LICHF: Good performance but... - Views on News from Equitymaster

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LICHF: Good performance but...

Jul 29, 2004

Introduction to results
LIC Housing Finance Limited (LICHF) has announced encouraging performance for 1QFY05, reporting topline and bottomline growth of 9% and 23% respectively, on a YoY basis. Strong improvement in operating margins, due to control over interest expenses as well as operating costs, has been the main highlight of the company's performance in the June quarter. The improvement in the bottomline is despite a significant fall in other income.

(Rs m) 1QFY04 1QFY05 Change
Income from Operations 2,228 2,430 9.1%
Other Income 103 54 -48.0%
Interest Expenses 1,549 1,603 3.5%
Net interest income 679 827 21.8%
Other Expenses 348 324 -6.9%
Operating Profit 331 503 52.1%
Operating Profit Margin (%) 14.8% 20.7%  
Provisions and Contingencies 5 8 44.2%
Profit before Tax 429 549 28.1%
Tax 89 130 46.1%
Profit after Tax/(Loss) 340 419 23.3%
Net Profit Margin (%) 15.2% 17.2%  
No. of Shares (m) 75.0 75.0  
Diluted Earnings per share (Rs) 18.1 22.3  
P/E Ratio (x)   6.4  

Second largest housing finance company
LIC Housing Finance (LICHF) is the second largest player in the housing finance market, with a share of over 8% in the incremental loans disbursed. Life Insurance Corporation (LIC) with a 38% stake is the promoter of this company. Its reach as well as distribution alliance with its parent has helped LICHF to grow its housing loans at a compounded rate of close to 19% over the past five years. The company is one of the most aggressive players in the housing finance segment and has managed to keep its operating costs low.

What has driven the performance in 1QFY05?
Sales:  During 1QFY05, while the company has managed to post a 22% YoY (28% YoY in FY04) growth in its outstanding advances, growth in disbursements has fallen to 13% YoY (37% YoY in FY04). This indicates that the company seems to be witnessing a slowdown in its lending operations and this may be due to higher competition from banks. However, despite falling yields, the company has managed to grow topline well indicating that the yields on its loan portfolio may be stabilising.

Operating margins:  During 1QFY05, the company was able to control interest expenses as well as reduce operating expenses, thus improving operating margins. The company has not provided the details of how its cost of capital has moved in the June quarter. The fall in operating expenses is encouraging considering that the company saw a fall in operating margins in FY04 due to higher operating expenses.

Net Profits:  Provisioning has also risen in 1QFY05. However, provisioning figures for NPAs have not been elaborated by the company. LICHF's net NPA to advances ratio stood at over 2.3% in FY04. Compared to rival HDFC, the NPA levels of the company are significantly higher. LICHF has been significantly aided by deferred tax assets in the June quarter. The deferred tax asset was also seen in the FY04 results of the company. The growth in bottomline, as apparent from the results, is mainly driven by improvement in operational efficiencies as well as growth in topline.

What to expect?
At Rs 143, the stock is trading at a P/E multiple of 6x annualised 1QFY05 earnings. After a disappointing performance in FY04, LICHF's results in the June quarter are encouraging. While the company has managed to improve its operational performance, the slowdown in growth of disbursements is a cause of concern. With fears of rising interest rates gaining ground, the company may lose market share to more competitive banks. Another major cause of concern is its higher NPAs. Valuations may look cheap at the current market price, however investors also need to realise that there needs to be a consistency in LICHF's performance before one can be confident about its prospects going forward. Thus, there is still a need to exercise caution at this stage.

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