Edelweiss Research: LIC Housing Finance - In Tune with Growth Notes; NIMs Hum a Soothing Pitch; Result Update Q4FY15; Buy

LIC Housing Finance’s (LICHF) Q4FY15 PAT, at INR3.78bn, came in line with estimate. Numbers, qualitatively, held in good stead with healthy disbursement growth riding continued traction of >20% in individual segment (albeit, marginally below estimate on slower-than-anticipated growth in corporate developer book) feeding into 18.6% YoY loan growth. NIMs also came bang in line with our 2.47% forecast (up 27bps QoQ), largely a derivative of funding cost improvement. Given the sustainability in growth momentum (refer our note, Making inroads in unchartered territory, dated Jan 12, 2015), visible triggers for NIM improvement (incremental business at higher-than-book spread, strong pipeline of developer loans, etc) and improved visibility on resolution of a few more developer loans, we estimate 20% earnings CAGR over FY15-17 leading to 18-19% RoE . Maintain ‘BUY’ with TP of INR525 (on 2.3x FY17E P/BV).

Includes Q4FY15/ Q3FY15 earnings con-call highlights

Individual loans fuel disbursement fire power

Disbursements maintained healthy pace, jumping 23% YoY, largely driven by continued momentum in individual segment (up 24%). Growth was broad-based across geographies with Mumbai/NCR region also registering >20% growth and proprotion of balance transfer cases being less than 10% for LICHF. Growth is led equally by rise in transaction volume and increased property value. As indicated, LAP contribution is rising (now contributing ~9-10% to disbursements forming 4.6% of portfolio). On the other hand, while disbursements to the corporate developer segment were slower than envisaged (at INR3.88bn versus management’s INR6.0bn guidance for Q4FY15). However, the company highlighted that sanctions were robust in this segment—up >80% YoY (sanctions of >INR20bn versus INR10bn disbursement in FY15)—indicating better traction in H1FY16.

Outlook and valuations: Attractive operating space; maintain ‘BUY’

Anchored by our in-depth analysis of the mortgage finance industry, we maintain that structural and incremental growth drivers are firmly in place, which will help players sustain higher growth rates over a sustainable timeframe. This, along with favourable interest rate cycles and benign asset quality, will result in higher earnings visibility and superior return ratios for housing finance companies versus other NBFCs. And, LICHF, being a lead player in the space with trigger for margin improvement, stands to benefit from the same. The stock trades at 2x FY17E ABV. We maintain ‘BUY/SO’.

Link to the detailed report - LIC Housing Finance  - In tune with growth notes; NIMs hum a soothing pitch; result update Q4FY15; Buy