>LIC HOUSING FINANCE LTD. (CD EQUIRESEARCH)

Company Brief
LIC Housing Finance Ltd. (LICHFL) is one of the largest housing finance companies in India. Almost 93% of the company’s loans are to retail customers and the balance 7% to project developers. The promoter, namely LIC of India, meets 8% of the total fund requirements, whereas 80% is funded by term loans from banks, bonds and debentures, and the remaining 12% in the form of refinance from NHB and others.

Highlights
■ LIC Housing is relying more on floating rate borrowing and lending, which will help the company to protect margins in a volatile interest rate scenario and ensure stable growth in profitability in the future.

■ The last quarter witnessed decline in both gross and net NPA levels. The net NPA fell from 0.9% in Q2FY09 to 0.7% in Q3FY09. NPA levels are expected to fall further because the company has now adopted stringent credit appraisal method and better recovery process.

■ LICHF has been steadily growing its loan book with loan sanctions and disbursal growing at a CAGR of 30% and 20% respectively in the last three financial years. Given the cost of
funds coming down and interest rate easing further, we expect LICHF to grow its loan book at a CAGR of 21% over a period of FY2008-10 (E)

■ We have valued the company using SOTP method based on the valuation of its core business at Rs 280 and 39.3% stake in LIC Mutual Fund at Rs 23 and arrived at a target price of Rs 303, implying a potential upside of 61% from current levels, over a 12 month period. The current market price discounts FY09E and FY10E adjusted book value by 0.69 x and 0.55 x respectively. The stock also provides an attractive dividend yield of 5%, assuming that status quo is maintained. We therefore recommend a BUY on LIC Housing Finance.

Risk & Concerns

■ Challenging real estate market: The real estate market in India is becoming a lot challenging. This could lead to marked slowdown in business and higher delinquencies.

■ Stiff competition: The Company could see loss of market share to commercial banks and pressure on spread due to interest rate cuts announced by PSU banks on home loans.

■ High exposure to project developers: The Company has made a deliberate strategy to increase exposure to project developers, which could also increase its NPA levels.

■ Increase in the average loan size: An increase in the average loan size might result in nonrepayment, increasing NPAs and hurting profitability.

To see full report: LIC HOUSING