Stock Market Result Update on LIC Housing Finance for 2QFY2012

Stock Market Result Update on LIC Housing Finance for 2QFY2012 with an Neutral recommendation. 

For 2QFY2012, LICHF reported a sharp 58.0% yoy drop in its reported profit to `98cr on account of one-off regulatory provisions of `205cr, primarily (`160cr) related to standard assets. Individual disbursements remained strong at 24.6% yoy, however NIM contracted by 48bp on a yoy basis. We recommend Neutral on the stock.

One-off regulatory provisioning dents bottom line: For 2QFY2012, LICHF’s loan book grew strongly by 29.3% yoy (6.1% qoq) to `56,098cr. During 2QFY2012, individual disbursements (`4,736cr) growth was healthy at 24.6% yoy, however overall disbursements (`5,148cr) increased by only 0.9% yoy as disbursements related to projects (`412cr) declined by 68.3% yoy, mostly due to a high base effect (`1,300cr worth project disbursements during 2QFY2011). LICHF’s loan portfolio share to developers, which is generally higher yielding, have been on a declining trend since the last 2-3 quarters, leading to slower rise in yield on advances (11.0% in 2QFY2012 compared to 10.5% in 1QFY2012 and 10.0% in 2QFY2011) for the company. LICHF picked up loans worth `5,000cr from banks during the quarter, leading to cost of funds shooting up by 84bp qoq to 9.5% (rise of 162 bp yoy). Consequently, NIM for the quarter declined by 48bp yoy to 2.45%. The company made provisions of `205cr during the quarter to meet the new regulatory norms of standard asset provisioning of 0.4% on individual loan book and higher provisioning required for substandard assets. On the asset-quality front, LICHF’s asset quality continued to be stable during 2QFY2012, with gross NPA ratio declining by 10bp yoy to 0.64% and net NPA ratio declining by 9bp yoy to 0.1%.

Outlook and valuation: At the CMP, the stock is trading at a P/ABV multiple of 1.7x FY2013E of `126.0cr. Historically, the stock has traded at 0.8x–2.1x one-year forward P/ABV multiple, with a five-year median of 1.2x, but it has been rerated over the past two years to 1.9x average. However, on account of the prevailing high interest rates, we expect loan growth to slow down to 27% for FY2012 and 23% for FY2013 (from 34.2% in FY2011) and spreads to be about ~33bp lower in FY2012 compared to FY2011. Also, unlike NBFCs regulated by the RBI, CAR requirements for HFCs have not been increased by NHB. Considering the near-term macro headwinds, regulatory overhang and above-average valuations, we recommend Neutral on the stock.