LIC Housing Finance : BUY

Impressive Performance

LICHF reported a strong set of numbers with net profit rising 47% YoY. Healthy net interest income (up 61% YoY) was driven by improvement in margins (up 15 bps YoY to 3.45%) and aboveindustry loan growth of 34% YoY. Non interest income included Rs 0.3 bn of profit on investment in Realty fund. Operating cost structure saw improvement, with cost-to-income ratio improving to 13.5% (down 414 bps YoY). Asset quality improved with absolute Gross NPAs falling sequentially by 23%.

Key highlights

• Biz momentum was maintained with sanctions rising 25% and disbursements rising 34% YoY, driven primarily by ‘Individuals’ biz segment (which saw 37% YoY growth in sanctions and 71% YoY rise in disbursements). 
• Lending towards non-individual segment slowed down in Dec’10; however, mgmt maintains that this segment will resume its normal growth trajectory going forward. 
• LICHF has guided for NIM of ~2.7% (vs. 3.45% in Q4FY11 which are not sustainable) & Advances growth of ~25% in FY12E which we believe are achievable. LICHF will look to raise equity capital in H2FY12. We have built in Rs15 bn of equity dilution in FY12E at a price of Rs 225 in our estimates.

Maintain BUY with a revised TP of Rs 270

LICHF has been able to demonstrate strong growth in core operational performance along with substantial improvement in asset quality (despite stiff competition in the housing loan space).

While rising rates & increasing real estate prices pose risk to housing demand, the mgmt is confident of maintaining above industry growth rates & healthy asset quality. However, margins will be under pressure going forward. We have revised our EPS est upwards by 4% in FY12E to factor in improving biz performance and equity dilution, resulting in 24% rise in FY12E BV. We recommend a BUY rating on the stock, with a target price of Rs 270 (2.2x FY12E ABV + Rs 2 as value of investments) – upside of 20%