Stock Fundamentals

LIC Housing Finance: Buy

M. V. S. Santosh Kumar | Updated on March 12, 2018

The long-term prospects for housing finance companies are promising due to the under-penetrated nature of the market. — P.V.Sivakumar


Thanks to the secured nature of lending, the company enjoys superior asset quality.

Fresh investments with a three-year horizon can be considered in the stock of LIC Housing Finance (LICHF). LICHF, the second largest housing finance company, has improved its market share in mortgage financing segment over the last few years and would continue to benefit from rising demand for housing. Capital infusion from the parent company LIC and expected qualified institutional placement may bolster the capital adequacy ratio and help support loan book growth.


After the recent underperformance, the valuations seem attractive. At the current price of Rs 250, LICHF’s price-to-estimated FY-14 book value ratio works out to 1.56 times (assuming the QIP proceeds will come in). The valuations are at a discount to HDFC and Gruh Finance but at a premium to other housing finance players such as Dewan Housing and GIC Housing.

The return on equity of the company in the past has been consistently maintained at over 20 per cent. The trend may sustain with significant scope for improvement in its net interest margins. This justifies a premium valuation for LIC Housing Finance. The EPS has grown at 18 per cent compounded annually during the period 2007-08 to 2011-2012.

LICHF enjoys superior asset quality, thanks to the secured nature of lending with conservative loan-to-value. This, coupled with lean operations (cost-to-income ratio of close to 14 per cent), were the reasons for the company enjoying superior profitability even as margins contracted.

Competition and credit growth

Superior credit rating allows it to raise money at competitive rates from the market. But what has limited its earnings growth is the limited pricing power due to intense competition in the home loan space.

With banking sector witnessing huge asset quality slippages elsewhere, they have begun to focus on home loan market. While this is a concern in the near-term, the long-term prospects for housing finance companies are promising due to under-penetrated nature of the market.

India’s mortgage loans-to-GDP ratio is low. BCG-FICCI report estimates that the mortgage finance industry is expected to grow to Rs 40 lakh crore by 2020.

This translates to 24 per cent, compounded annually for the next nine years. Not only is the home financing space expected to witness sharp growth, developer loans are also expected to witness demand. LIC HF plans to leverage by lending to this segment as well.

LICHF’s loan book grew at 30 per cent compounded annually over last four years. As of September 2012, the loan book growth was strong at 23 per cent year-on-year. Around 95 per cent of the total loans are to individuals with average ticket size anywhere between Rs 15 and Rs 16 lakh. Incremental average ticket size is around Rs 17.5 lakh per customer. The company has very competitive rates on home loan products. But its fixed-cum-floating rate loan product continues to witness higher demand from customers and helps it retain market share. Around 70 per cent of the incremental loans are fixed-cum-floating product.

LICHF has very low proportion of developer loans which enjoy far higher yields than retail loans. The company plans to increase developer loan proportion to 10 per cent to improve its margins.

The gross NPA ratio of LICHF is 0.6 per cent as of September 2012. Much of the loans are disbursed to the salaried class. Even in the developer loan portfolio the gross NPAs are lower than the banking industry.

Contracting margins to improve

The net interest margin of LICHF has been on a downward trajectory. The margins declined from 3.08 per cent for March 2012 to 2.14 per cent during the first half of the current fiscal. The decline was largely due to the sticky nature of its lending rates while the cost of funds shot up. Close to two-thirds of the loans given by LIC Housing are fixed-cum-floating rate loans.

Secondly, lower cost debentures have been replaced by the high-cost ones during the last few months. But the margins are expected to improve from the current levels for the following reasons. One, around Rs 10,000-crore worth loans are shifting from fixed loans (at 8.9 per cent yield) to floating rate of 11.9 per cent.

Two, the wholesale borrowing rates have declined with five-year NCD rates falling by more than 50 basis points year-on-year. Even bank lending rates are down by 25 bps.

This would somewhat reduce the borrowing costs for LICHF. Further reduction in interest rates will have significant impact on the margins as the interest rates on the asset side are sticky (higher proportion of fixed loans).

Capital raising also will help the margins in the near term while management’s intent to improve share of developer loans will yield further benefit. LICHF also plans to reduce the dependence on bank loans to 25 per cent (from 32 per cent as of March 2012). This would also improve its margins as the borrowing rates in the market are below base rate of banks.

Published on November 17, 2012

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