>LIC HOUSING FINANCE LIMITED (FINQUEST)

We interacted with the management of LIC housing Finance. Key takeaways of the meetings are as under:

■ Demand for Housing Loan is picking up.
Post interest rate cuts and correction in property prices (especially in big cities), the demand for
housing loans is picking up. Last two months (March and April) the disbursements grew by
42% and 34% respectively for the company which indicates strong trend. Further correction in
property prices coupled with easing of interest rates will boost the demand. We expect
disbursements to grow at a CAGR of 22% for the company over FY09-11E.

■ Expanding geographical presence
LIC has ramped up its distribution network with increase in the number of branches and agent force. The company has opened 20 branches in the current fiscal which has increased the total branch count to 150 (targets 160 branches by FY10). Despite branch additions the employee numbers have remained almost same due to effective utilization of manpower.

■ Decline in interest rates to cushion margins
Management expects to maintain margins at the current levels (i-e 2.95%) despite offering loans at the competitive rates. With decline in overall interest rates, the incremental cost of funds will decline and the company expects to maintain spread of ~2% on incremental loans. The special rate of 8.75% offered by the company would not have any significant impact on margins as the offer is for limited period and would constitute small part (~10%) of the overall loan book.

■ Customer mix dominated by PSU/govt employees
LICHFL's customers mainly consist of salaried employees and self employed people. Among the salaried customers about 50% are government/PSU employees resulting in lower risk on loans. The company will continue to expand its customer base (PSU & govt.) which will benefit from the implementation of sixth pay commission.

■ Asset quality set to improve
Asset quality has shown marked improvement as gross NPAs and Net NPA have declined to 1.07% and 0.21% respectively at the end of FY09. Management targets to reduce net NPA to zero by the end of current fiscal.

■ Valuations attractive despite run up
We expect company's loan book to grow at CAGR% of 22% over FY09-FY11E led by drop in the interest rates and correction in property prices. Net interest margins are expected to remain stable at 3% despite lending rate cuts. Current valuations of 1.1x FY11 BV is attractive considering higher RoE's (26% & 27% for FY10, FY11), better asset quality and huge growth potential in the housing finance segment. We have a target price of INR 512 for the stock which is 1.3xFY11 BV. We recommend Buy on the stock.

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