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LICHF: Analyst meet extracts

Jul 7, 2005

In the recent analyst meet held by LIC Housing Finance (LICHF), the second largest HFC in India highlighted the prospects of mortgage financing in the country and steps taken by it to compete in the same. Following are the key extracts of the meet.

Prospects in mortgage finance industry
The great Indian middle class:  The Indian mortgage industry seems to be at the inflection point as the Indian middle class (categorized by NCAER as those households with annual income ranging between Rs 90,000 to Rs 5 lacs per annum) continues to grow at a fast clip. By the end of this decade, two-thirds of the country’s population is expected to belong to this category. Also, the per capita income in the country has grown at a faster rate of 11% than the GDP (6.9%) in FY05. Not to mention the scores of financial entities (including banks and HFCs) that are looking at bolstering their retail portfolio by focusing on the low risk home loan segment. Given these, the liquidity in the hands of the mass affluent is immense (either by way of income or credit) and the propensity to spend the same on buying shelter remains high.

Changing industry dynamics:  It is also interesting to note that the dynamics of the mortgage industry have changed substantially over the past few decades and the preference for owning homes is clearly higher than renting one. The percentage of homes owned has increased from 53% of total number of dwelling units in FY89 to around 65% in FY05. Also, the average age of the home loan borrower has reduced from 45 years in FY89 to 35 years in FY05 (Source: CRIS INFAC Retail Finance report). This is further expected to reduce to 32 years by FY09. The comprehension of this is that the demand for mortgage finance is here to stay and the same will reflect on the balance sheets of HFCs and banks having a reasonable market share in mortgage finance, in the years to come.

Where does LICHF stand?
Losing market share:  Despite the brilliant scope of the sector in which it is operating, LICHF seems to be losing out on all grounds. The HFC has steadily lost market share from 20% of the housing advances in the early 1990s to around 6% in FY05. At the same time, banks (new entrants in the industry) have poached a large chunk of the market share from HFCs (LICHF and HDFC) and accounted for 61% of the incremental market share in FY05. This is the reason despite a significant increase in sales team, LICHF has had a slower growth in disbursements and sanctions in FY05. The company has increased its marketing strength substantially during last two years with its number of direct selling agents (DSAs) going up from 1,750 in FY03 to 4,400 in FY05. Going forward, if the company is not able to capitalise on the additional sales force, the cost to income ratio will be pressurised. However, it must be noted that a major part of the DSA cost is directly linked to the loan disbursals (commission on loans) and are thus not fixed cost to the company.

Churn in portfolio:  LICHF has persisted on its attempt to modify its customer portfolio in favour of the corporate clients, that comprised 10% of the total advance portfolio in FY05, up from 6% in FY04.This is because not only is this segment high yielding but also of a shorter duration as compared to the retail segment. LICHF provided loans to over 700 corporates through the corporate housing loan scheme in FY05. Also, the HFC has continued to reduce the quantum of borrowings from LIC (from 42% in FY04 to 34% in FY05) and sourced additional low cost loans from the National Housing Bank. Although the HFC has increased interest rates on home loans in 1QFY06, with interest costs also keeping an upward bias, the margin pressures are expected to sustain.

Going forward…
As per the company’s projections, the housing finance industry is expected to grow at a CAGR of 18% over the next 3 years from Rs 569 bn in FY05 to Rs 1,347 bn in FY08. However, the share of banks will grow to 67% and they will continue to remain competitive due to cost efficiency and better reach. However, LICHF is anticipating a growth of 25% to 30% in advances in the next 2 to 3 years. Also, the total number of selling agents is expected to grow by 50% over the next 3 years. The company has initiated an in-house data mining system called ‘Fractal’ in FY06 that is expected to help arrest its incremental delinquencies and bring down its NPA levels in FY06 (NPAs increased to 2.8% of net advances in FY05 from 2.4% in FY04 due to 90 day delinquency norms).

What to expect?
At the current price of Rs 224, LICHF is trading 2 times our estimated FY07 adjusted book value. We had recommended a ‘Sell’ on the stock in June 2005 at the price of Rs 237. Although the stock has corrected from the earlier levels, we stand by our view and believe that there are more competitive players in the housing finance industry. Also, given the fact that LICHF will not show any significant improvements in terms of operating costs and grow at lower than industry rate, the possibility of its valuations improving in the medium term looks unlikely.

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