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RESULTS REVIEW 3QFY19 31 JAN 2019

LIC Housing Finance

BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

Unutilised opportunity 3Q was yet again a mixed bag for LICHF. While yields and spreads registered a commendable increase of ~21 and ~6bps respectively, QoQ, NIMs were flat QoQ at ~2.33%. Disbursals dipped ~11% QoQ, weighed down by lower project disbursals as individual disbursals (home loan +LAP) were flat, a mild disappointment.

The steady rise in individual GNPAs (+19% QoQ vs. 3% in 2Q and x2 in 1Q) is disconcerting and needs to be closely monitored. The dip in project GNPAs (-23% QoQ) on a/c of higher recoveries and lower slippages was the silver lining.

We believe that the co missed out on the opportunity to capitalise on waning competition from other HFCs. LICHF’s ability to improve individual home loan growth, maintain margins and improve asset quality here on, is to be watched. Valuations are undemanding at 1.4xFY20E. Maintain BUY with a TP of Rs 527 (1.5x Dec-20E ABV of Rs 351).

Highlights of the quarter The rising share of the high yielding non-core book

(~23%, +60bps QoQ) and floating loans (~93% vs. ~82% QoQ) along with a 60bps rise in lending rates drove yields higher (+21bps QoQ). As expected, the 15bps rise in CoF was slower vs. peers. With this, the NIMs were stable, sequentially. Having sailed through the liquidity squeeze, along with rising yields, we expect NIMs to have bottomed out. We have factored NIMs of 2.5% over FY19-21E.

Disappointingly, individual disbursals were muted (+2% QoQ); further, with a 58% plunge in project disbursals, overall disbursal dipped ~11% QoQ. The stagnant pre-payment rate at ~10.4% in the individual segment is surprising, given the reduction in competition, contrary to mgt commentary. We believe, with lower competition from other HFCs, the core book can grow faster. We have factored in an AUM CAGR of 15.5%.

Near-term outlook: The stock should remain range bound, given the muted performance.

FINANCIAL SUMMARY (Rs mn) 3QFY19 3QFY18 YoY (%) 2QFY19 QoQ (%) FY18 FY19E FY20E FY21E Net Interest Income 10,843 7,637 42.0 10,492 3.3 38,350 44,831 51,360 59,616 PPOP 8,565 6,976 22.8 8,347 2.6 33,007 39,861 45,798 53,175 PAT 5,963 4,751 25.5 5,731 4.1 19,896 23,944 26,809 30,357 EPS (Rs) 11.8 9.4 25.5 11.4 4.1 39.4 47.4 53.1 60.1 ROAE (%)

16.7 17.5 17.1 16.8

ROAA (%)

1.23 1.30 1.27 1.24 Adj. BVPS (Rs)

237 265 312 364

P/ABV (x)

1.90 1.70 1.44 1.24 P/E (x)

11.4 9.5 8.5 7.5

Source: Company, HDFC sec Inst Research

INDUSTRY NBFCs

CMP (as on 31 Jan 2019) Rs 450

Target Price Rs 527

Nifty 10,831

Sensex 36,257

KEY STOCK DATA

Bloomberg LICHF IN

No. of Shares (mn) 505

MCap (Rs bn) / ($ mn) 227/3,182

6m avg traded value (Rs mn) 1,070

STOCK PERFORMANCE (%)

52 Week high / low Rs 584/388

3M 6M 12M

Absolute (%) 9.2 (15.2) (16.1)

Relative (%) 3.9 (11.6) (16.9)

SHAREHOLDING PATTERN (%)

Promoters 40.31

FIs & Local MFs 10.94

FPIs 34.97

Public & Others 13.78

Source : BSE

Darpin Shah [email protected] +91-22-6171-7328

LIC HOUSING FINANCE : RESULTS REVIEW 3QFY19

Page | 2

While the GNPAs were flat QoQ (~Rs 22.7bn, 1.26%),

the continued rise in individual GNPAs (19% QoQ,

after a 3% QoQ in 2Q and 2x in 1Q) was a negative

surprise, given the higher proportion of salaried

borrowers (85%). The sustained rise in individual

GNPAs, although not too serious at this juncture, is

disconcerting. However, with recoveries from 5-6

project loans, project GNPAs dipped ~23% QoQ. In

the current liquidity environment, the slippage of

lumpy developer a/cs must be monitored, although

the mgt is confident on the quality of the developer

book.

LICHF wrote-back provisions of ~Rs 31mn in 3Q vs.

provisions of ~Rs 894mn in 2Q. Consequently, the

coverage plunged to ~32% from 52% QoQ and NNPAs

increased ~24bps sequentially to ~85bps.

LICHF booked losses of ~Rs 149.3mn over 9MFY19 vs.

~Rs 1.6bn over 3QFY18 in interest income relating to

modification in the terms of loans. This is the first

time the management has disclosed the same.

P/ABV Band Chart

Source: Bank, HDFC sec Inst Research

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Page | 3

Five Quarters At A Glance (Rs mn) 3QFY18* 4QFY18 1QFY19* 2QFY19* 3QFY19* YoY Growth QoQ Growth

Net Interest Income 7,637 10,036 10,223 10,492 10,843 42.0% 3.3%

Non-Interest Income 392 875 320 206 251 -36.0% 21.7%

Operating income 8,028 10,911 10,543 10,698 11,093 38.2% 3.7%

Operating expenses 1,053 2,242 769 2,351 2,529 140.2% 7.5%

Pre provision profits 6,976 8,669 9,775 8,347 8,565 22.8% 2.6%

Provisions and contingencies (205) 281 1,608 894 (31) -84.6% -103.5%

PBT 7,180 8,387 8,167 7,453 8,596 19.7% 15.3%

Provision for Tax 2,429 2,994 2,205 1,722 2,633 8.4% 52.9%

PAT 4,751 5,393 5,962 5,731 5,963 25.5% 4.1%

Balance Sheet items

Disbursements (Rs bn) 123.0 174.0 95.9 142.7 127.8 3.9% -10.5%

Individual (Rs bn) 113.2 151.4 87.0 113.2 115.4 1.9% 1.9%

Projects (Rs bn) 9.8 22.7 8.9 29.5 12.4 26.6% -58.0%

Loan Book (Rs bn) 1,561.8 1,663.6 1,686.5 1,759.5 1,817.0 16.3% 3.3%

Individual (Rs bn) 1,499.9 1,582.7 1,602.7 1,651.0 1,703.3 13.6% 3.2%

Projects (Rs bn) 61.9 80.9 83.9 108.5 113.7 83.6% 4.7%

Borrowings (Rs bn) 1,376.3 1,453.4 1,477.4 1,544.5 1,602.9 16.5% 3.8%

Profitability

Yield on advances (%) 10.18 10.12 10.19 10.24 10.45 27 bps 21 bps

Cost of Funds (%) 8.32 8.31 8.29 8.30 8.45 13 bps 15 bps

Spreads 1.86 1.81 1.90 1.94 2.00 14 bps 6 bps

NIM (%) 2.33 2.49 2.34 2.35 2.33 0 bps -2 bps

Cost-Income ratio (%) 13.1 20.5 7.3 22.0 22.8 968 bps 82 bps

Tax rate (%) 33.8 35.7 27.0 23.1 30.6 -320 bps 753 bps

Asset quality

Gross NPA 14,212 13,040 20,407 22,346 22,712 67.0% 1.6%

Net NPA 6,066 7,120 13,883 10,649 15,444 93.3% 45.0%

Gross NPAs (%) 0.87 0.78 1.21 1.20 1.26 39 bps 6 bps

Net NPAs (%) 0.49 0.43 0.82 0.61 0.85 36 bps 24 bps

Coverage ratio (%) 0.47 0.42 0.81 0.81 0.93 46 bps 12 bps

Individual GNPA (%) 41.3 45.4 32.0 52.3 32.0 -925 bps -2034 bps

Source: HDFC sec Inst Research; Numbers for 3QFY18, 1QFY19, 2QFY19 and 3QFY19 are as per IND AS

Change In Estimates

Rs mn FY19E FY20E FY21E

Old New Change Old New Change Old New Change

NII 44,608.8 44,831.1 0.5 50,348.5 51,359.6 2.0 57,741.5 59,616.1 3.2

PPOP 41,556.5 39,860.8 (4.1) 46,455.9 45,798.1 (1.4) 53,224.2 53,175.5 (0.1)

PAT 23,881.5 23,944.3 0.3 26,560.6 26,809.3 0.9 30,391.1 30,357.3 (0.1)

Adj. BVPS (Rs) 272.5 264.6 (2.9) 317.9 312.4 (1.7) 369.1 364.2 (1.3)

Slightly higher than estimates, led by AUM growth of ~16/3% while NIMs were flat YoY/QoQ

Net off losses of ~Rs 149.3mn on the modification of loans over 9MFY19

The share of the non-core portfolio increased ~60bps QoQ to ~23%

Led by a ~46/7% YoY/QoQ growth in LAP disbursals

The share of NCDs and retail deposits increased while those of bank borrowings and NHB refinance fell

Led by the rising share of high yielding loans and a 60bps increase in lending rates (FYTD)

Individual GNPAs increased ~19% QoQ while project GNPAs dipped ~23% QoQ

Higher vs. estimates led by provisions reversals


Page | 4

Disbursals down ~11% Sequentially Individual Disbursements up ~2% QoQ

Source: Company Source: Company

Project Disbursals Down ~58% QoQ Disbursal Break-up


Disbursal dipped ~11% QoQ (+4% YoY) after rising ~49% QoQ in 2Q Individual disbursals grew ~2% YoY & QoQ Disbursals break-up: -Individual Home Loans (~Rs 92bn) -LAP (~Rs 2.37bn) -Project Loans (~Rs 12.4bn) After growing rapidly in 2Q, project disbursals were down ~58% QoQ Project disbursals were towards ~7 a/cs vs. ~33 a/cs QoQ The share of project disbursals dipped sharply to ~10% vs. 21% QoQ The average ticket size of incremental home loans YTD was ~Rs 23mn The average prepayment rates have marginally fell ~30bps to ~10.4% QoQ The mgt guided for disbursal of ~Rs 120bn in individual segment

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Page | 5

Loans grew ~16/3% YoY/QoQ Individual Loans Grew ~3% QoQ


Project Loans Grew ~5% QoQ Loan Break Up: Share of LAP inches Up


The Loan book grew ~16/3% YoY/QoQ to ~Rs 1.82tn Individual Loans grew ~14/3% YoY/QoQ to ~Rs 1.7trn (~93% of the book) Project Loans grew ~84/4% YoY/QoQ albeit on a smaller base Within Individual Loans, LAP grew ~46/7% YoY/QoQ to Rs 300bn The share of the non-core portfolio grew ~60bps QoQ to ~23% driven by an increase in the share of the LAP portfolio ~93% of the individual home loan portfolio is linked to the PLR

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Page | 6

NIM: Flat Sequentially Borrowing Mix: Share of NCDs rises


Provision Write-Backs in 3Q Asset Quality Stable QoQ

Source: Company Source: Company; 1Q/2Q/3QFY18, 1Q/2Q/3QFY19 are as per IND AS

NIMs were sequentially flat at ~2.33% in spite of a ~6bps increase in spreads Funds raised during the qtr: -NCDs (~Rs 200bn) -CPs (~Rs 90bn) -Retail Deposits (~Rs 10bn) Individual GNPAs grew 2x/19% YoY/QoQ while project GNPAs dipped ~23% QoQ (+5% YoY) Write-backs during the qtr were ~Rs 31mn vs. ~Rs 894mn of provisions in 2Q As a result of provision write-backs during the qtr, the PCR dipped to ~32% vs. ~52% QoQ and NNPAs increased ~93/45% YoY/QoQ

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Page | 7

Peer Set Comparison

NBFC MCap

(Rs bn) CMP (Rs)

Rating TP

(Rs)

ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%)

FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E

MMFS# 249 406 BUY 498 143 159 180 16.7 13.6 11.9 2.72 2.45 2.26 14.5 16.0 17.1 2.40 2.50 2.54

SHTF 231 1,017 BUY 1,486 566 669 765 10.0 8.3 7.3 1.80 1.52 1.33 17.1 17.8 17.7 2.45 2.54 2.46

CIFC 183 1,170 BUY 1,611 353 431 517 15.7 13.0 11.0 3.31 2.71 2.26 20.6 20.7 20.5 2.50 2.40 2.45

LICHF 227 450 BUY 527 265 312 364 9.5 8.5 7.5 1.70 1.44 1.24 17.5 17.1 16.8 1.30 1.27 1.24

REPCO 25 400 BUY 583 223 262 303 10.4 9.4 8.3 1.79 1.53 1.32 16.8 15.9 15.6 2.27 2.20 2.19

Source: Company, HDFC sec Inst Research;


Page | 8

Income Statement

(Rs mn) FY17 FY18 FY19E FY20E FY21E

Interest Earned 139,869 149,597 176,536 207,280 243,085

Interest Expended 102,315 111,247 131,705 155,920 183,469

Net Interest Income 37,555 38,350 44,831 51,360 59,616

Other Income 934 1,132 1,918 2,224 2,562

Total Income 38,489 39,483 46,749 53,584 62,178

Total Operating Exp 6,118 6,475 6,888 7,786 9,003

Employee Expense 2,458 2,175 2,239 2,589 2,991

PPOP 32,371 33,007 39,861 45,798 53,175

Provisions 2,813 2,389 3,582 5,178 7,180

PBT 29,558 30,619 36,279 40,620 45,996

Provision For Tax 10,247 10,723 12,335 13,811 15,639

PAT 19,311 19,896 23,944 26,809 30,357


Balance Sheet

(Rs mn) FY17 FY18 FY19E FY20E FY21E

SOURCES OF FUNDS

Share Capital 1,010 1,010 1,010 1,010 1,010

Reserves And Surplus 109,760 125,897 145,242 166,901 191,427

Shareholders’ Funds 110,770 126,907 146,252 167,911 192,437

Total Borrowings 1,263,350 1,453,390 1,675,102 1,942,659 2,241,499

Other Liab, Provisions 134,885 138,223 135,042 153,014 193,818

Total Liabilities 1,509,006 1,718,520 1,956,395 2,263,584 2,627,754

APPLICATION OF FUNDS

Advances 1,447,565 1,663,630 1,917,991 2,224,344 2,562,033

Investments 5,270 9,868 4,062 4,696 5,460

Fixed assets 965 971 1,020 1,071 1,124

Cash & Bank Balance 44,633 29,535 19,299 17,031 39,962

Other Assets 10,572 14,516 14,023 16,442 19,174

Total assets 1,509,006 1,718,520 1,956,395 2,263,584 2,627,754



Page | 9

Key Ratios

FY17 FY18 FY19E FY20E FY21E

VALUATION RATIOS

EPS (Rs.) 38.2 39.4 47.4 53.1 60.1

Earnings Growth (%) 16.3 3.0 20.3 12.0 13.2

BVPS (Rs.) 219.4 251.3 289.6 332.5 381.1

Adj. BVPS (100% cover) (Rs.) 215.1 237.2 264.6 312.4 364.2

ROAA (%) 1.37 1.23 1.30 1.27 1.24

ROAE (%) 19.1 16.7 17.5 17.1 16.8

P/E (x) 11.8 11.4 9.5 8.5 7.5

P/ABV (x) 2.09 1.90 1.70 1.44 1.24

P/PPOP (x) 7.0 6.9 5.7 5.0 4.3

Dividend Yield (%) 1.4 1.5 1.7 1.9 2.1

PROFITABILITY

Yield On Advances (%) 10.36 9.62 9.86 10.01 10.16

Cost Of Funds (%) 8.44 8.19 8.42 8.62 8.77

Spread (%) 1.92 1.43 1.44 1.39 1.39

NIM (%) 2.78 2.47 2.50 2.48 2.49

OPERATING EFFICIENCY

Cost/Avg. Asset Ratio (%) 0.44 0.40 0.37 0.37 0.37

Cost-Income Ratio 15.89 16.40 14.73 14.53 14.48

BALANCE SHEET STRUCTURE RATIOS

Loan Growth (%) 15.51 14.93 15.29 15.97 15.18

Borrowing Growth (%) 8.83 15.04 15.25 15.97 15.38

Equity/Assets (%) 7.34 7.38 7.48 7.42 7.32

Equity/Loans (%) 7.65 7.63 7.63 7.55 7.51

Total CRAR (%) 16.64 16.39 16.28 15.90 15.47

Tier I (%) 13.99 14.07 14.24 14.13 13.95

FY17 FY18 FY19E FY20E FY21E

ASSET QUALITY

Gross NPLs (Rs mn) 6,271 13,040 21,065 22,209 25,581

Net NPLs (Rs mn) 2,134 7,120 12,638 10,158 8,504

Gross NPLs (%) 0.45 0.78 1.10 1.00 1.00

Net NPLs (%) 0.15 0.43 0.66 0.46 0.33

Coverage Ratio (%) 66.0 45.4 40.0 54.3 66.8

Provision/Avg. Loans (%) 0.21 0.15 0.20 0.25 0.30

RoAA TREE (%)

Net Interest Income 2.67% 2.38% 2.44% 2.43% 2.44%

Non Interest Income 0.07% 0.07% 0.10% 0.11% 0.10%

Operating Cost 0.44% 0.40% 0.37% 0.37% 0.37%

Provisions 0.20% 0.15% 0.19% 0.25% 0.29%

Tax 0.73% 0.66% 0.67% 0.65% 0.64%

ROAA 1.37% 1.23% 1.30% 1.27% 1.24%

Leverage (x) 13.9 13.6 13.5 13.4 13.6

ROAE 19.1% 16.7% 17.5% 17.1% 16.8%



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Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target

9-Jan-18 571 BUY 675

29-Jan-18 548 BUY 655

10-Apr-18 561 BUY 655

25-Apr-18 547 BUY 636

6-Jul-18 476 BUY 636

27-Aug-18 530 BUY 627

9-Oct-18 397 BUY 592

30-Oct-18 406 BUY 515

8-Jan-19 479 BUY 534

15-Jan-19 478 BUY 534

31-Jan-19 450 BUY 527

RECOMMENDATION HISTORY

350

400

450

500

550

600

650

700

750

800

Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

De

c-1

8

Jan

-19

LIC Housing Finance TP


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Disclosure: I, Darpin Shah MBA author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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