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LIC Housing: Change is the key

Jun 12, 2002

LIC Housing Finance (LICHF) reported a 22% rise in earnings and a 17% growth in interest income for the quarter ended March 2002. The company's operating margins for the quarter declined by 70 basis points to 27.3%. For the full year, however, it managed its operating margins at 21%. This is commendable considering a significant decline in interest rates in the last one year.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Income from operations 1,960 2,28216.5% 7,446 8,57815.2%
Other Income 6 30 374.6% 9 38 308.6%
Interest expense 1,438 1,64714.5% 5,509 6,27814.0%
Net interest income 522 63521.8% 1,937 2,30118.7%
Other expenses (27)13-150.2% 379 50633.8%
Operating Profit 548 622 13.5% 1,559 1,794 15.1%
Operating Profit Margin (%)28.0%27.3%20.9%20.9%
Provisions and contingencies - - - 109 21092.0%
Profit before Tax 554 65217.6% 1,459 1,62211.2%
Tax 83 75-9.5% 353 3560.7%
Profit after Tax/(Loss) 471 57722.4% 1,106 1,26714.5%
Net profit margin (%)24.1%25.3%14.9%14.8%
No. of Shares (m) 75.0 75.0 75.0 75.0
Diluted Earnings per share*25.130.814.716.9
P/E Ratio2.54.6
*(annualised)

Increasing competition has however lowered the company's business growth. Its loan disbursements growth at 25% for the year was lower than the industry growth rate. Loans sanctioned by the company also increased at a relatively low rate of 21% YoY.

The company's cost to income ratio increased marginally to 22% for FY02 from 19% in the previous year. This is mainly due to provisions on account of losses suffered by the company on US-64 and on amount written off for loans due to IFCI. LICHF however, managed to improve its interest spread to 2.1% from 1.8% in the previous year on the back of steep decline in its cost of borrowings (from 12.5% to 11.3% in FY02). Notably, LIC's contribution to total borrowings of the company come down to 17% in FY02 from 57% in the previous year. This has been replaced by low cost borrowings from banks (accounted for 28% of LICHF's total borrowings). While cost of funds declined sharply, its average yield on advances declined at a comparatively lower rate to 13.8% from 14.4% in the previous year. Consequently, the company managed to get higher interest spread.

Currently, LICHF derives 60% of its business from about 1,250 LIC agents for which LICHF is not incurring any cost. Going forward, the company plans to appoint its own direct marketing agents to improve the business growth amidst intensifying competition. Presently, it operates through 97 offices across the country. For FY03, LICHF has targeted over 35% loan growth for its individual loan disbursements (accounts for 97% of its total loan disbursements). This will be achieved through both acquisitions and organic growth. In FY02 only, the company took over individual loan portfolio of GLFL Housing Finance amounting to Rs 553 m.

The company's tax provision for the year remained constant as it has taken credit for deferred tax assets of Rs 10 m. Though its NPA provision jumped by 92%, its net NPA ratio could increase from 2.8% as on March 2001 considering low recovery rate.

At the current market price of Rs 77, LIC Housing Finance is trading at a P/E of 5x FY02 earnings and price to book value ratio of 0.8x. The company has targeted strong growth rates in business for FY03, which would be achievable if it becomes proactive to market changes (with customized housing finance products and improving services, in line with its peers).

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