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LICHF: Un‘real’ growth! - Views on News from Equitymaster
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LICHF: Un‘real’ growth!
Jun 20, 2006

Performance summary
The second largest housing finance institution in the country, LIC Housing Finance (LICHF) registered an enthusing 45% YoY growth in bottomline for FY06, marked by a strong pick up in its disbursal to sanction ratio. While the housing finance company (HFC) continues to lose market share to its banking peers, a real estate boom lead by spiraling average loan sizes has enabled the institution to guard its topline. Also, control over operating overheads and lower tax incidence has further cushioned the profit margins.

Rs (m) 4QFY05 4QFY06 Change FY05 FY06 Change
Income from operations 2,701 3,420 26.6% 10,233 12,379 21.0%
Other Income 58 124 114.2% 263 309 17.6%
Interest Expense 1,800 2,362 31.2% 6,771 8,546 26.2%
Net Interest Income 901 1,058 17.4% 3,462 3,833 10.7%
Other Expense 635 663 4.5% 1,649 1,480 -10.2%
Operating profit / (loss) 266 395 48.3% 1,813 2,353 29.8%
Operating profit margin (%) 9.9% 11.5%   17.7% 19.0%  
Provisions 9 19 111.1% 33.0 44.6 35.2%
Profit before tax 315 500 58.6% 2,043 2,617 28.1%
Tax 175 87 -50.5% 605 532 -12.2%
Profit after tax/ (loss) 141 414 194.3% 1,437 2,086 45.1%
Net profit margin (%) 5.2% 12.1%   14.0% 16.8%  
No. of shares (m)       84.9 84.9  
Diluted earnings per share (Rs)       16.9 24.6  
P/E (x)         6.3  

Second largest HFC
LICHF is a key player in the housing finance industry in India with a 7% market share. It was promoted in 1989 by LIC (which has 38% stake in the company) and floated its maiden GDR issue in September 2004. Although competition in the mortgage financing sector has been increasing, LICHF has shown a strong 22% CAGR in its loan book over past the five years. LICHF markets its products largely to retail clients through a network of 113 outlets. Recently, the company has begun to market its products through direct selling agencies and LIC’s insurance agents that incrementally account for around 80% of LICHF’s disbursements. LICHF, despite being the second largest housing finance company in the country (after HDFC), has been losing market share to banks over the last couple of years.

What has driven performance in FY06?
Tepid growth: LICHF showed a very tepid growth in it incremental sanctions and disbursements during FY06. This is despite the fact that the mortgage finance industry witnessed a growth of over 30% YoY in FY06. This shows the HFC’s inability to effectively market its home loan product despite the latent demand. Nevertheless, LICHF tried to catch up by increasing the disbursement to sanction ratio to 96% (89% in FY05).

What is notable here is that despite the negligible growth in incremental offtake in volume terms, LICHF managed to post a decent growth in interest income. This was on the back higher ticket size of loans. Also, the company enjoys a higher value per loan as compared to HDFC. This augured well for the HFC as it reduces the operating overheads per loan. The lower interest rates and rising real estate prices over the past couple of years had triggered the real estate boom, as a result pf which, HFCs saw an unanticipated growth in the ticket size per loan. However, going forward, with the rising interest rates, the same seems unsustainable. This will particularly impact HFCs like LICHF, which are largely reliant on value growth rather than volume growth.

Diverting from its corporate focus, LICHF, once again, seems to have reverted back to luring its retail customers, as its credit book showed a 28% YoY growth in the retail segment while the corporate book witnessed a degrowth of 43%. This can primarily be attributed to the HFC deriving higher yields on advances on the retail book, having raised the interest rates on home loans. However, the attempt does not seem to be yielding much in terms of margins, as with the weighted average cost of funds (37% bank loans) having risen by 50 basis points (7.3% in FY06) and yields showing barely 10 basis points improvement, net interest margins (NIMs) have contracted from 2.9% in FY05 to 2.4% in FY06.

Incremental disbursals skewed towards retail
(Rs m) FY05 % of total FY06 % of total Change
Retail 111,144 90.0% 141,684 95.3% 27.5%
Corporate 12,349 10.0% 6,988 4.7% -43.4%
Total home loans 123,493   148,672   20.4%

Overhead relief: LICHF has successfully curbed its operating overheads in FY06, thereby bringing down its cost to income ratio to 19%, from 23% in FY05. This has brought it close to that of HDFC, which enjoys the highest cost efficiency in the sector (cost to income ratio 12% in FY06). Further, it must be noted that banks, which are making a strong foray in the home loans industry, stand to lose to HFCs on this front, as they have much higher cost to income ratios due to more number of branches and employees.

Deterioration in asset quality: LICHF had witnessed deterioration in asset quality in FY05, having to adopt the 90 days delinquency norms (as per National Housing Bank guidelines of 2005). However, the same improved in FY06 with the gross and net NPAs coming down to 3.4% and 1.8%, from 4.4% and 2.8% in FY05. Also the provision coverage improved from 37% in FY05 to 47% in FY06.

Deferred tax cushion: LICHF’s bottomline continues to be aided by deferred tax assets, as a result of which, the effective tax rate was 20% in FY06 against 30% in FY05. However, this is not likely to continue in the coming quarters.

What to expect?
The increase in risk weightage on home loans and difficulty in passing on the rate hikes may deter banks from increasing their mortgage loan portfolio. However, we do not see any direct benefit accruing to the HFCs due to this, as they too have to counter higher interest costs. The HFC’s new business venture by way of LICHF Care Homes (homes built for the aged) will take a reasonable amount of time to contribute to its bottomline. Also, the company has made a contribution of Rs 500 m in Kotak’s Realty Fund and Rs 100 m in CIG Realty Fund, which may see downside risks going forward.

At the current price of Rs 156, LICHF is trading 1.1 times our estimated FY08 adjusted book value. While our outlook is cautious on the prospects of the mortgage finance industry in the medium term, we believe that it will be the larger players who will remain relatively hedged. Also, our concerns on LICHF remain in terms of asset quality and margin pressures. The company board has recommended a dividend of Rs 6 per share (dividend yield of 3.8%).

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