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On solid ground

Strong business growth, improving asset quality, fresh capital infusion and improving margins will support the scrip's continuous rerating

All the past efforts of internal restructuring have started delivering good results for LIC Housing Finance. The loan disbursement for the quarter ended Sep'07, grew by 36% to Rs 1600 crore. The company had around Rs 1500 crore of disbursement pending in Sep'07 quarter, which is confident to disburse by Dec'07. Hence the company is very positive for achieving its disbursement target of Rs 6200 crore for FY'08, which is a growth of 20% y.o.y.

In FY'07, the disbursement stood at Rs 5130 crore, up by 5% compared to FY'06. However because of significant increase in asset pricing (as the housing interest rate kept on increasing and nearly 93% of the total disbursement by the company are on floating basis) there was a 25% increase in income from operations. Thus in FY'07, growth was driven by asset repricing and in FY'08 growth is driven by volume.

The much needed volume growth (disbursement) along with the value growth (asset reprising) was felt in Sep'07 quarter, where disbursement improved by 20% and the yield stood at 10.3%.

The NIM improved to 3.21% (2.68% in the corresponding period last year), which is the highest in 9 consecutive quarters. Of course, this has lot to do with reprising of assets in the March 2007 quarter, which had fully benefited the company now. The company expects NIM of around 2.8-2.95% levels for the rest of year. This combination of strong disbursement growth and improvement of NIM, though in small proportion, is very effective and will continue going forward.

Improving asset quality

The company has streamlined its credit appraisal methodology to keep a check on defaults and strengthened its recovery management mechanism. This move has lead to improvement in asset quality. The Gross Non Performing Assets (NPA) recorded a decline from 3.75% as on September 2006 to 2.84% as of September 2007. The Net NPA of the Company stood at 1.65% as of September 2007 compared to 2.11% as of September 2006. For Q1 FY'08, the provision of bad debt stood at Rs 38 crore which was reversed by Rs 19 crore in Q2 FY'08. This was because of significant recovery in the bad debts. Gross NPA, which stood at Rs 739 crore in Q1 FY'08, was brought down to Rs 543 crore in Q2 FY'08.

A leading player

LIC Housing Finance (LICHFL) is one of the largest Housing Finance companies in India. LICHFL possesses one of the industry's most extensive marketing networks in India: 6 regional offices and 115 area offices backed by chain of camp offices nationwide, an offshore office in Dubai and Registered and Corporate Office at Mumbai. It has a team of 875 dedicated employees. In addition the company has appointed over 5500 Direct Sales Agents (DSAs) and Home Loan Agents (HLAs) to extend its marketing reach. 16 Back Offices spread across the country conduct the credit appraisal and administrative functions.

The company has set up a Representative Office in Dubai to cater to the Non-Resident Indians in the GLCC countries covering Bahrain, Dubai, Kuwait, Qatar and Saudi Arabia.

The company has so far disbursed Rs 32000 crore. It also lends to Corporate Bodies and Companies under different schemes for purchase / construction of office premises for their own use, construction of staff quarters and also for onward lending to meet the requirements of employees, and also to Builders and Developers for residential and commercial projects.

LICHFL has floated a 100% subsidiary "LICHFL Care Homes" to conduct the business of providing 'Assisted Living Community Centres' for Senior citizens.

The company also holds 39.3% equity stake in LIC Mutual Fund (AUM: Rs 13000 crore).

Days of below-average growth are over

Between 2002-05, the mortgage industry grew at CAGR of 36%. During this period, the company was able to hardly grow its business at 9%. The primary reason for the below-average industry growth was the internal restructuring exercise conducted by the company. Frequent changes in top management, no incentives for employees, lack of fully computerized systems etc was some of the other hurdles, which the company was facing during this period.

The company subsequently set right all the loopholes within its structure. Initiatives like strong and consistent top management, direct co-ordination with employees, installation of SAP etc was undertaken. The salaries of employees was linked to the profits and business of the company.

During FY 2007, the company had identified certain areas of priority, which it has delivered on to a considerable extent. The company has been able to reduce NPAs significantly both in terms of Gross & Net. The company had undertaken a lot of efforts on the Marketing front, which have resulted in very encouraging numbers in sanctions & disbursements. Margins have also been improved through proper cost management as well as judicious reprising of loans. In the current year, the company has taken up several initiatives in the areas of Marketing & Resource mobilization, which will enable it to further increase its market share as well as profitability.

For the six months ended September 2007 the Company sanctioned Rs 3425 crore and disbursed Rs 2821 crore, a growth of 48% and 25% respectively. The Outstanding Mortgage Portfolio as on September 30, 2007 was Rs 19135 crore as against Rs 15959 crore on September 2006, thus registering a growth of 20%. The company had around Rs 1500 crore of disbursement pending in Sep'07 quarter, which is confident to disburse by Dec'07. Hence the company is very positive for achieving its disbursement target of Rs 6200 crore for FY'08, which is a growth of 20% y.o.y.

Retail forms a major chunk of disbursement (around 95%), while the developers/corporate form the rest. The company is aggressively targeting the growth in developers/corporate sector. The disbursement to developers/corporate stood at Rs 377 crore so far for six month of FY'08 as against Rs 67 crore in the FY'07. The company is very positive of achieving the target of disbursement to corporate/developers of Rs 500 crore in FY'08 and may consider an upward revision of overall disbursement target of Rs 6200 crore in Dec'07. The margins are higher by 150 basis points in developers/corporate segment.

New business initiatives

In order to achieve this aggressive disbursement plan, the company has taken various initiatives.

The company increased the strength of its home loan agents, direct sales agents and home loan counselors by more than 20%. The company has ongoing operations in Dubai, and is set to open up an office in Kuwait shortly.

The company has increased its Corporate Tie-ups with reputed organizations in the country for granting loans to their employees. The total business coming out of such tie-ups now account for around 33% of the total retail business, up from 25% last year.

Further the company is in talks and negotiations with various builders and is in advance stage of forming a tie up with them.

The company has set up an internal scorecard system for the purpose of appraisals and commissions of its employees based on the profits and business of the company.

The company has also forayed into real estate venture funds through strategic investment of Rs 50 crore in Kotak Real Estate Fund and Rs 10 crore in Unitech-CIG fund. Both have tenure of 7 years.

Mortgage sector retains good growth potential

The Mortgage sector in India is likely to retain the growth potential. The growth in demand is driven by improved affordability due to rising disposable income, affordable interest rates and Fiscal incentives on both interest and principal repayments. The rise in interest rates and real estate prices has been partially compensated by rise in disposable income. Moreover the need for housing due to urbanisation and increasing nuclearisation of family remains strong, and the continuing fiscal incentives still lightens the burden of higher notional interest rates. Willingness to borrow for housing as well as availability of finance for this sector has also increased, which will continue to drive the growth. Moreover interest rates have already peaked and likely to come down in medium-term.

Mortgages contribute approx 5% of India's GDP as compared to over 70% in the USA. Even in China this rate is 11% and in most Asian countries it is above 10%.

According to the National Housing Bank during the 11th Five Year Plan (2007-2012), the country would require 4.5 crore new units. This will demand investment of Rs 10 trillion between 2007-2012 i.e. Rs. 2 trillion per year.

Lack of aggression on the part of LICHFL and past bad loans had limited its growth. However, the company is now showing encouraging signs of getting back its due share of this growing market.

Recent RBI guidelines is positive

The recent RBI guidelines (reducing risk weights from 75% to 50% on residential mortgage of less than Rs 2 million or Rs 20 lakh) would be implemented on HFCs. These is positive for LICHFL, as it has small ticket loan book with most loans at loan-to-value (LTV) ratios of less than 75% (which is the requirement for lower risk weights).

The average ticket size of incremental loans is still below Rs 20 lakh at Rs 0.83 million in FY07 (though has improved significantly from Rs 0.63 million in FY06). The average ticket size in Tier 1 cities and Tier 2 cities, from where 52% of sanctions are originated at Rs 1.4 million and Rs 1.1 million respectively, is still below the prescribed limit. Moreover, average LTV ratio for incremental sanctions is maintained at 58%.

Financials are improving every quarter

For the quarter-ended Sep'07, the income from operations grew by 36% to Rs 512.55 crore. PAT stood at Rs 116.37 crore for the quarter ended Sep'07 compared to Rs 75.93 crore in the corresponding previous quarter thus, recording a growth of 53%. Strong growth in income from operation and other income combined with low operating expenses boosted the bottom line. The loan sanctions for the quarter increased by 69% to Rs 2268 crore, while disbursements increased by 36% to Rs 159.90 crore.

Commenting on the results, S. K. Mitter, Director and Chief Executive, said, "There has been a good performance in almost all areas of operation in the quarter just ended. We have shown a business growth at a higher than Industry rates. There have been very healthy improvements in the Net Interest Margins as well, registering over 3% for the quarter, one of the highest we have witnessed so far. The Company is now poised to move into the next level of growth and performance. We are also considering an enhancement of the Equity Capital."

For the half year ended Sep'07 LICHFL Income from operation increased by 36% to Rs 965.46 crore and total income grew by 36% to Rs 990.11 crore. After accounting for 138% increase tax provision at Rs 56.09 crore, the Net profit increased by 44% to Rs 163.07 crore. The loan sanctions were up by 48% to Rs 342.50 crore, while disbursement was up by 25% to Rs 282.10 crore.

The company has laid down plans for capital raising program. It intends to raise Rs 500 crore, which is likely to be through QIP route. The main purpose of raising the funds is to further augment is capital adequacy ratio from the current level of 15.3. Diluted equity will be maximum Rs 100 crore.


For FY'08, we expect the company to register income from operations Rs 2028.54 crore and PAT of Rs 360.13 crore. This gives an EPS of Rs 42.4 on current equity (around Rs 37 on expected diluted equity). For FY'09, we expect the company to register income from operations of Rs 2535.67 crore and PAT of Rs 427.56 crore. This gives an EPS of Rs 50.3 on current equity (around Rs 43 on expected diluted equity). As further capital raising is likely to be done at a higher rate than the book value, book value will go up faster. Diluted book value will cross Rs 230 in FY 08 and Rs 260 in FY 09. At current price of Rs 360, P/E on FY 09 diluted EPS is 8.4 and P/BV on FY 09 diluted BV is 1.4, which is attractive.

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