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LICHF: Home alone! - Views on News from Equitymaster
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LICHF: Home alone!
Jun 29, 2005

Performance Summary
It was yet another disappointing quarter for LICHF, which declared its 4QFY05 results recently registering a 73% YoY drop in bottomline. The company, despite being the second largest housing finance company (HFC) in the country, continues to struggle to retain its market share. Cutting down provisions has also been of no avail as the deferred tax assets that were cushioning the bottomline so far have considerably reduced.

Rs (m) 4QFY04 4QFY05 Change FY04 FY05 Change
Income from operations 2,469 2,701 9.4% 9,576 10,233 6.9%
Other Income 38 45 18.4% 278 249 -10.4%
Interest Expense 1,289 1,800 39.6% 6,105 6,771 10.9%
Net Interest Income 1,180 901 -23.6% 3,471 3,462 -0.3%
Other Expense 718 624 -13.1% 1,839 1,639 -10.9%
Operating profit / (loss) 462 277 -40.0% 1,632 1,823 11.7%
Operating profit margin (%) 18.7% 10.3%   17.0% 17.8%  
Provisions 12.0 7.0 -41.7% 27.0 29.0 7%
Profit before tax 488 315 -35.5% 1,883 2,043 8.5%
Tax 217 238 9.7% 598 768 28.4%
Deferred tax asset 253 65 -74.3% 390 163 -58.2%
Profit after tax/ (loss) 524 142 -72.9% 1,675 1,438 -14.1%
Net profit margin (%) 21.2% 5.3%   17.5% 14.1%  
No. of shares (m) 74.9 84.9   74.9 84.9  
Diluted earnings per share (Rs)* 27.98 6.69   22.36 16.94  
P/E (x)         11.9  
* annualised            

Second largest HFC
LIC Housing Finance is a key player in 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 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 4QFY05?
Disbursements up, margins down: Despite witnessing a 20% YoY growth in sanctions and 13% YoY growth in incremental disbursals, LICHF has witnessed a very meager 7% growth in topline during FY05. This is mainly because the yields on housing loans have dropped from 10.4% in FY04 to 8.8% in FY05. However, what is heartening is the fact that the HFC has reversed the trend of declining disbursal to sanction ratio (D/S) in this fiscal. The ratio improved from 87.9% in FY04 to 88.3% in FY05. At the same time, however, the HFC seems to be unkempt about maintaining its net interest margin (NIM) levels that has considerably declined over the last year (2.9% in FY05 against 3.5% in FY04). Going forward, with interest rates keeping an upward bias the pressure on margins is likely to continue.

Corporate focus: Carrying forward its attempt to allocate a higher proportion of advances to corporates and builders, that are higher yielding and lower duration loans as compared to retail, the proportion of corporate loans to total loans has gone up to 10% in FY05 (5% in FY04). Thus, even though the number of loans has fallen, the value per loan has gone up to Rs 0.6 m from Rs 0.4 m in FY04.This augurs well for the bank as it reduces the operating overheads per loan. Going forward, we expect the retail segment to continue growing at the consistent rate of 23% YoY while the corporate segment is expected to grow at an average rate of 10% over the next 3 years.

Deterioration in asset quality: LICHF has had to adopt the 90 days delinquency norms from FY05 (as per National Housing Bank guidelines of 2005). Due to this the asset quality has deteriorated with incremental slippages, bringing the gross NPA to advance ratio to 4.4% in FY05 (from 3.6% in FY04). Although the coverage ratio (provisions to gross NPAs) has been maintained at 37%, the net NPA to advance ratio has gone up to 2.8% in FY05 (from 2.4% in FY04).

Taxation hit: LICHF’s bottomline was significantly aided by deferred tax assets in the June and September quarters of FY05. However, this has discontinued from the December quarter onwards resulting in an extraordinary jump in tax liabilities. The dent in bottomline, as is apparent from the results, is mainly driven by this factor and impairment in topline growth.

What to expect?
In line with our expectations, LICHF has failed to counter competition from its peers in the housing finance industry. Given the company’s single product concentration and limited reach the scalability of its business leaves a lot to be desired. We thus anticipate that the HFC will continue to loose market share to banks that are now getting more aggressive in this business. Also, asset quality remains a matter of concern for the company and will continue to erode its book value.

At the current price of Rs 201, LICHF is trading 1.8 times our expected FY07E adjusted book value. We had given a SELL on the stock in June 2005 at the price of Rs 237. Although the stock has considerably corrected from the earlier levels, we stand by our view and believe that there are more competitive players in the housing finance industry. Although the company is undervalued as compared to its contemporary HDFC, inability to boost its topline and sustain its market share in the coming quarters may further dampen its valuations.

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