its capital adequacy, which is now at a sound 13.5 per cent.

The company is also entering lucrative businesses such as venture capital fund and LIC Care (providing dwelling centres for a growing population of senior citizens), but these are in the nascent stages. The company recently sold part of its stake in LIC MF to Nomura.

The advantage the company has is that 50 per cent of the borrowing portfolio and 96 per cent of the loan portfolio are pegged to floating rates, reducing the impact of interest rate volatility.

The company cites improving housing demand since February this year as the trigger for its good disbursement growth.

That much of disbursements came from new home buyers (the ones switching the loans to LIC Housing were only 7-8 per cent of incremental disbursements) is also a positive as it indicates sustainable new home sales driving the growth.

This shows that the company can expect to capitalise on reviving housing demand. The falling age of home owners and moderating housing prices may aid asset quality. With the Eleventh Plan projecting a 24.7 million unit shortfall in housing units, potential for market expansion remains substantial.

LIC Housing may be able to leverage both on its strong distribution network (especially in urban and semi-urban areas) and rising ticket size of the loans.
Source : Hindu Business Line

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