Investor's Eye: Stock Idea - LIC Housing Finance (Home on it); Viewpoint - Mangalore Refinery and Petrochemicals (Play on firming up of the refining margin)

 

To ensure delivery to your inbox, please add (newsletter@mailer.sharekhan.com) to your address book.   Investor's Eye [March 28, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA LIC Housing Finance Recommendation: Buy Price target: Rs300 Current market price: Rs232 Home on it Key points Steady loan demand, strong distribution and brand recall to drive growth: LIC Housing Finance Ltd (LICHFL), the second largest housing finance company in India (with a loan book of Rs86,422 crore), is likely to expand its loan book at about 19% CAGR over FY2013-16 with the revival in the economy. LICHFL would gain due to its strong distribution network, brand recall and attractive product offerings.  Margins to firm up, boost earnings: Despite increasing competition in the mortgage space, the company has maintained its lending rates and also discontinued the discounted rate schemes. Going ahead, we expect LICHFL's net interest margin (NIM) to improve gradually led by a stable interest rate environment, replacement of bank borrowings with bonds (which could reduce the cost of funds) and conversion of fixed rate loans to floating rate loans. In addition, the expected increase in the proportion of high yielding non-individual loans (loan against property and developer loans constitute about 6.5% of the total loans). The release of provision on teaser loans (~Rs140 crore) could aid the profitability. With a healthy growth in advances and an improvement in the margins, LICHFL's earnings would grow at a CAGR of 23% over FY2013-16. Asset quality resilient: The company's gross and net NPAs are at 0.81% and 0.51% respectively, among the best in the system. While the NPAs increased from developer segment during Q3FYFY14, the management expects to recover the same which will further improve the asset quality and may reverse the provisions. LICHFL's conservative lending practices and higher proportion of retail salaried class customers to sustain healthy asset quality. Valuations-at discount to mean multiple despite a healthy growth outlook: Currently, LICHFL trades at 1.2x FY2016E book value, which seems attractive considering the stable RoE of around 18-20% and healthy asset quality. Going ahead, a revival in the economy and moderation in the borrowing rates could be the key triggers for the stock. We value the company at 1.5x FY2016E book value (at a 20% discount to its five-year mean valuation multiple) which results in a price target of Rs300. We initiate coverage on LICHFL with a Buy rating.   VIEWPOINT Mangalore Refinery and Petrochemicals Current market price: Rs45 View: Positive Play on firming up of the refining margin  Key points With the benchmark gross refining margin (GRM; the Singapore GRM surged to $6.2 per bbl in Q4FY2014) picking up, Mangalore Refinery and Petrochemicals Ltd (MRPL) is set to show a significant improvement in its financial performance. It is expected to report a GRM of around $6 per bbl in Q4FY2014 as against $2 per bbl in Q4FY2013 and a loss Q3FY2014; therefore it is likely to post a strong earnings growth in Q4FY2014.  The commissioning of its phase-III expansion in H1FY2015 would also improve the margin (as the refining complexities improve from 6 to 9 owing to better efficiency) by $1.5-2 per bbl on a structural basis.  With strong Q4 numbers and structurally positive changes in place, we expect a decent appreciation in the short-to-medium term. Currently, MRPL is attractively valued at 4x EV/EBIDTA based on FY2016E estimates (Bloomberg consensus). Therefore, we recommend investors to buy the stock (expect a close to 20% appreciation; 5.5x FY2016 EBITDA works to Rs55). Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team

This e-mail message may contain information, which is confidential,  proprietary, legally privileged or subject to copyright. It is intended  for use only by the individual or entity to which it is addressed. If you  are not the intended recipient or it appears that this mail has been  forwarded to you without proper authority, you are not authorized to  access, read, disclose, copy, use or otherwise deal with it and any such  actions are prohibited and may be unlawful. The recipient acknowledges  that Sharekhan Limited  or its subsidiaries, (collectively "Sharekhan "),  are unable to exercise control or ensure or guarantee the integrity  of/over the contents of the information contained in e-mail transmissions  and further acknowledges that any views expressed in this message are  those of the individual sender and no binding nature of the message shall  be implied or assumed unless the sender does so expressly with due  authority of Sharekhan . Sharekhan does not accept liability for any  errors, omissions, viruses or computer problems experienced as a result  of this email. Before opening any attachments please check them for  viruses and defects. If you have received this e-mail in error, please  notify us immediately at mail to: mailadmin@sharekhan.com and delete this  mail from your records.