4QFY2013 Result Update | HFC

April 29, 2013

LIC Housing Finance

Performance Highlights

Particulars (` cr) NII Pre-prov. profit PAT 4QFY13 487 413 316 3QFY13 399 352 236 % chg (qoq) 22.1 17.2 33.8 4QFY12 405 346 254 % chg (yoy) 20.3 19.2 24.7

ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Financials 12,725 1.1 300/209 487,282 2 19,388 5,904 LIC.BO LICHF@IN

`252 `281
12 months

Source: Company, Angel Research

LIC Housing Finance (LICHF) reported a healthy set of numbers for 4QFY2013, with net interest income growth of 20.3% yoy and earnings growth of 24.7% yoy. Key highlights of the results are the sequential improvement in NIMs (36bp) and improvement witnessed on the asset quality front (Gross and Net NPA ratio lower by 13bp and 9bp, respectively to 0.61% and 0.36%). NIMs and Asset quality, both improve qoq: LICHFs loan book grew strongly by 23.3% yoy to `77,812cr during 4QFY2013. Loans to the individual segment grew by 25.5% yoy, while loans to the developer segment declined by 16.3% yoy and 5.5% sequentially. Hence, the share of developer loans declined from 3.9% in 3QFY2013 to 3.4% for 4QFY2013. During the quarter, the margins increased by 36bp qoq, primarily due to the 27bp decline in the cost of funds, owing to ~25bp cut in base rate by most of its funding banks (around 30% of total interest bearing liabilities constitute bank loans) and also, due to downward pricing for some of its NCDs, which were due for re-pricing. Going forward, the Management targets an increase in the proportion of developer loans (3.4% currently) and Loan against property (2.6% currently) to 5% each by FY2014, to improve margins. As per the Management, in 1QFY2014, ~2,700cr of fixed-o-floaty loans are expected to re-price upwards by 200bp and in FY2014, ~9,000cr of NCDs having average costs of ~9.6%, are scheduled to reprise downwards. On the asset quality front, the company reported an improvement, as both gross and Net NPA levels came down sequentially by 12.5% and 15.8%, respectively, on an absolute basis. During the quarter, the company witnessed slippage in an account worth ~`100cr in the developer loan book; however it recovered ~`50-60cr from an account (of the three accounts, that slipped in 3QFY2013) and reported further improvement in asset quality of individual loans, which aided it to report a sequential improvement in Gross NPA levels. The PCR improved by 230bp sequentially to 41.4%, as of 4QFY2013. Outlook and valuation: We expect the company to post a healthy loan book CAGR of ~20% over FY2013-15E, which is likely to reflect in an earnings CAGR of ~20%, over the same period. At the current market price, the stock is trading at a P/ABV multiple of 1.5x FY2015E ABV. Historically, the stock has traded at 0.8-2.1x one-year forward P/ABV multiple over FY2006-13. We recommend an Accumulate rating on the stock with a target price of `281.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 40.3 12.3 34.1 13.3

Abs. (%) Sensex LICHF

3m

1yr

3yr 10.8 34.1

(3.0) 12.8 (11.6) (1.0)

Vaibhav Agrawal
022 3935 7800 Ext: 6808 [email protected]

Key financials (standalone)

Y/E March (` cr) NII % chg Net profit % chg NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%)
Source: Company, Angel Research

FY2012 1,481 2.8 914 (6.2) 2.6 18.1 13.9 2.2 1.6 18.6

FY2013 1,604 8.4 1,023 11.9 2.3 20.3 12.4 2.0 1.4 16.8

FY2014E 1,976 23.2 1,282 25.3 2.3 25.4 9.9 1.7 1.5 18.4

FY2015E 2,377 20.3 1,475 15.0 2.3 29.2 8.6 1.5 1.4 18.3

Sourabh Taparia
022 3935 7800 Ext: 6872 [email protected]

Akshay Narang
022 3935 7800 Ext: 6829 [email protected]

Harshal Patkar
022 3935 7800 Ext: 6847 [email protected]

Please refer to important disclosures at the end of this report

LIC Housing Finance | 4QFY2013 Result Update

Exhibit 1: 4QFY2013 performance (standalone)

Particulars (` cr) Interest earned Interest expenses Net interest income Non-interest income Operating income Operating expenses Pre-prov. profit Provisions & cont. PBT Prov. for taxes PAT EPS (`) Cost-to-income ratio (%) Effective tax rate (%) Net NPA (%)
Source: Company, Angel Research

4QFY13 2,055 1,567 487 20 507 95 413 (3) 416 100 316 6.3 18.6 24.1 0.4

3QFY13 1,935 1,535 399 20 420 67 352 32 320 84 236 4.7 16.0 26.3 0.5

% chg (qoq) 6.2 2.1 22.1 (1.3) 20.9 40.6 17.2 29.9 18.9 33.8 33.8

4QFY12 1,662 1,257 405 27 432 85 346 (2) 349 95 254 5.0 19.8 27.3 0.1

% chg (yoy) 23.6 24.7 20.3 (25.1) 17.5 10.8 19.2 45.7 19.4 5.2 24.7 24.7

FY2013 7,576 5,925 1,651 83 1,734 282 1,452 79 1,374 350 1,023 20.3 16.3 25.5 0.4

FY2012 6,115 4,591 1,524 100 1,624 237 1,387 156 1,231 317 914 19.2 14.6 25.7 0.3

% chg 23.9 29.0 8.4 (17.3) 6.8 18.9 4.7 (49.5) 11.6 10.6 11.9 5.3

Exhibit 2: 4QFY2013 Actual vs. Angel estimates

Particulars (` cr) Net interest income Non-interest income Operating income Operating expenses Pre-prov. profit Provisions & cont. PBT Prov. for taxes PAT
Source: Company, Angel Research

Actual 487 20 507 95 413 (3) 416 100 316

Estimates 470 25 495 96 400 32 367 94 274

% chg 3.7 (20.7) 2.5 (1.1) 3.3 13.4 7.1 15.6

Strong traction continues in Individual loan book; Developer disbursements decline sequentially
LICHFs loan book grew strongly by 23.4% yoy (7.0% qoq) to `77,812cr during 4QFY2013. Loans to the individual segment grew by 25.5% yoy (7.5% qoq) to `75,147cr, while loans to the developer segment declined by 16.3% yoy (5.5% qoq) to `2,665cr. Hence, the share of developer loans to overall loans further declined from 3.9% in 3QFY2013 and 5.0% in 4QFY2012 to 3.4% in 4QFY2013. Disbursement growth in the individual segment (`7,536cr) was healthy during 4QFY2013 at 18.8% yoy, while the disbursements to developer loans stood at `189cr compared to `497cr in 3QFY2013 and `274cr in 4QFY2012. The developer loan book has continued to contract sequentially quarter after quarter over the past few years; a similar trend could be seen in this quarter as well.

April 29, 2013

LIC Housing Finance | 4QFY2013 Result Update

Exhibit 3: Advances growth remains healthy

90,000 75,000 60,000 45,000 30,000 15,000 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13
Source: Company, Angel Research

Exhibit 4: Developer disbursements lower qoq

30.0 28.0
Individual (`cr) 10,000 8,000 6,000 4,000 13.4 Project (`cr) 35.1 27.2 16.7 20.0 10.0 Total yoy (%) 40.0 30.0

Advances (`cr)

Growth yoy (%, RHS)

23.5

24.1 23.2

26.0 23.8 23.4 24.0 22.0 20.0

63,080

65,644

69,119

72,704

77,812

6,345

4,470

5,716

5,508

2,000 -

7,536

(2.6)

(10.0)

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

Source: Company, Angel Research

Margins increase sequentially

During 4QFY2013, the margins remained flat yoy at 2.45%, however, increased by 36bp qoq, primarily due to the 27bp decline in the cost of funds, owing to ~25bp cut in base rate by most of its funding banks (around 30% of total interest bearing liabilities constitute bank loans) and also, due to downward pricing for some of its NCDs, which were due for re-pricing. The yield on advances rose marginally by 3bp qoq to 10.78%, thereby taking the spread to 1.38%, up by 30bp qoq. Going forward, the Management targets an increase in the proportion of developer loans (3.4% currently) and Loan against property (2.6% currently) to 5% each by FY2014 to improve margins. As per the Management, in 1QFY2014, ~2,700cr of the loans given under fixed-o-floaty scheme (fixed rates for 2-3 yrs and floating rates afterwards) are expected to re-price upwards by 200bp and in FY2014, ~9,000cr of NCDs having average costs of ~9.6%, are scheduled to reprise downwards (recent NCDs have been raised at cost of 8.9%).

Exhibit 5: NIM improved sequentially by 36bp

4.00 3.25 2.50 1.75 3.45 2.78 2.45 2.27 2.44 2.18 2.45 2.10 2.09

Exhibit 6: NII growth trend

400 375 350 325 (11.7) 4.5 (3.0) NII (`cr) Growth yoy (%, RHS) 20.3 11.3 30.0 20.0 10.0 -

405

379

385

399

1.00

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

300 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

Source: Company, Angel Research

487

(10.0) (20.0)

Source: Company, Angel Research

April 29, 2013

LIC Housing Finance | 4QFY2013 Result Update

Processing fees remain subdued

The processing fees (other operating income) have remained weak for the company on account of 1) abolishment of prepayment charges, and 2) lower share of developer loans (processing fees higher on loans sanctioned to developer segment compared to individual segment).

Exhibit 7: Processing fees have remained subdued

(`cr) 45 40 35 30 30 25 20 38 35 33 34 29 32

30 27

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

Source: Company, Angel Research

Asset quality improves sequentially

On the asset quality front, the company reported improvement, as both gross and Net NPA levels came down sequentially by 12.5% and 15.8%, respectively, on an absolute basis. During the quarter, the company witnessed slippage in an account worth ~`100cr in the developer loan book; however it recovered ~`50-60cr from an account (of the three accounts, that slipped in 3QFY2013) and reported further improvement in asset quality of individual loans, which aided it to report sequential improvement in Gross NPA levels. Gross NPA ratio improved by 13bp qoq to 0.61%, while net NPA ratio improved by 9bp sequentially to 0.36%. PCR improved by 230bp sequentially to 41.4%, as of 4QFY2013. The Management remains confident of recovering the slipped accounts in the developer loan book (two accounts slipped in 3QFY2013 and one in 4QFY2013) over the next few quarters, as it has adequate collaterals (as high as 2.5x the loan amount). In the remaining developer loan book, the Management remains comfortable on the asset quality front and has reiterated its plans to grow the share of developer book to 5% by FY2015 from 3.4% in 4QFY2013. Going forward, beginning 2QFY2014, teaser rate provisioning on fixed-o-floaty loans is expected to start reversing back (on loans, which have completed one year of satisfactory performance) and hence, we have built in significant reversal of teaser-rate provisioning in overall provisioning expenses for LICHF in FY2014.

April 29, 2013

4QFY13

LIC Housing Finance | 4QFY2013 Result Update

Exhibit 8: Asset quality

Gross NPA (`cr) 600 68.0 400 46.9 52.8 39.1 200 41.4 30.0 60.0 Net NPA (`cr) PCR (%, RHS) 90.0

Exhibit 9: NPA ratios trend

0.80 0.60 0.40 0.20 Gross NPA % Net NPA %

0.14

0.39

0.28

0.45

0.42

0.71

0.60

0.74

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

0.00

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

Source: Company, Angel Research

Source: Company, Angel Research

Investor arguments
Margins improvement to be modest and gradual
LICHF has witnessed a substantial margin squeeze from the levels of 3.1% in FY2011 to 2.2% as of FY2013, due to a) significant fall in share of high yielding developer loan book from 8.5% as of FY2011 to 3.4% as of FY2013 and b) recent increase in the competitive intensity on the retail side of its loan book, as banks (particularly PSUs) have become aggressive, owing to higher risk adjusted yields offered in this segment. In fact, most of these banks have priced their products at rates much closer to the bank funding costs for LICHF (bank funding forms ~30% of total interest bearing liabilities for LICHF as of 4QFY2013). In our view, significant increase in share of higher-yielding developer loans and loan against property, to total loan book remain critical for the margins to improve substantially from here on, as we believe competitive intensity in the retail loan book is likely to prevail. The Management targets an increase in the share of developer loans and loan against property from the current 3.4% and 2.6%, respectively to ~5.0% each by FY2014. Hence, though we expect margins to improve from the current levels, the increase, however, is likely to be modest and gradual.

Outlook and valuation

Driven by a strong parent brand and success of its home loan products (80% of the incremental disbursements are in products having interest rate which is initially fixed, later converted to floating), we expect the company to post a healthy loan book CAGR of ~20% over FY2013-15E, which is likely to reflect in earnings CAGR of ~20%, over the same period. At the current market price, the stock is trading at a P/ABV multiple of 1.5x FY2015E ABV. Historically, the stock has traded at 0.8-2.1x one-year forward P/ABV multiple over FY2006-13. We recommend an Accumulate rating on the stock with a target price of `281.

April 29, 2013

0.61

0.36

265 85

468 249

414 195

538 328

471 276

LIC Housing Finance | 4QFY2013 Result Update

Exhibit 10: Change in estimates

Particulars (` cr) NII Non-interest income Operating income Operating expenses Pre-prov. profit Provisions & cont. PBT Prov. for taxes PAT
Source: Angel Research

FY2014E Revised Earlier Var. (%) estimates estimates 1,952 174 2,127 339 1,787 48 1,739 473 1,266 1,976 136 2,113 339 1,774 12 1,761 479 1,282 1.2 (21.8) (0.7) (0.1) (0.8) (74.2) 1.3 1.3 1.3

FY2015E Earlier Revised Var. (%) estimates estimates 2,297 200 2,498 407 2,090 132 1,958 533 1,426 2,377 147 2,525 407 2,118 92 2,026 551 1,475 3.5 (26.6) 1.1 (0.1) 1.3 (30.3) 3.5 3.5 3.5

Exhibit 11: P/ABV band

Price (`) 450 400 350 300 250 200 150 100 50 0.8x 1.2x 1.7x 2.2x 2.7x

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Source: Bloomberg, Angel Research;

Company Background
LIC Housing Finance (LICHF) is one of the largest specialized mortgage lenders in India, with a balance sheet size of ~`80,000cr. The credit portfolio for LICHF is ~`78,000cr, of which more than ~96% is derived from the retail segment. The company has a network of over 200 offices spread across the country and is promoted by the state-owned life insurance behemoth, Life Insurance Corporation of India (LIC) which holds a 40.3% stake in the company.

April 29, 2013

Apr-13

LIC Housing Finance | 4QFY2013 Result Update

Income statement (standalone)

Y/E March (` cr) NII - YoY Growth (%) Other Income - YoY Growth (%) Operating Income - YoY Growth (%) Operating Expenses - YoY Growth (%) Pre - Provision Profit - YoY Growth (%) Prov. & Cont. - YoY Growth (%) Profit Before Tax - YoY Growth (%) Prov. for Taxation - as a % of PBT PAT - YoY Growth (%) FY2010 937 17.6 137 51.1 1,073 21.1 192 24.2 882 20.4 (28) 910 25.2 249 27.4 662 24.6 FY2011 1,441 53.8 331 141.4 1,771 65.0 216 12.7 1,555 76.3 261 1,294 42.2 320 24.7 974 47.2 FY2012 1,481 2.8 143 (56.7) 1,624 (8.3) 237 9.8 1,387 (10.8) 156 (40.2) 1,231 (4.9) 317 25.7 914 (6.2) FY2013 1,604 8.4 130 (9.4) 1,734 6.8 282 18.8 1,453 4.7 79 (49.4) 1,374 11.6 350 25.5 1,023 11.9 FY2014E 1,976 23.2 136 5.0 2,113 21.8 339 20.3 1,774 22.1 12 (84.3) 1,761 28.2 479 27.2 1,282 25.3 FY2015E 2,377 20.3 147 8.0 2,525 19.5 407 20.0 2,118 19.4 92 640.0 2,026 15.0 551 27.2 1,475 15.0

Balance sheet (standalone)

Y/E March (` cr) Share Capital Reserve & Surplus Loan Funds - Growth (%) Other Liabilities & Provisions Total Liabilities Investments Advances - Growth (%) Fixed Assets Other Assets Total Assets FY2010* 95 3,293 34,758 36.7 2,096 40,242 1,389 38,081 37.6 36 736 40,242 FY2011 95 4,074 45,163 29.9 3,205 52,537 165 51,090 34.2 34 1,249 52,537 FY2012 101 5,581 56,087 24.2 2,660 64,430 164 63,080 23.5 62 1,123 64,430 FY2013 FY2014E FY2015E 101 6,380 68,766 22.6 4,258 79,505 185 77,813 23.4 62 1,446 79,505 101 7,382 21.4 5,223 223 21.0 75 1,749 101 8,534 20.3 6,381 268 20.0 91 2,099

83,495 100,425

96,201 115,442 94,153 112,984

96,201 115,442

Note:*FY2010 balance sheet numbers as per old schedule VI

April 29, 2013

LIC Housing Finance | 4QFY2013 Result Update

Ratio analysis (standalone)

Y/E March Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE Asset Quality (%) Gross NPAs Net NPAs Provision Coverage Per Share Data (`) EPS ABVPS (75% cover.) DPS Valuation Ratios PER (x) P/ABVPS (x) Dividend Yield DuPont Analysis NII (-) Prov. Exp. Adj. NII Treasury Int. Sens. Inc. Other Inc. Op. Inc. Opex PBT Taxes RoA Leverage RoE 2.7 (0.1) 2.8 0.0 2.8 0.4 3.2 0.6 2.6 0.7 1.9 12.4 23.5 3.1 0.6 2.5 0.4 2.9 0.3 3.3 0.5 2.8 0.7 2.1 12.3 25.8 2.5 0.3 2.3 (0.0) 2.3 0.2 2.5 0.4 2.1 0.5 1.6 11.9 18.6 2.2 0.1 2.1 0.0 2.1 0.2 2.3 0.4 1.9 0.5 1.4 11.8 16.8 2.2 0.0 2.2 0.0 2.2 0.2 2.4 0.4 2.0 0.5 1.5 12.6 18.4 2.2 0.1 2.2 0.0 2.2 0.1 2.3 0.4 1.9 0.5 1.4 13.1 18.3 18.1 3.5 1.2 12.3 2.9 0.9 13.9 2.2 1.4 12.4 2.0 1.5 9.9 1.7 1.9 8.6 1.5 2.2 13.9 71.3 3.0 20.5 87.8 2.3 18.1 112.2 3.6 20.3 125.2 3.8 25.4 144.2 4.8 29.2 165.5 5.5 0.69 0.12 82.6 0.47 0.08 83.1 0.42 0.13 68.0 0.61 0.35 41.4 0.66 0.38 42.5 0.71 0.42 40.0 2.7 17.8 1.9 23.6 3.1 12.2 2.1 25.8 2.6 14.6 1.6 18.6 2.3 16.2 1.4 16.8 2.3 16.0 1.5 18.4 2.3 16.1 1.4 18.3 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

April 29, 2013

LIC Housing Finance | 4QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

LIC Housing Finance No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

April 29, 2013