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LIC Housing Finance – Long Term Buy

July 2, 2007

LIC Housing Finance (LICHFL) is one of the largest housing finance companies in India. It possesses one of the industry’s most extensive marketing networks in India and Dubai with thousands of direct sales agents.

LICHFL reported robust income from operations, with disbursals growing 23% and net interest margin (NIM) sustaining at 2.45% in the March 2007 quarter over the March 2006 quarter. The company more than doubled (up 115%) the profit after tax (PAT) to Rs 89.14 crore, supported mainly by the strong NII growth and net performing asset (NPA) recoveries, surpassing market expectation. It sanctioned Rs 2479 crore and disbursed Rs 1755 crore — a growth of 72% and 23%, respectively, in the quarter.

LICHFL sanctioned Rs 6105 crore and disbursed Rs 5121 crore in the year ended March 2007 — a growth of 19% & 5%, respectively, over FY 2006. The company’s total income increased 25%, Rs 1583.25 crore. Net profit was up 34% to Rs 279.14 crore in the year.

The gross NPA ratio stood at 2.58% end March 2007 as against 3.41% end March 2006. Net NPAs were 1.26% as against 1.80%. The company has declared a total dividend of 80% (including 50% interim dividend already paid). The outstanding mortgage portfolio was Rs 17563 crore end March 2007 as against Rs 14867 crore end March 2006 — a growth of 18%.

LICHFL has taken a number of growth initiatives. The company recently launched a fixed deposit scheme to raise resources from individual depositors. It has increased its corporate tie-ups with reputed organisations in the country for granting loans to their employees. The total business coming out of such tie-ups accounted for around 33% of the total retail business in FY 2007 — up from 25% in FY 2006.

LICHFL identified certain areas of priority in FY 2007. It has delivered on it to a considerable extent. The company has been able to reduce both the gross and net NPAs significantly. It had undertaken lots of efforts on marketing, resulting in encouraging sanction and disbursement numbers in the March 2007 quarter (Q4).

LICHFL has targeted loan disbursals of Rs 6000 crore in FY 2008 — a growth of 17%, compared with a growth of just 5% in FY 2007. In view of the strong performance achieved in the March 2007 quarter and the management’s confidence and marketing initiatives already taken, such ramp-up in disbursals is achievable. However, on a conservative basis, the company si expected to report EPS of Rs 36.1 in FY 2008.

LIC holds a 40.5% equity stake in the company. There are good chances of LIC exiting from the business in the long run as housing finance is not its core business, nor does it offer any significant synergy. Moreover, in the hands of any other focused and aggressive player, the company can grow much faster. There is also lots of interest in the housing finance business in India due to the enticing growth potential.

Considering this, the current price of Rs 200, which is near the FY 2007 book value of Rs 180 and gives FY 2008 forward P/E of just 5.5 and dividend yield of 4.4%, offers great value. BUY this stock for Long Term.

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