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LICHF: ‘Dwelling’ in hope! - Views on News from Equitymaster

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LICHF: ‘Dwelling’ in hope!

Dec 5, 2005

Performance Summary
LIC Housing Finance (LICHF) registered an enthusing 28% YoY growth in bottomline for 2QFY06, marked by a strong pick up in its disbursal to sanction ratio. The housing finance company (HFC), though lagging its peers (including banks) in terms of market share, has made an appreciable attempt to consolidate its market share. Changes in delinquency norms have, however, considerably impacted the HFC’s asset quality. Nevertheless, control over operating overheads has helped the company improve its cost to income ratio.

Rs (m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Income from operations 2,490 3,011 20.9% 4,921 5,823 18.3%
Other Income 77 89 15.6% 131 140 6.9%
Interest Expense 1,643 2,056 25.1% 3,246 3,985 22.8%
Net Interest Income 847 955 12.8% 1,675 1,838 9.7%
Other Expense 355 317 -10.7% 680 612 -10.0%
Operating profit / (loss) 492 638 29.7% 995 1,226 23.2%
Operating profit margin (%) 19.8% 21.2%   20.2% 21.1%  
Provisions 8 9 14.3% 15.0 17.0 13.3%
Profit before tax 561 718 28.0% 1,111 1,349 21.4%
Tax 106 134 26.4% 236 264 11.9%
Profit after tax/ (loss) 455 584 28.3% 875 1,085 24.0%
Net profit margin (%) 18.3% 19.4%   17.8% 18.6%  
No. of shares (m)       84.9 84.9  
Diluted earnings per share (Rs)*       20.6 25.6  
P/E (x)         8.0  
* annualised            

Second largest HFC
LIC Housing Finance 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 2QFY06?
Back to retail: Diverting from its corporate focus, LICHF, once again, seems to have reverted back to luring its retail customers as its credit book showed a 16% YoY growth in the retail segment while the corporate book witnessed a degrowth of 34%. This can be primarily attributed to the HFC deriving higher yields on advances on the retail book, having raised the interest rates on home loans. Although LICHF has been attempting to allocate a higher proportion of advances to corporates and builders (that are high yielding and lower duration loans as compared to retail), the proportion of corporate loans to total loans has stagnated at around 7% over the last several quarters. This indicates pricing pressures on the corporate side.

Nevertheless, it must be noted that LICHF has shown a 11% YoY growth in disbursals in 2QFY06, higher than that witnessed over the past few quarters. Also, the company enjoys 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 in terms of margins, as net interest margins (NIM) continue to remain under pressure.

Incremental disbursals skewed towards retail
(Rs m) 1HFY05 % of total 1HFY06 % of total Change
Retail 18,172 90.0% 21,080 94.1% 16.0%
Corporate 2,017 10.0% 1,330 5.9% -34.1%
Total home loans 20,189   22,410   11.0%

Overhead relief: LICHF has successfully curbed its operating overheads in this quarter thereby bringing it down by 11%. This has helped the HFC reduce its cost to income ratio from 14% in 1HFY05 to 10% in 1HFY06. Also, this has brought it almost at par with HDFC, which enjoys the highest cost efficiency in the sector (cost to income ratio 9% in 1HFY06). 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 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 2QFY06 (from 3.5% in 2QFY05). 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 2QFY06 (from 2.2% in 2QFY05).

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. However, 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 205, LICHF is trading 1.5 times our estimated FY08 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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