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LICHF: Home sick! - Views on News from Equitymaster
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LICHF: Home sick!
Aug 9, 2005

Performance Summary
LIC Housing Finance posted a 20% YoY growth in bottomline for 1QFY06, with its net interest income growing at a slower pace of 7% YoY. The HFC continues to feel the heat of competition in the mortgage finance industry, as its margins continue to plunge. Changes in delinquency norms have further deteriorated the company’s asset quality. However, control over operating overheads has helped the company improve its cost to income ratio.

Rs (m) 1QFY05 1QFY06 Change
Income from operations 2,429 2,812 15.8%
Other Income 54 51 -5.6%
Interest Expense 1,602 1,928 20.3%
Net Interest Income 827 884 6.9%
Other Expense 324 295 -9.0%
Operating profit / (loss) 503 589 17.1%
Operating profit margin (%) 20.7% 20.9%  
Provisions 8 8 0.0%
Profit before tax 549 632 15.1%
Tax 170 177 4.1%
Deferred tax asset 40 47 17.5%
Profit after tax/ (loss) 419 502 19.8%
Net profit margin (%) 17.2% 17.9%  
No. of shares (m) 74.9 84.9  
Diluted earnings per share (Rs)* 22.38 23.65  
P/E (x)   9.2  
* 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 1QFY06?
Corporate focus to no avail: With a 10% YoY growth in sanctions and 8% YoY growth in incremental disbursals, LICHF witnessed a relatively better 16% YoY growth in topline during 1QFY06, as compared to the past few quarters. This is primarily the effect of higher yields on advances, due to the HFC having raised interest rates on home loans. 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 been increased to 7% in 1QFY06 from 5% in 1QFY05. This has helped the company enjoy a higher value per loan as compared to HDFC. This also augurs well for the HFC as it reduces the operating overheads per loan. However, the attempt does not seem to be yielding much for the HFC in terms of margins, as net interest margin (NIM) have shrunk considerably over the last year (2.7% in 1QFY06 against 3.2% in 1QFY05).

Incremental disbursals skewed towards corporate
(Rs m) 1QFY05 % of total 1QFY06 % of total Change
Retail 8,798 94.5% 9,380 93.3% 6.6%
Corporate 512 5.5% 670 6.7% 30.8%
Total home loans 9,310   10,050   7.9%

Overheads curbed: LICHF has successfully curbed its operating overheads in this quarter thereby bringing it down by 6%. It has helped the HFC reduce its cost to income ratio from 13% in 1QFY05 to 10% in 1QFY06. This has brought it almost at par with HDFC, which enjoys the highest cost efficiency in the sector (cost to income ratio 9% in 1QFY06). Also, 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.

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 4.7% in 1QFY06 (from 3.5% in 1QFY05). Also, the coverage ratio (provisions to gross NPAs) has declined to 17% and the net NPA to advance ratio has gone up to 3.0% in 1QFY06 (from 2.2% in 1QFY05).

Deferred tax cushion: LICHF’s bottomline continues to be aided by deferred tax assets, as was the case in the early quarters of FY05. However, this is likely to discontinue in the coming quarters, which may result in a jump in tax liabilities.

What to expect?
In line with our expectations, LICHF has failed to counter competition from its peers and continues to lose market share to banks in the housing finance industry. At the same time, the increase in risk weightage on home loans from 100% to 125% (as mandated by the RBI in its revised monetary policy for 1QFY06) may to some extent, deter banks from increasing their mortgage loan portfolio, which in turn may augur well for HFCs. Given LICHF’s single product concentration and limited reach, the scalability of its business leaves a lot to be desired. 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.

At the current price of Rs 216, LICHF is trading 1.9 times our expected FY07E adjusted book value. We had given a SELL on the stock in June 2005 at the price of Rs 237. While our outlook continues to remain positive on the prospects of the mortgage finance industry, we believe that it will be the larger players who will benefit in the longer run. Also, our concerns on LICHF remain in terms of asset quality and margin pressures. We thus, stand by our recommendation.

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