1QFY2012 Result Update | NBFC

July 27, 2011

LIC Housing Finance

Performance Highlights

Particulars (` cr) NII Pre-prov. profit PAT

Source: Company, Angel Research

NEUTRAL
CMP Target Price
% chg (qoq) (13.4) (15.5) (18.5) 1QFY11 335 298 212 % chg (yoy) 24.2 27.0 21.0

`214 -

1QFY12 416 379 257

4QFY11 481 448 315

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

NBFC 10,168 1.3 299/150 1,172,049 2 18,432 5,547 LICH.BO LICHF@IN

For 1QFY2012, LICHFs net profit grew by 21.0% yoy (down 18.5% qoq). Reported NIM for 1QFY2012 witnessed a decline of 23bp over 1QFY2011, while disbursements grew by weak 4.5% yoy (35.6% in 1QFY2011). We recommend Neutral on the stock. Disbursements remain muted; NIM declines by 23bp yoy: For 1QFY2012, LICHFs loan book grew strongly by 32.1% yoy (3.5% qoq) to `52,876cr; however, disbursements growth was muted at 4.5% yoy (35.6% in 1QFY2011). Individual loan disbursements increased by 14.9% yoy, while project loan disbursements, which are relatively higher yielding, declined by 79.4% yoy. LICHFs asset quality continued to be stable during 1QFY2012, with gross NPA ratio declining by 6bp yoy to 0.84% and net NPA ratio remaining constant at 0.35%. Calculated provision to coverage ratio for 1QFY2012 stood at 58.3% as compared to 62.0% in 1QFY2011. NII increased by 24.2% yoy (60.1% yoy growth in 1QFY2011); however, the pace of growth slowed considerably compared to the previous quarters. Reported NIM for 1QFY2012 stood at 2.8% as against 3.1% in 1QFY2011. Outlook and valuation: At the CMP, the stock is trading at a P/ABV multiple of 1.7x FY2013E ABV of `129.9cr. Historically, the stock has traded at 0.8x2.1x one-year forward P/ABV multiple, with a five-year median of 1.2x, but it has been rerated over the past two years to 1.9x average. However, on account of a higher interest rate environment, we expect loan growth to slow down to 23% for FY2012 (from 34.2% in FY2011) and spreads to be about ~33bp lower in FY2012 compared to FY2011. Also, unlike NBFCs regulated by the RBI, CAR and provisioning requirements for HFCs have not been increased by National Housing Board (NHB). Considering the near-term macro headwinds, regulatory overhang and above-average valuations, we recommend Neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 36.5 7.8 40.4 15.3

Abs. (%) Sensex LICHF

3m (5.2) (6.0)

1yr 2.0 (0.9)

3yr 28.5 243.8

Key financials
Y/E March (` cr) NII % chg Net profit % chg NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%)
Source: Company, Angel Research

FY2010 937 17.6 662 24.6 2.7 13.9 15.4 3.0 1.9 23.6

FY2011 1,441 53.8 974 47.2 3.1 20.5 10.4 2.4 2.1 25.8

FY2012E 1,682 16.8 1,118 14.7 2.9 23.5 9.1 2.0 1.9 24.2

FY2013E 1,985 18.0 1,311 17.3 2.7 27.6 7.8 1.7 1.8 23.5

Vaibhav Agrawal
022 3935 7800 Ext: 6808 vaibhav.agrawal@angelbroking.com

Shrinivas Bhutda
022 3935 7800 Ext: 6845 shrinivas.bhutda@angelbroking.com Varun Varma 022 3935 7800 Ext: 6847 varun.varma@angelbroking.com

Please refer to important disclosures at the end of this report

LIC Housing Finance | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 performance

Particulars (` cr) Interest earned Interest expenses Net interest income Non-interest income Operating income Operating expenses Pre-prov. profit Provisions & cont. PBT Prov. for taxes PAT EPS (`) Cost-to-income ratio (%) Effective tax rate (%) Net NPA (%)
Source: Company, Angel Research

1QFY12 4QFY11 % chg (qoq) 1QFY11 % chg (yoy) 1,414 997 416 5 421 42 379 33 345 89 257 5.4 10.0 25.7 0.4 1,354 873 481 38 519 70 448 19 430 115 315 6.6 13.5 26.7 0.0 4.4 14.2 (13.4) (87.7) (18.8) (39.9) (15.5) 77.4 (19.6) (22.5) (18.5) (18.5) 1,012 677 335 2 338 39 298 9 289 77 212 4.5 11.7 26.7 0.4 39.6 47.2 24.2 87.6 24.7 7.1 27.0 274.4 19.4 15.0 21.0 21.0

Disbursements remain muted during the quarter

For 1QFY2012, LICHFs loan book grew strongly by 32.1% yoy (3.5% qoq) to `52,876cr; however, disbursements growth was muted at 4.5% yoy (35.6% in 1QFY2011). Individual loan disbursements increased moderately by 14.9% yoy, while project loan disbursements, which are relatively higher yielding, declined by 79.4% yoy. During the quarter, the company announced withdrawal of the Advantage-5 product and introduced a new home loan product Freedom. Freedom is a floating rate product that provides the user a one-time option, within one year of obtaining loan, to convert to a fixed rate for the next five years. The drop in the growth rate of retail disbursements hints at a slow start to its non-teaser new home loan product, and considering the prevailing high interest rates and uncertainties surrounding the mortgage market, we expect a relatively slower pace in loan growth compared to the previous years (34.2% in FY2011 and 37.6% in FY2010); hence, we have conservatively factored in loan growth of 23% for FY2012 and FY2013.

Exhibit 2: Disbursements muted during 1QFY2012

Individual (`cr) Project (`cr) Total yoy (%)

Exhibit 3: Advances growth remains strong

Advances (`cr) Growth yoy (%, RHS)

8,000 6,000 4,000

35.6

34.2 27.8

33.3

40.0 60,000 30.0 20.0 45,000 36.6 36.0 35.7 34.2 32.1 40.0 36.0 32.0 28.0 24.0 20.0 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Source: Company, Angel Research

40,030

43,385

46,380

51,090

3,018

3,800

4,200

6,500

2,000 -

3,468

10.0 -

15,000 -

4.5

1QFY11 2QFY11 3QFY11 4QFY11 1QFY12

Source: Company, Angel Research

July 27, 2011

52,876

30,000

LIC Housing Finance | 1QFY2012 Result Update

Asset quality remains stable

LICHFs asset quality continued to be stable during 1QFY2012, with gross NPA ratio declining by 6bp yoy to 0.84% and net NPA ratio remaining constant at 0.35%. Calculated provision to coverage ratio for 1QFY2012 stood at 58.3% as compared to 62.0% in 1QFY2011. Provision expenses for the quarter stood at `33cr compared to `9cr for 1QFY2011 (Provisioning for teaser loans at 2% of total advances required from 3QFY2011).

Exhibit 4: Asset quality stable compared to 1QFY2011

Gross NPA (`cr) Net NPA (`cr) PCR (%, RHS)

Exhibit 5: NPA ratios lower compared to 1QFY2011

Gross NPA % 1.00 0.80 0.60 0.40 Net NPA %

600 62.0 71.6 73.1

93.6

120.0 58.3 90.0 60.0 30.0 -

140

321 91

311 83

185

300

0.92 0.35

0.74 0.21

0.67 0.18

0.47 0.03

368

240 15

444

0.20 0.00

1QFY11 2QFY11 3QFY11 4QFY11 1QFY12

Source: Company, Angel Research

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

Source: Company, Angel Research

NIM drops due to higher cost of funds

The banks NII increased by 24.2% yoy during the quarter (60.1% yoy growth in 1QFY2011); however, the pace of growth slowed considerably compared to the previous quarters. Reported NIM for 1QFY2012 stood at 2.8% as against 3.0% in 1QFY2011 (3.5% in 4QFY2011). The sequential drop of 67bp in NIM, although partly can be attributed to seasonality and a higher base, was substantially higher than that witnessed in 1QFY2011 (sequential drop of 29bp). Considering the rise in cost of funds due to the prevailing high interest rates, sluggishness in disbursements of retail as well as higher yielding project loans and expected deceleration in loan growth, we expect a 26bp decline in the companys NIM for FY2012 over FY2011 and relative lower NII growth of 16.8% and 18.0% for FY2012E and FY2013E, respectively.

Exhibit 6: NIM drops by 23bp compared to 1QFY2011

4.00 3.25 2.50 1.75 1.00 2.45 2.44 2.76

Exhibit 7: NII yoy growth trend

NII (`cr) Growth yoy (%, RHS)

3.30

3.01 2.93 3.14

3.45 2.78

600 60.1 52.9 300 48.2 40.8 24.2

335

362

404

481

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

1QFY11 2QFY11 3QFY11 4QFY11 1QFY12

Source: Company, Angel Research

416

Source: Company, Angel Research

July 27, 2011

0.84 0.35
80.0 60.0 40.0 20.0 -

LIC Housing Finance | 1QFY2012 Result Update

Investor concerns
Concerns on the regulatory front
Currently, as mandated by the NHB, LICHF (an HFC), only has to provide 0.4% provisions on total outstanding amount of non-housing loans (0.7% of overall loan book); however, as with the case of banks and NBFCs where provisioning is required on overall standard assets the standard asset provisioning could also be extended to housing loans as well in case of HFCs, leading to higher provisioning expenses. LICHF also did not make any teaser loan provision on its Advantage-5 product, as it had not been notified by the NHB to do so. The company has replaced Advantage5 by a new non teaser plan Freedom; however, the threat of NHB classifying the loans disbursed via the Advantage-5 plan as teaser still remains. Also, capital adequacy requirements are relatively less strict for HFCs (12% CAR required with no specific requirement for Tier-1 capital) as compared to NBFCs (15% CAR required, 10% minimum tier-1 in case of IFCs). As of FY2011, the CAR of LICHF stood at 14.9%, and considering LICHF is leveraged 1213 times, the company might have to raise capital in future if CAR requirements are raised.

Outlook and valuation

LICHF has been able to grow its loan book at a 35.9% CAGR over FY200911, driven by a strong parent brand, success of its home loan products (~25% of its loan book comprised teaser loans as of FY2011) and strategic focus on tier-2 and 3 cities to sell its home loans. At the CMP, the stock is trading at a P/ABV multiple of 1.7x FY2013E ABV of `129.9cr. Historically, the stock has traded at 0.8x2.1x one-year forward P/ABV multiple, with a five-year median of 1.2x, but it has been rerated over the past two years to 1.9x average. However, on account of the higher interest rate environment, we expect loan growth to slow down to 23% for FY2012 (from 34.2% in FY2011) and spreads to be about ~33bp lower in FY2012 compared to FY2011. Also, unlike NBFCs regulated by the RBI, CAR and provisioning requirements for HFCs have not been increased by NHB. Considering the near-term macro headwinds, regulatory overhang and above-average valuations, we recommend Neutral on the stock.

July 27, 2011

LIC Housing Finance | 1QFY2012 Result Update

Exhibit 8: P/ABV band

Price (`) 0.8x 1.2x 1.7x 2.2x 2.7x

400 350 300 250 200 150 100 50 -

Dec-07

Apr-06

Mar-09

Aug-09

Oct-08

Apr-11

Jul-07

Feb-07

Nov-10

Sep-06

May-08

Source: Bloomberg, Angel Research;

July 27, 2011

Feb-12

Sep-11

Jan-10

Jun-10

LIC Housing Finance | 1QFY2012 Result Update

Income statement
Y/E March (` cr) NII - YoY Growth (%) Other Income - YoY Growth (%) Operating Income - YoY Growth (%) Operating Expenses - YoY Growth (%) Pre - Provision Profit - YoY Growth (%) Prov. & Cont. - YoY Growth (%) Profit Before Tax - YoY Growth (%) Prov. for Taxation - as a % of PBT PAT - YoY Growth (%) FY08 619 48.0 72 28.1 690 45.6 134 28.1 557 50.6 24 54.4 532 50.4 145 27.3 387 38.7 FY09 796 28.7 91 26.3 887 28.4 154 15.3 732 31.6 5 (78.4) 727 36.6 195 26.8 532 37.3 FY10 937 17.6 137 51.1 1,073 21.1 192 24.2 882 20.4 (28) 910 25.2 249 27.4 662 24.6 FY11 1,441 53.8 331 141.4 1,771 65.0 216 12.9 1,555 76.3 261 1,294 42.1 320 24.7 974 47.2 FY12E 1,682 16.8 207 (37.3) 1,889 6.7 263 21.4 1,627 4.6 117 (55.0) 1,509 16.7 392 26.0 1,118 14.7 FY13E 1,985 18.0 253 21.8 2,237 18.4 323 23.0 1,914 17.7 143 22.3 1,771 17.3 460 26.0 1,311 17.3

(641.2) (1,017.3)

Balance sheet
Y/E March (` cr) Share Capital Reserve & Surplus Loan Funds - Growth (%) Other Liabilities & Provisions Total Liabilities Investments Advances - Growth (%) Fixed Assets Other Assets Total Assets FY08 85 1,747 20,344 24.6 1,181 23,357 775 21,936 24.9 30 616 23,357 FY09 85 2,149 25,422 25.0 1,727 29,382 1,129 27,679 26.2 35 539 29,382 FY10 95 3,293 34,758 36.7 2,096 40,242 1,389 38,081 37.6 36 736 40,242 FY11 95 4,074 45,163 29.9 4,298 53,630 1,403 51,090 34.2 47 1,090 53,630 FY12E 95 4,970 57,032 26.3 3,867 65,965 1,727 62,840 23.0 57 1,340 65,965 FY13E 95 6,022 70,149 23.0 4,870 81,137 2,126 77,294 23.0 68 1,648 81,137

July 27, 2011

LIC Housing Finance | 1QFY2012 Result Update

Ratio analysis
Y/E March Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE Asset Quality (%) Gross NPAs Net NPAs Provision Coverage Per Share Data (`) EPS ABVPS (75% cover.) DPS Valuation Ratios PER (x) P/ABVPS (x) Dividend Yield DuPont Analysis NII (-) Prov. Exp. Adj. NII Treasury Int. Sens. Inc. Other Inc. Op. Inc. Opex PBT Taxes RoA Leverage RoE 2.9 0.1 2.8 0.0 2.8 0.3 3.2 0.6 2.5 0.7 1.8 12.5 22.9 3.0 0.0 3.0 0.0 3.0 0.3 3.3 0.6 2.8 0.7 2.0 13.0 26.2 2.7 (0.1) 2.8 0.0 2.8 0.4 3.2 0.6 2.6 0.7 1.9 12.4 23.5 3.1 0.6 2.5 0.4 2.9 0.3 3.2 0.5 2.8 0.7 2.1 12.4 25.8 2.8 0.2 2.6 0.0 2.6 0.3 3.0 0.4 2.5 0.7 1.9 13.0 24.2 2.7 0.2 2.5 0.0 2.5 0.3 2.8 0.4 2.4 0.6 1.8 13.2 23.5 23.5 5.1 0.9 17.1 4.1 1.2 15.4 3.0 1.4 10.4 2.4 1.6 9.1 2.0 1.9 7.8 1.7 2.2 9.1 42.0 2.0 12.5 52.6 2.6 13.9 71.3 3.0 20.5 87.8 3.5 23.5 106.6 4.0 27.6 128.8 4.7 1.70 0.64 62.4 1.07 0.21 80.4 0.69 0.12 82.6 0.47 0.03 93.7 0.53 0.05 90.0 0.55 0.06 90.0 3.0 19.4 1.8 22.9 3.1 17.4 2.0 26.2 2.7 17.8 1.9 23.6 3.1 12.2 2.1 25.8 2.9 13.9 1.9 24.2 2.7 14.4 1.8 23.5 FY08 FY09 FY10 FY11 FY12E FY13E

July 27, 2011

LIC Housing Finance | 1QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

LIC Housing Finance No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

July 27, 2011