3QFY2012 Result Update | NBFC

February 7, 2012

LIC Housing Finance

Performance Highlights

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

Source: Company, Angel Research

ACCUMULATE
CMP Target Price
% chg (qoq) (3.1) (2.7) 210.7 3QFY11 404 489 213 % chg (yoy) (7.0) (33.3) 43.2

`262 `291
12 months

3QFY12 376 326 306

2QFY12 388 335 98

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 12,825 1.3 272/163 3,383,331 2 17,707 5,362 LICH.BO LICHF@IN

For 3QFY2012, LIC Housing posted net profit growth of 43.2% yoy to `306cr, above our estimates mostly due to reversal of excess provisions (~`100cr) that the company was carrying on its balance sheet. We recommend an Accumulate rating on the stock. NIM disappoints, as disbursements to the developer segment remain sluggish: For 3QFY2012, LICHFs loan book grew strongly by 26.6% yoy (4.7% qoq) to `58,707cr. Loan growth was driven by loans to the individual segment, which grew by 32.9% yoy to `55,171cr, while loans to the developer segment declined by 27.2% yoy to `3,536cr (6.0% of overall loan book). Disbursement growth to the individual segment (`4,568cr) was moderate during 3QFY2012 at 8.8% yoy, however disbursements to the developer segment remained sluggish at `154cr, declining by 61.5% yoy. LICHFs loan portfolio share to developers, which are generally higher yielding, has been on a declining trend since the last 2-3 quarters, leading to slower rise in yield on assets for the company. The companys cost of funds also rose sharply by 73bp qoq (226bp yoy) due to higher interest expenses, leading to a contraction in reported NIM by 18bp qoq (87bp yoy). However, management has guided for improvement in NIM for 4QFY2012, as the company plans to disburse ~`1,000cr of developer loans in the next quarter. LICHF had accumulated ~`100cr of extra provisioning on its balance sheet, as it had made the entire standard provisioning of `160cr (40bp on `40,000cr) on individual loans in 2QFY2012, despite already providing 10-15bp. Also, the company was providing more on developer loans (90bp) than required by NHB (40bp). The company chose to reverse these provisions (netting for provisioning for NPA) during 3QFY2012, leading to negative provisioning expenses of `80cr during the quarter. Outlook and valuation: At the CMP, the stock is trading at a P/ABV multiple of 2.0x FY2013E ABV of `129.3cr. Historically, the stock has traded at 0.8-2.1x one-year forward P/ABV multiple, with a five-year median of 1.2x, but it has been rerated over the past three years to 1.9x average. Although loan growth is expected to slow down to 24% for FY2012 and 21% for FY2013 (from 34.2% in FY2011) and spreads are likely to be lower by ~84bp in FY2012 compared to FY2011, considering that interest rates have peaked and the company has healthy growth prospects, we recommend Accumulate with a target price of `291.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 36.5 9.4 40.3 13.7

Abs. (%) Sensex LICHF

3m 0.7 13.0

1yr (1.8) 52.5

3yr 90.1 548.6

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 18.8 3.7 1.9 23.6

FY2011 1,441 53.8 974 47.2 3.1 20.5 12.8 3.0 2.1 25.8

FY2012E 1,472 2.2 924 (5.2) 2.5 18.6 14.0 2.4 1.5 19.3

FY2013E 1,879 27.7 1,246 34.8 2.6 25.1 10.4 2.0 1.7 21.1

Vaibhav Agrawal
022 3935 7800 Ext: 6808 vaibhav.agrawal@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 | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 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

3QFY12 2QFY12 % chg (qoq) 3QFY11 % chg (yoy) 1,589 1,213 376 4 380 53 326 -80 406 100 306 6.4 14.1 24.7 0.3 1,511 1,124 388 4 392 56 335 205 131 32 98 2.1 14.3 24.7 0.1 5.1 7.9 (3.1) 3.2 (3.0) (4.9) (2.7) (138.9) 210.5 210.1 210.7 210.7 1,213 809 404 141 545 56 489 233 256 43 213 4.5 10.3 16.7 0.2 30.9 49.9 (7.0) (97.2) (30.4) (4.7) (33.3) (134.2) 58.4 134.4 43.2 43.2

Exhibit 2: 3QFY2012 Actual vs. Angel estimates

Particulars (` cr) Net interest income Non-interest income Operating income Operating expenses Pre-prov. profit Provisions & cont. PBT Prov. for taxes PAT
Source: Company, Angel Research

Actual 376 4 380 53 326 (80) 406 100 306

Estimates 454 4 458 66 391 24 367 92 275

% chg (17.2) 7.5 (17.0) (19.4) (16.6) NA 10.7 8.7 11.3

February 7, 2012

LIC Housing Finance | 3QFY2012 Result Update

Loan growth remains healthy; NIM declines on lower developer loans

For 3QFY2012, LICHFs loan book grew strongly by 26.6% yoy (4.7% qoq) to `58,707cr. Loan growth was driven by loans to the individual segment, which grew by 32.9% yoy to `55,171cr, while loans to the developer segment declined by 27.2% yoy to `3,536cr (6.0% of overall loan book). Disbursement growth to the individual segment (`4,568cr) was moderate during 3QFY2012 at 8.8% yoy, however disbursements to the developer segment remained sluggish at `154cr, declining by 61.5% yoy. LICHFs loan portfolio share to developers, which are generally higher yielding, have been on a declining trend since the last 2-3 quarters, leading to slower rise in yield on assets for the company. The companys cost of funds also rose sharply by 73bp qoq (226bp yoy) due to higher interest expenses, leading to an 18bp qoq (87bp yoy) contraction in reported NIM. However, management has guided for improvement in NIM for 4QFY2012, as the company plans to disburse ~`1,000cr of developer loans in the next quarter. Also, the companys loan disbursement (~`9,000cr) under the dual rate fix-o-floaty scheme (given out at 8.9%) will start re-pricing upwards from 2QFY2013. Accordingly, we have factored in healthy NII growth of 27.7% yoy for FY2013.

Exhibit 3: Disbursements to dev. segment remain weak

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

Exhibit 4: Advances growth remains strong

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

8,000 6,000 4,000 27.8

33.3

40.0 30.0 20.0

75,000 60,000 45,000

35.7

40.0 34.2 32.1 29.3 36.0 32.0

46,380

51,090

52,876

56,098

58,707

30,000 15,000 -

4,200

6,500

3,468

4,736

2,000 -

4,568

4.5 0.9

10.0 -

26.6

28.0 24.0 20.0

2.7

3QFY11 4QFY11 1QFY12 2QFY12 3QFY12

Source: Company, Angel Research

3QFY11 4QFY11 1QFY12 2QFY12 3QFY12

Source: Company, Angel Research

Extra provisions reversed during 3QFY2012

LICHF had accumulated ~`100cr of extra provisioning on its balance sheet, as it had made the entire standard provisioning of `160cr (40bp on `40,000cr) on individual loans in 2QFY2012, despite already providing 10-15bp. Also, the company was providing more on developer loans (90bp) than required by NHB (40bp). The company chose to reverse these provisions (netting for provisioning for NPA) during 3QFY2012, leading to negative provisioning expenses of `80cr during the quarter. While gross NPA of the company remained stable at 0.63%, net NPA increased to 0.3% (0.1% in 2QFY2012 and 0.2% in 3QFY2011). Provision coverage for LICHF declined to 51.1% for 3QFY2012 (81.6% in 2QFY2012 and 73.1% in 3QFY2011).
February 7, 2012

LIC Housing Finance | 3QFY2012 Result Update

Exhibit 5: Asset quality remains stable

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

Exhibit 6: NPA ratio trend

Gross NPA % 1.00 0.80 0.60 0.40 Net NPA %

600 73.1

93.6 58.3

120.0 81.6 90.0 51.1 60.0 30.0 -

311 83

185 240 15 359 66 444

300

368 180

0.18

0.03

0.35

0.12

0.67

0.47

0.84

0.64

3QFY11 4QFY11 1QFY12 2QFY12 3QFY12

0.00

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 7: NIM continues to decline in FY2012

4.00 3.25 2.50 1.75 1.00 2.76

Exhibit 8: NII yoy growth negative for 3QFY2012

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

3.30

3.01 2.93 3.14

3.45 2.78 2.45 2.27

600

0.63 376

0.20

48.2 40.8 24.2

300

7.0

404

481

416

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

3QFY11 4QFY11 1QFY12 2QFY12 3QFY12

Source: Company, Angel Research

388

(7.0) (20.0)

Source: Company, Angel Research

Investor concerns
Concerns on the regulatory front
LICHF 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, CAR of LICHF stood at 14.6% (tier-1 ratio of 8.7% including 1HFY2012 profits), and considering LICHF is leveraged 12-13 times, the company might have to raise capital in future if CAR requirements are raised. At present, we have built in `500cr of capital infusion in the company.

February 7, 2012

0.30
60.0 40.0 20.0

LIC Housing Finance | 3QFY2012 Result Update

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 tier-3 cities to sell its home loans. At the CMP, the stock is trading at a P/ABV multiple of 2.0x FY2013E ABV of `129.3cr. Historically, the stock has traded at 0.8-2.1x one-year forward P/ABV multiple, with a five-year median of 1.2x, but it has been rerated over the past three years to 1.9x average. Although loan growth is expected to slow down to 24% for FY2012 and 21% for FY2013 (from 34.2% in FY2011) and spreads are likely to be lower by ~84bp in FY2012 compared to FY2011, considering that interest rates have peaked and the company has healthy growth prospects, we recommend Accumulate on the stock with a target price of `291.

Exhibit 9: Change in estimates

Particulars (` cr) NII Non-interest income Operating income Operating expenses Pre-prov. profit Provisions & cont. PBT Prov. for taxes PAT
Source: Angel Research

Earlier estimates
1,667 193 1,860 256 1,604 288 1,316 342 974

FY2013 FY2012 Revised Earlier Revised Var. (%) Var. (%) estimates estimates estimates
1,472 193 1,665 227 1,437 189 1,248 324 924 (11.7) (0.2) (10.5) (11.3) (10.4) (34.3) (5.1) (5.1) (5.1) 1,991 228 2,219 307 1,912 166 1,746 453 1,293 1,879 224 2,103 275 1,828 146 1,682 437 1,246 (5.6) (1.9) (5.2) (10.4) (4.4) (12.1) (3.6) (3.6) (3.6)

Exhibit 10: 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;

February 7, 2012

Feb-12

Sep-11

Jan-10

Jun-10

LIC Housing Finance | 3QFY2012 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 1,472 2.2 193 (41.7) 1,665 (6.0) 227 5.1 1,437 (7.5) 189 (27.5) 1,248 (3.5) 324 26.0 924 (5.2) FY13E 1,879 27.7 224 16.1 2,103 26.3 275 21.0 1,828 27.2 146 (22.8) 1,682 34.8 437 26.0 1,246 34.8

(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 99 5,310 57,496 27.3 3,596 66,501 1,741 63,351 24.0 57 1,351 66,501 FY13E 99 6,309 69,570 21.0 4,488 80,466 2,109 76,655 21.0 68 1,635 80,466

February 7, 2012

LIC Housing Finance | 3QFY2012 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 2.5 0.3 2.1 0.0 2.1 0.3 2.5 0.4 2.1 0.5 1.5 12.5 19.3 2.6 0.2 2.4 0.0 2.4 0.3 2.7 0.4 2.3 0.6 1.7 12.4 21.1 28.7 6.2 0.8 20.9 5.0 1.0 18.8 3.7 1.1 12.8 3.0 1.3 14.0 2.4 1.2 10.4 2.0 1.6 9.1 42.0 2.0 12.5 52.6 2.6 13.9 71.3 3.0 20.5 87.8 3.5 18.6 109.1 3.2 25.1 129.3 4.3 1.70 0.64 62.4 1.07 0.21 80.4 0.69 0.12 82.6 0.47 0.03 93.7 0.45 0.11 75.0 0.50 0.10 80.0 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 2.5 13.6 1.5 19.3 2.6 13.1 1.7 21.1 FY08 FY09 FY10 FY11 FY12E FY13E

February 7, 2012

LIC Housing Finance | 3QFY2012 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%)

February 7, 2012