We upgrade LIC Housing Finance Ltd to overweight (earlier underweight) and raise our target price to R290 (earlier R185) as the company is better placed than other financial companies, being well-capitalised (Tier I ratio of ~12.5% as of September 2013) with granular retail loan book, low impaired ratio (0.8%). Pricing discipline owing to base rate regime is key difference in this cycle.
Historically, weakness has been lower margins owing to low diversity on both asset and liability sides. Liquidity conditions and interest rates have been stable, and we expect this situation to continue with some moderation in rates gradually. Further, management has been focusing on new products like LAP and on reducing share of high-cost liabilities like bank borrowings. This should drive moderate NIM expansion going forward. We expect profitability to be healthy at 19% EPS CAGR in FY14-16 with average ROE of 17.5%.
Valuation, in the above context, at 9.1x FY15e P/E and 1.4x BV is attractive, in our view. We have raised EPS estimates by 7% and 12% in FY15 and FY16, driven by higher NIM and lower credit cost forecasts. The overhang of a potential bank licence is behind the stock. As a wholesale-funded mortgage lender.
LICHF is a good play on both lower interest rates and a moderate economic recovery. Wholesale funding rates have been in a tight range in the last six months, and we expect moderation through F15-16 ? an opportune time to own LICHF.
