LIC Housing Finance - Unfavorable base and shrinking spread take toll - Emkay

- LICHF's Q3FY12 NII (Rs3.3bn) and APAT (Rs2.5bn) below our expectations. Lower than expected numbers driven by sharper 20bps contraction in NIMs.

- Individual disbursements at 8.4% yoy, due to unfavorable base effect. However, mgmt still confident of 20% growth in disbursement implying 27% yoy growth in Q4FY12.

- NIMs at 2.3%, down 20bps qoq (est 12bps). Provisions write back (Rs780mn) helps as RPAT grows 45%. However, PCR dips back to 51%.

- Intended QIP and teaser rate loan provisions, key upside risk to our numbers. Valuations have seen sharp run up to 2.4x/1.9x FY12E/FY13E ABV. Recommend Hold.

NII below estimates; PAT gets push from provision write back

LICHF Q3FY12 NII at Rs3.3bn (down 7.5% yoy) was below our / street estimates of Rs3.4-3.6bn. Despite healthy 26% yoy (4.6% qoq) loan growth, reported margins at 2.3% contracted 20bps qoq (our expectations of dip of 12bps) primarily due to higher interest cost. Calculated cost of funds at 8.7% was up 20bps qoq as against flat yield on earning funds of 10.7%.

LICHF has written back general provisions worth Rs780mn lying on its balance sheet which helped the reported PAT grow by 43% yoy. However, adjusted for the same, the PAT declined by 16.6% yoy to Rs2.5bn.

NIMs likely to have bottomed-out

Q3FY12 NIM at 2.27% was at nine-quarter low and dragged by higher interest cost. Even as LICHF has raised its lending rates by total 40bps in late Q2, the benefits of which would have flown in coming quarters. However, the positive impact was largely offset by lower proportion of high yielding developers' loans in total portfolio.

Individual disbursement slows down; but not worried on loan growth due to longer repayment cycle

On the disbursements front, individual loan portfolio at Rs45.7bn was up just 8.4% yoy. However, this was partly due to base effect as in Dec-10, the individual disbursements had grown at 10.4% qoq. Historically, December quarter usually witnesses a decline on sequentially which was not so the case in Dec-10.

For FY11, the management has still guided 20% growth in disbursements which implies 28% yoy growth (Rs82bn) in Q4FY12. We believe that this would be quite a daunting task. We have assumed a growth of 17% yoy for FY12E in disbursements implying a growth of 22% in Q4FY12.

However, the longer repayment cycle (11-12% repayment rates, 8-9 years), we are not worried on the loan growth front. For Q3FY12, the individual loans portfolio still grew by 33% yoy.

PCR drops to 51% due to write back of provisions

While complying with NHB guidelines of 0.4% provisions on standard advances, LICHF had not used the provisions (Rs1bn) lying on balance sheet. LICHF has written back Rs790mn of those provisions back through P/L and used Rs198mn for provisions against disbursements during the quarter.

As a result, the PCR as at the end of Q3FY12 has declined to 51% and the net NPLs have almost tripled despite no increase in the gross NPAs. We yet have to understand the impact of NHB guidelines on 70% provisions against GNPAs vis-à-vis this write back.

APAT declines by 16.6% yoy

Even as the reported PAT grew by 43% yoy due to provision write back, adjusted for the same, the PAT declined by 16.6% yoy to Rs2.5bn. However, had the management passed the standard assets provisions for this quarter through the P/L, the profit decline would be much higher at 27% yoy with APAT at Rs2.3bn.

Valuations and view

The stock has exhibited resilience in the past given of a) strong loan growth momentum b) limited concerns on asset quality and c) superior return ratios. We have lowered our NII assumptions by 13%/5% to take into account sharper contraction in NIMs. We continue with our disbursement growth of 17% for FY12E vis-à-vis the management guidance of 20%. However, due to lower than expected provisions, we are lowering EPS estimates by 8.4%/4.1% only.

The upside risks to our estimates could come from two factors (1) write back of the standard asset provisions done on teaser rate loans in FY13E (starting Q1FY13) and (2) the intended QIP by the management. A Rs10bn QIP at price of Rs250, would result in 8% upside to our ABV estimates, similar dilution in the equity and 200bps contraction in RoEs. The stock has sharply run up over last couple of days in anticipation of QIP and currently quotes at 2.4x/1.9x FY12E/FY13E. We downgrade the stock to HOLD looking at steep valuations.

Source : Equity Bulls

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