` India Equity Research | Banking and Financial Services Company Update

LIC HOUSING FINANCE INR 447

Due for structural re-rating BUY May 26, 2009

Delivering quarter after quarter; building a strong track record Vishal Goyal, CFA
LIC Housing Finance (LICHF) is delivering strong operating performance quarter after +91-22-6620 3022
quarter on all key parameters (refer chart 1). It has been consistently reporting - (1) vishal.goyal@edelcap.com
20% plus loan growth; (2) sharp reduction in NPLs; and (3) margins of ~2.8-3.2% -
despite weak real estate sentiments and intense competition from PSU banks (with Kunal Shah
lower lending rates). Moreover, the outlook on mortgage growth and asset quality has +91-22-4040 7579
improved since January with change in macro environment and increased availability kunal.shah@edelcap.com
of capital. Also, margins are expected to be sustained due to sharp decline in
wholesale funding cost, which will help LICHF sustain this strong performance.

Significant improvement in market share

LICHF is estimated to have improved its market share to 9% plus in FY09 from ~6% in
FY08. After muted disbursements over FY05-07, LICHF has been gaining market share
(due to internal restructuring), growing its disbursements by 38% in FY08 and 24% in
FY09. We expect the company’s loan book to grow at 22% CAGR over FY09-11E. Reuters : LICH.BO

Bloomberg : LICHF IN
Concerns on corporate developers abating with improved capital availability
LICHF’s exposure to corporate developers has gone up to 8.8% in FY09 (from 3% in
Market Data
FY07). However, NPL risk on the corporate developer book has abated (compared with
52-week range (INR) : 453 / 151
December 2008) with improved capital availability as reflected in fund raising by
Unitech and DLF (and more QIPs in pipeline). Moreover, with anticipated economic Share in issue (mn) : 84.9

recovery and increased property deals in the second half of FY10, we expect gross M cap (INR bn/USD mn) : 38.0 / 804.0
NPAs to remain below 2% over FY09-11E. Its gross NPAs declined sharply to 1.07% in
Avg. Daily Vol. BSE/NSE (‘000) : 921.6
FY09 and with provision coverage of 80%, net NPAs declined to 0.2% (refer chart 2).
Share Holding Pattern (%)
Outlook and valuations: Due for structural re-rating; upgrading to ‘BUY’
Promoters* : 40.8
LICHF is consistently delivering strong profitability quarter after quarter and concerns
MFs, FIs & Banks : 18.8
over stability in business growth, earnings and asset quality are gradually getting
diluted. The company has constantly improved RoEs from 16% in FY06 to 26% in FIIs : 21.6

FY09 (refer chart 3), and even post equity dilution (of say 15%) it will continue to Others : 18.8
generate RoEs in the range of 21-22%. We had downgraded the stock in January due
* Promoters pledged shares : Nil
to increased risks on developers’ loan. However, we believe on the back of sustained (% of share in issue)

operating metrics and improving real estate environment (when NPL risk on developer Relative Performance (%)
book is lower), the stock has potential for a re-rating. Over the next one year, we
Sensex Stock Stock over
expect the stock to get re-rated and trade in the range of 1.8-2.0x book value, which Sensex

gives a target price of INR 610 per share. We are revising our earnings estimate 1 month 22.8 25.3 2.5

upwards by 4% for FY10 to INR 73.5 per share and by 5% for FY11 to INR 84.7 per 3 months 25.3 108.9 51.2

share. It is currently trading at 1.4x FY10E book and 6x earnings, and we are 12 months (14.9) 31.5 46.4
upgrading it from ‘ACCUMULATE’ to ‘BUY’.

Financials
Year to March FY07 FY08 FY09 FY10E
Revenues (INR mn) 4,970 7,190 8,948 10,530 600 4,200
Rev growth (%) 15.3 44.7 24.5 17.7
Net interest income(INR mn) 3,976 5,644 7,315 8,778
Net profit (INR mn) 2,792 3,872 5,319 6,246 400 2,800
('000)
(INR)

Shares outstanding (mn) 85.0 85.0 85.0 85.0

EPS (INR) 32.9 45.6 62.6 73.5 200 1,400
EPS growth (%) 33.8 38.7 37.3 17.4
PE (x) 13.6 9.8 7.1 6.1
0 0
Price to book (x) 2.5 2.1 1.7 1.4
May-08 Nov-08 May-09
ROE (%) 19.3 22.9 26.2 25.3

Edelweiss Research is also available on www.edelresearch.com ,Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

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LIC Housing Finance

Chart 1: PAT growth of 38% in FY08 and FY09; loan book grew by 20% plus

3.0 30.0

2.4 26.0

1.8 22.0

(%)
(INR bn)
1.2 18.0

0.6 14.0

0.0 10.0
Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409

Revenues Profits Loan growth

Source: Company

Chart 2: NPLs declining significantly

5.0 100.0

4.0 80.0

3.0 60.0
(%)

(%)
2.0 40.0

1.0 20.0

0.0 0.0
Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409

Gross NPAs Net NPAs Prov coverage

Source: Company

Chart 3: RoEs on an uptrend

12 30.0

10 26.0

8 22.0
(INR bn)

(%)

6 18.0

4 14.0

2 10.0
FY06 FY07 FY08 FY09 FY10E
Revenues Profits Loan growth RoEs
Source: Company, Edelweiss research

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 LIC Housing Finance

Significant improvement in market share

LICHF is estimated to have improved its market share to 9% plus in FY09 from ~6% in FY08.
Of the estimated disbursements of ~INR 685 bn in FY09 of the top four players - namely
HDFC, ICICI Bank, SBI and LIC Housing (accounting for ~75% of the mortgage space) -
LICHF has disbursed ~INR 88 bn. After muted disbursements over FY05-07, LICHF has been
gaining market share (due to internal restructuring) in the past two years, growing its
disbursements by 38% in FY08 and 24% in FY09. Its focus on the salaried class (which forms
80% of its individual loan segment), and particularly public sector entities (~50-60% of
salaried class), has enabled to post better-than-industry growth; these segments have
benefited from implementation of Sixth Pay Commission recommendations and no job losses.
The company is now planning to increase its presence in the mid-ticket size segment and add
26 new offices in Q1FY10. We expect the company’s loan book to grow at 22% CAGR over
FY09-11E.

Chart 4: Strong disbursement growth—Higher than industry average

40 60.0

32 48.0

24 36.0

(%)
(INR bn)

16 24.0

8 12.0

0 0.0
Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409
Individual Project Disbursement growth
Source: Company

Wholesale funding cost dipping; margins to sustain

The wholesale funding cost has come down significantly and, incrementally, the company is
raising funds at the rate of ~7.0-7.5%; there is further scope of reduction in average funding
cost, going forward. Taking this into account, the company has reduced its lending rates
further by 75bps with effect from April 2009 (besides 75bps reduction in January). The
spreads (calc) during FY09 were maintained at ~2.3% and the outlook on spreads is positive
in the near term considering shift in favour of the high-yielding corporate developer space
and sharp correction in wholesale funding cost.

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LIC Housing Finance

Company Description

LICHF is the fourth-largest mortgage finance company in India. It provides loans for homes,
construction activities, and corporate housing schemes. Almost 91% of the company’s loans
are to retail customers and the balance 9% to large ticket commercial sector companies. It is
fourth in terms of market share (including banks), with ~8% market share in home loan
disbursements in FY08. The company has loan outstanding of INR 277 bn as at March 31,
2009. It has 130 offices and 100 camps across the country. The company has a marketing
network of over 6,000 direct sales agents, home loan agents, and associates. LIC India is its
majority shareholder with 41% equity holding, followed by FIIs at 22%.

Investment Theme

Internal restructuring and intense pricing war resulted in LICHF’s disbursals growing a paltry
9% (below industry average of 36%) over FY04-06. Post internal restructuring, defying the
concerns of slowdown in mortgages, and expectations of margin compression, LICHF
reported robust disbursals in FY07-08. We expect the company to grow its disbursement at
higher-than-historical growth rates. With the change in competitive landscape in favour of
HFCs, we expect LICHF to gain market share and report margin improvement. Historically,
asset quality for LICHF has not been highly impressive; however, with adoption of better and
strict risk management process and concerted efforts on NPA recoveries, the company has
reported significant improvement in its net NPAs. LICHF also holds 39% stake in LIC Mutual
Fund.

Key Risks

Loss of market share to commercial banks and HFCs and pressure on spread due to inability
to raise lending rates amidst stiff competition.

Real estate lending is becoming more challenging due to a high interest-rate background and
weak property prices.

Deterioration of asset quality can increase NPA provisioning and affect profitability.

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 LIC Housing Finance

Financial Statements

Income statement (INR mn)

Year to March FY07 FY08 FY09 FY10E FY11E
Interest income 15,054 20,587 27,476 32,629 38,582
Interest expended 11,079 14,943 20,162 23,851 28,189
Net interest income 3,976 5,644 7,315 8,778 10,393
Non interest income 817 1,248 1,470 1,581 1,728
- Fee & forex income 583 655 789 915 1,024
- Investment profits 29 24 24 24 24
- Misc. income 205 568 658 642 680
Income from operations 4,792 6,892 8,785 10,358 12,120
Other income 177 299 163 171 180
Net revenues 4,970 7,190 8,948 10,530 12,300
Operating expenses 1,244 1,467 1,542 1,694 1,863
- Employee exp 267 345 407 470 543
- Depreciation /amortisation 38 37 50 52 54
- Other opex 939 1,085 1,085 1,172 1,266
Preprovision profit 3,725 5,723 7,406 8,835 10,437
Provisions 188 400 139 263 739
PBT 3,538 5,323 7,267 8,573 9,698
Taxes 746 1,451 1,948 2,327 2,501
PAT 2,792 3,872 5,319 6,246 7,197
Basic number of shares (mn) 85 85 85 85 85
Basic EPS (INR) 32.9 45.6 62.6 73.5 84.7
Diluted number of shares (mn) 85 85 85 85 85
Diluted EPS (INR) 32.9 45.6 62.6 73.5 84.7
DPS (INR) 8.0 10.0 13.0 14.7 16.9
Dividend pay out (%) 28.0 25.7 24.3 23.4 23.4

Growth metrics (%)

Year to March FY07 FY08 FY09 FY10E FY11E
Net interest income 17.0 42.0 29.6 20.0 18.4
Net revenues growth 15.3 44.7 24.5 17.7 16.8
Opex growth 18.1 17.9 5.1 9.9 10.0
PPP growth 14.5 53.6 29.4 19.3 18.1
Provisions growth (70.6) 113.3 (65.3) 89.2 181.2
PAT growth 33.8 38.7 37.4 17.4 15.2

Operating ratios (%)

Year to March FY07 FY08 FY09 FY10E FY11E
Yield on assets 9.2 10.3 11.1 10.6 10.3
Yield on advances 9.3 10.3 11.1 10.6 10.3
Cost of funds 7.4 8.1 8.8 8.4 8.1
Spread 1.9 2.2 2.3 2.2 2.2
Net interest margins 2.4 2.8 2.9 2.8 2.8
Cost-income 25.0 20.4 17.2 16.1 15.1
Tax rate 21.1 27.3 26.8 27.1 25.8

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LIC Housing Finance

Balance sheet (INR mn)

As on 31st March FY07 FY08 FY09E FY10E FY11E
LIABILITIES
Equity capital 850 850 850 850 850
Share premium 2,533 2,533 2,533 2,533 2,533
Reserves & surplus 12,056 14,934 18,960 23,744 29,258
Net worth 15,438 18,317 22,343 27,127 32,641
Total deposits - 157 1,630 3,141 5,199
Secured Loans 146,770 191,134 237,776 292,116 352,186
Unsecured Loans 16,557 12,153 16,195 19,237 22,630
Total liabilities 178,764 221,761 277,943 341,621 412,656
ASSETS
Loans 175,635 219,364 276,784 340,410 410,013
Investments 2,061 7,746 6,119 5,423 4,576
Current assets 9,074 5,214 6,819 8,976 7,689
Current liabilities 9,076 11,792 13,102 14,618 11,091
Net current assets (2) (6,578) (6,282) (5,642) (3,402)
Fixed assets (net block) 236 300 277 245 134
Other assets 834 929 1,046 1,185 1,335
Total assets 178,764 221,761 277,943 341,621 412,656
Balance sheet ratios (%)
Loan growth 19.6 24.9 26.2 23.0 20.4
EA growth 18.3 24.1 25.4 23.0 20.9
Gross NPA ratio 2.6 1.7 1.1 1.1 1.3
Net NPA ratio 1.3 0.6 0.2 0.3 0.5
Provision coverage 51.2 62.2 80.9 70.0 62.0

Sanctions and disbursements (INR mn)

Year to March FY07 FY08 FY09 FY10E FY11E
Sanctions (INR mn) 61,050 86,179 108,984 130,780 154,321
Disbursements (INR mn) 51,210 70,715 87,619 105,143 124,069
Disbursements to sanction ratio (%) 83.9 82.1 80.4 80.4 80.4
Disbursements growth (%) 4.6 38.1 23.9 20.0 18.0
Sanctions growth (%) 19.4 41.2 26.5 20.0 18.0

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 LIC Housing Finance

RoE decomposition (%)

Year to March FY07 FY08 FY09 FY10E FY11E
Net interest income/assets 2.4 2.8 2.9 2.8 2.8
Non interest income/assets 0.6 0.8 0.6 0.6 0.5
Investment gains/assets 0.0 0.0 0.0 0.0 0.0
Net revenues/assets 3.0 3.6 3.6 3.4 3.3
Operating expense/assets 0.8 0.7 0.6 0.5 0.5
Provisions/assets 0.1 0.2 0.1 0.1 0.2
Taxes/assets 0.5 0.7 0.8 0.8 0.7
Total costs/assets 1.3 1.7 1.5 1.4 1.4
ROA 1.7 1.9 2.1 2.0 1.9
Equity/assets 8.8 8.5 8.2 8.0 8.0
ROAE 19.3 22.9 26.2 25.3 24.1

Valuation metrics
Year to March FY07 FY08 FY09 FY10E FY11E
Diluted EPS (INR) 32.9 45.6 62.6 73.5 84.7
EPS growth (%) 33.8 38.7 37.3 17.4 15.2
Book value per share (INR) 181.6 215.5 262.9 319.1 384.0
Adjusted book value per share (INR) 163.4 203.9 258.2 310.1 367.8
Diluted P/E (x) 13.6 9.8 7.1 6.1 5.3
Price/ BV (x) 2.5 2.1 1.7 1.4 1.2
Price/ Adj. BV (x) 2.7 2.2 1.7 1.4 1.2
Dividend yield (%) 1.8 2.2 2.9 3.3 3.8

Valuation metrics (considering 15% equity dilution)

Year to March FY07 FY08 FY09 FY10E FY11E
Diluted EPS (INR) 32.9 45.6 62.6 65.7 77.4
EPS growth (%) 33.8 38.7 37.3 5.0 17.8
Book value per share (INR) 181.6 215.5 262.9 337.6 396.9
Adjusted book value per share (INR) 163.4 203.9 258.2 329.7 382.8
Diluted P/E (x) 13.6 9.8 7.1 6.8 5.8
Price/ BV (x) 2.5 2.1 1.7 1.3 1.1
Price/ Adj. BV (x) 2.7 2.2 1.7 1.4 1.2
Dividend yield (%) 1.8 2.2 2.9 2.9 3.5

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 Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021,
Board: (91-22) 2286 4400, Email: research@edelcap.com

Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services:

Allahabad Bank, Axis Bank, Centurion Bank of Punjab, Federal Bank, HDFC Bank, ICICI Bank, IOB, Karnataka Bank, Kotak Mahindra Bank,
OBC, SBI, Yes Bank, IDFC, HDFC, LIC Housing Finance, PNB, Power Finance Corporation, Reliance Capital, SREI Infrastructure Finance,
Shriram City Union, Syndicate Bank and Union Bank.

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May-09
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Mar-09
Oct-08

Dec-08
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Apr-09
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21-May-09 Punjab Improving asset 667 Buy

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Distribution of Ratings / Market Cap Rating Interpretation

Edelweiss Research Coverage Universe Rating Expected to

Buy Accumulate Reduce Sell Total Buy appreciate more than 20% over a 12-month period

Rating Distribution* 46 46 25 8 126

Accumulate appreciate up to 20% over a 12-month period
* 1 stocks under review
Reduce depreciate up to 10% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn

Market Cap (INR) 68 39 19 Sell depreciate more than 10% over a 12-month period

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