Add LICHF as strong NII drives core earnings: Kotak Institutional Equities

By: | Published: April 21, 2015 12:14 AM

Retain ‘add’ on LIC Housing Finance (LICHF) with a target price of Rs 500 a share...

Retain ‘add’ on LIC Housing Finance (LICHF) with a target price of Rs 500 a share.

LICHF’s Q4FY15 results (24% disbursements growth and 50 bps expansion in incremental spreads) underpin our bullish stance on the stock, in particular, and housing finance companies, in general. Sharp decline in borrowing cost will help the company weather strong competition in housing finance and sustain market share gains.

At our target price, LICHF will trade at 2.1x P/B FY17e. We expect the company to deliver 18-19% RoE and 19-20% medium-term earnings growth on the back of 19% loan growth. Current trends pose higher upside risk than downside risk to our loan growth estimates.

LICHF currently operates at high leverage (asset to equity ratio of 13.6x in March 2015) and given its high growth trajectory, will likely need to raise capital in the near term; we are not factoring capital issuance in our forecasts.

LICHF reported 17% y-o-y growth in comparable earnings and 22% growth in NII on the back of stable (19%) loan growth and marginal y-o-y NIM expansion. Higher-than-expected expenses, y-o-y rise in provisions (due to exceptional benefits in the base) and provision for deferred tax liabilities resulted in 2% growth in reported earnings to R378 crore.

We remain positive on the incremental trends in LICHF. The company reported strong (24%) growth in individual disbursements to R9,600 crore and 27 bps q-o-q and 7-bps y-o-y expansion in NIMs.

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