Company Background Incorporated in 1989, LIC Housing Finance (LICHF) was promoted by the Life Insurance Corporation of India (40.5% stake) with equity participation from UTI, ICICI and IFCI. The company is engaged mainly in granting housing loans to individuals. It also provides finance to agencies engaged in construction of houses/flats for residential purposes.
LICHF is the second biggest player for housing loans. The housing loans market is perhaps the least risky segment in the financial sector. The company has the largest reach in the country with a network of 6 regional offices, and 115 area offices covering almost 450 locations. It also has an office in Dubai and Kuwait. The company currently has 861 employees.
The company floated its first public issue in 1994, which was followed by a GDR issue in 2004. The company recently promoted a wholly owned subsidiary namely, LICHF Care Homes Ltd. LICHF also holds 39.3% stake in LIC Mutual Fund. It has also inked an agreement to enter into credit card business along with its parent LIC, Corporation bank and GE Money. The company so far has disbursed Rs320 billion towards home financing since its inception and had almost 9,00,000 customers since then.
Business environment turning favorable We believe the business environment for dedicated housing finance companies (HFCs) has become favourable, as commercial banks have slowed down on housing finance activity (owing to the new RBI guidelines). This move is expected to help LICHF boost sanctions and disbursements, improve realisation of yields and enhance NIMs while sustaining its asset quality. Further, the internal restructuring the company has undergone strengthening the operation process, setting up a centralised loan processing centre and focussing on recoveries will prepare it to cash on the emerging opportunities.
Sanctions and disbursements to increase During FY05-07, sanctions and disbursements saw a paltry CAGR of 8% and 5% respectively. Loans witnessed a 19% CAGR over the same period. The lacklustre growth in sanctions and disbursements can be attributed to stiff competition faced by HFCs from commercial banks. But going forward, we believe the scenario is likely to favour HFCs. Already during H1FY08, LICHF’s sanctions and disbursements have grown 48% and 25% respectively. We believe sanctions and disbursements will pick up in FY08 and forecast a 20% and 23% CAGR respectively over FY07-FY09E. We expect advances to grow to Rs 25,929 crore in FY09E from Rs 17,563 crore in FY07, implying a CAGR of 21.5%. This should help the company boost its market share from the current 6%.Growth in business and optimum funding mix to boost NIMs Almost 95%-96% of LICHF’s loan portfolio comprises of retail clients. Due to its high retail exposure, the company has always garnered healthy yields on the retail book. Yields on advances have been hovering around 8.7%- 9.2% over the past few years. With the average age of the loan borrower coming down, and increasing urbanisation, we expect strong demand for housing loans in the long run, which we believe will help LICHF improve the yield to the 10%-levels in FY08-09E.
On the funding side, the company has focused on a balanced funding approach. About 40% of the resources are raised at fixed rates, and the remaining at floating rates. The “AAA” rating assigned to its non- convertible debentures (NCDs) by CRISIL has helped the company mobilise funds from institutions, and banks at a cheaper rate, which has significantly added to margins expansion. At present, 40% of the funding book comprises of NCDs, while the rest consist of loans from banks, LIC, and the National Housing Board (NHB). We expect the company to adopt the same strategy in future, and estimate its cost of fund at around 8.5% – 8.65% in FY08E and FY09E. Even in a falling interest rate scenario, the company is adequately hedged via interest rate swaps, which would negate the rise in cost of funds.
On the back of good business growth and optimum funding mix, we expect LICHF to register a NII of Rs 669 crores in FY09E, implying a CAGR of 30% over FY07-FY09E. On the net interest margin (NIM) front, we expect the company to report a NIM of 2.68% and 2.78% in FY08E and FY09E. Historically, the company has maintained healthy NIMs of 2.41% in FY06 and FY07.
In spite of the high retail exposure of its loan book, LICHF has maintained the quality of its assets. GNPAs and NNPAs have come down from 3.41% and 1.8% in FY06 to 2.58% and 1.26% in FY07 respectively. The company has taken necessary steps like maintaining a low loan-to-value ratio, providing multiple due dates for EMI payments, creating lien on the property until the loan is cleared, churning customer mix – concentrating on more credit-worthy Category A and B retail clients, and high degree of improvement in the appraisal methodology, etc. We expect the company to increase the focus on maintaining a healthy asset quality and faster recoveries, which will bring down the GNPAs and NNPAs to 1.84% and 0.85% respectively in FY09E. We also expect the loan loss coverage to go up from 47% in FY06 to 54% in FY09E.
Internal restructuring to help boost market share LICHF has shifted its strategy to strengthen its information technology back-up, implementation of automated loan appraisal scorecard, reorganising operational processes, etc. These initiatives will help the company speed up its operations, enhance business, achieve greater operating efficiency (cost to income ratio to come down from 23% in FY07 to 17.6% in FY09E), and reduce the probability of loan defaults .
LICHF has a pan-India presence with 115 operating offices covering almost 450 locations. The company’s marketing and distribution channels, which comprises of 4,073 home loan agents, 794 direct sales agents (DSAs) and 423 customer relations agents (CRAs), coupled with strong brand identity (LIC) will help it seize the upcoming business opportunity in terms of good volume growth and a large client base .
Demographics will be a big plus The disintegration of joint families, emergence of nuclear families, surge in urbanisation, rising income levels, and shortages of housing units are demographic variables that would throw up enormous opportunities for players like LICHF, which has a singular approach business model (home financing). Further, the government policy that is pro-housing which inturn will benefit LICHF going forward. On the macro environment front, the picture looks good for LICHF as many commercial banks have started cutting down the home loan rates. This move is expected to boost demand. Further, real estate prices in many cities have stagnated, or started correcting, which will increase affordability for individuals, thereby impacting the demand positively.
Regulatory guidelines augur well for volume growth The RBI’s recent guidelines on provisioning of home loans for less than Rs 20 lakhs would benefit HFCs like LICHF. This would augur well for the company in terms of increase in business volume and improvement of market share in the organised housing finance market. It is expected to be a key trigger for LICHF, the loan size of its mainly retail client base is about Rs 8.5 lakh. It also boasts a low loan to value (LTV) ratio per client of 58% in FY07 and 52.8% in H1FY08.
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