LIC Housing Finance - Loan growth healthy but NIM expansion limited - Religare

We recently interacted with the management of LICHF. Disbursements have remained strong in the retail segment despite rising competitive intensity. However, growth in the developer portfolio is likely to be muted in FY13. NIM expansion (from Q1FY13 levels) will also be limited as the rising cost of funds will offset re-pricing benefits on fixed loans. We expect FY13 NIMs to decline by 10bps and improve only marginally in FY14. Earnings growth, however, would be driven by business growth and healthy asset quality.

- Retail disbursals to grow 20% in FY13: Retail disbursement growth was strong at 29% YoY in Q1FY13 and the management expects a robust 15-20% uptick in Q2FY13 as well. However, project disbursements will remain low at ~Rs 3-3.5bn. Consequently, the proportion of developer loans could decline further to 4.4% by September'12 (as against 5% in Mar'12 and 4.6% in Jun'12).

- NIM disappointment likely to continue: Yield on advances could increase by 25bps YoY in FY13 due to re-pricing of three-year fixed-rate loans; however, the higher cost of funds would still lead to ~10bps NIM compression in FY13 to ~2.4%. FY14 NIMs would improve only marginally (to 2.45-2.5%) as asset re-pricing benefits will largely play out by Q1FY14. A sharp increase in competition and PLR cuts could put further pressure on NIMs. However, upside risks to NIMs could emanate from a sharp pick-up in the developer loan portfolio and equity dilution.

- Valuations reasonable at 1.9x FY14E BV but near-term re-rating potential limited: LICHF has done well YTD due to strong business growth and low risks on asset quality. While we like the stock due to its presence in the mortgage segment, we believe that subdued NIMs and increasing competitive intensity would restrict any re-rating from current levels in the near term. We note that ROEs have declined from an average of 25% over FY08-FY11 to ~19% in FY12-FY13. We roll forward to a September'13 TP of Rs 310/sh, where the stock would trade at 2.0x FY14E BV and 11x FY14E EPS.

Source : Equity Bulls

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