Margin concerns may spoil LICHF's growth party

LIC Housing Finance’s net interest margins are likely to be tempered with increased funding costs and a fall in high-margin loans

On the back of a strong December 2010 quarter performance, the LIC Housing Finance (LICHF) scrip has rallied by 14 per cent in the last three days as against a muted movement of around 1 per cent for the Sensex during the same period. This surge follows a sharp correction of 41 per cent in the LICHF stock price in the last three months. The company’s December quarter results were ahead of expectations with net interest income growing 54 per cent y-o-y, aided by robust loan growth and improvement in margins. Analysts say despite hikes in interest rates, there might be a trending down of margins on a higher cost of funds and reduction in loans to the high-margin project segment. However, given the steep price correction, most brokerages have a buy rating on the stock with the target price ranging between Rs 190-250, implying upsides of up to 44 per cent from the current levels over the next one year.

Robust loan growth
For the quarter ended December 2010, LICHF posted a loan growth of 36 per cent y-o-y at Rs 46,380 crore, while sanctions and disbursements grew a robust 28 per cent each. As against the individual loan disbursement surge of 41 per cent over last year, the disbursement of developer loans nosedived by 33 per cent. This slowdown was not surprising given the management’s cautious approach towards lending to real estate developers. Project loans’ contribution to the overall loan book fell by 82 bps sequentially to 10.5 per cent. For FY10-12, analysts expect a compounded growth of individual loans at 25 per cent and disbursements at 22 per cent. This is lower than the current growth rates as the sales volumes in the realty space are expected to fall going ahead. The overall loan book is expected to grow at a compounded rate of 28 per cent over the same period.
 

STRONG GROWTH
In Rs  crore	Q3-FY11	Q3-FY10
Total Income	1, 354	881
NII	352	228
NIM (%)	3.14	2.76
Net profit	213	154
Source:Company

NIMs peaking out
LICHF’s net interest margin (NIM) expanded by 20bps sequentially to 3.14 per cent on the back of a 50 basis point hike in the prime lending rate in October. Spreads were unchanged at 2.1 per cent due to the higher cost of funds (up 20 bps q-o-q). Though it has raised rates by another 50 basis points from January 2011, higher funding costs, lower disbursements in high-yielding project loans, and increased competition will put pressure on the spreads. That will reduce NIMs to 3 per cent this financial year, with further moderation likely in FY12.

Strong net profits
Good loan growth coupled with NIM expansion pushed the company’s net profit by 39 per cent y-o-y at Rs 213 crore. There were a couple of one-off items, including a stake sale and provisioning. The company garnered a profit of Rs 137 crore on the sale of a 17.3 per cent stake in LIC MF to Nomura (the current stake in LIC MF post the recent sale is 20 per cent). Further, owing to the new norms prescribed by National Housing Board (NHB), it made a total provisioning of Rs 330 crore. This was met by utilising Rs 100 crore from excess reserves and the balance Rs 235 crore in the profit and loss account. On a pre-tax basis, and adjusted for these one-off items, the pre-tax profit grew 63 per cent to Rs 350 crore. Brokerages expect its bottom line to post a compounded growth of 19 per cent over FY11-13.

Asset quality improves
For the December 2010 quarter, LICHF’s gross non-performing assets (NPAs) stood at 0.67 per cent (versus 1.44 per cent in Q3’10) while net NPAs were 0.18 per cent (versus 0.77 per cent in Q3’10). The coverage ratio also improved to 73 per cent (versus 46 per cent in Q3’10). Gross NPAs on the builders’ loan portfolio was 0.08 per cent. Recently, RBI has made it mandatory to provide 0.25 per cent on outstanding standard assets. If NHB follows similar provisioning, LICHF may need to provide Rs 62.5 crore on its standard assets, which will impact profitability.

Valuations
The stock is currently trading at an attractive 7.74 times the FY12 earnings and 1.7 times to the FY12 book value. Brokerages expect a compounded earnings growth of 30 per cent and a return on equity (ROE) of 26 per cent over the next three years.