One man’s loss is another man’s gain. This is the investment rationale supporting the LIC Housing Finance Ltd (LICHFL) stock. The mortgages business, which until 2019 was quite crowded, is now left with just a handful of players. The merger of HDFC Limited (the market leader) with HDFC Bank will leave a bigger vacuum for investors.

LICHFL trading at a four-year low valuation of 0.9 times FY23 estimated book could fill the gap to some extent. The asset quality issues being addressed by the management and the renewed focus on retail loans makes a favourable case for investors to hold on to their position in LICHFL stock. Those with some propensity for risk (given the possibility of a delayed improvement in loan growth) can consider accumulating the stock at the current levels. 

Macro advantages

DHFL vacated the housing finance space in 2019. Same year, Indiabulls Housing, which was then the No. 3 mortgager changed its growth strategy to make it asset-light or go slow on balance sheet growth. A year later PNB Housing, the fifth largest player was hit hard by the pandemic and had to go slow on the business owing to its capital crunch. Meanwhile, the housing finance market polarised into two fragments – the large players who remain competitors to banks and those exclusively in the affordable housing market. While the latter segment is well-represented by stocks such as Aadhar Housing, Home First, Aptus and Repco, the first segment is pretty much left with just two large players – HDFC Limited and LICHFL. This is set to further shrink, leaving LICHFL with an opportunity in terms of volume and scale of market potential that it has not enjoyed much in the past.

This sets a favourable investment case for the stock. The question is whether LICHFL is well-placed to capture this opportunity.

Mistakes addressed: LICHFL stock’s underperformance in 2020 was largely driven by the possibility of a merger with IDBI Bank pursuant to LIC’s (its parent company) share holder agreement for IDBI Bank. But this option has recently been ruled out, as efforts are for LIC to divest its stake in the bank.

From FY21 the lender wasn’t spared of the asset quality issues. Gross non-performing assets rose 46 per to 4.1 cent in FY21 and peaked at 5.9 per cent in Q1 FY22. From these levels, March quarter of FY22 (Q4), saw significant respite at 4.6 per cent, reiterating the management’s commitment towards improving the asset quality. What instils confidence is that improvement in Q4 didn’t happen because of the denominator effect (loan growth). If any, FY22 loan growth at eight per cent year-on-year is rather sluggish compared to industry growth of over 12 per cent. While normally slow growth rate is perceived negatively, for LICHFL it is somewhat acceptable given that the management’s promise to remain focused on the retail side rather than the low-hanging wholesale loans.

In fact, it was the unfavouable loan mix which costed the company during the pandemic.

Loan mix

LICHFL’s forte is its focus on retail customers and that too a high proportion of salaried base. This mix is unique to the company, which even players such HDFC Limited and PNB Housing don’t have. The rally between 2015 – 2019 was spurred because of this advantageous positioning.

But during this time that the lender bumped up the non-retail loans to shore up growth. Share of wholesale loans rose from five per cent to over seven per cent and this triggered the bad loan mess subsequently. Now, the base is once again turning in favour of retail loans, with its share increasing by 400 bps from 77 per cent in FY20 to 81 per cent FY22.

Loan disbursements to the wholesale segment moderated in FY22 to ₹1,300 crore, as against ₹2,500 crore and ₹3,100 crore in FY20 and FY21 respectively. However, the product mix leaning towards retail loans isn’t being factored by the market. Sustained performance on this parameter could help. Also, at five per cent share of wholesale book, LICHFL’s exposure to the non-retail loans is the lowest (12 per cent and above for peers) and this should also help the stock rerate.

However, with the focus shifting back to retail loans, overall loan growth could remain tepid given the current inflationary conditions. Going forward, 12 – 14 per cent loan growth (seen prior to the pandemic) may be a more realistic expectation rather than 15 per cent plus growth which peers are anticipating.


Unlike peers who are at the three per cent plus net interest margin (NIM), LICHFL’s profitability has always been sub-3 per cent. Since it largely caters to the salaried segment which tends to be rate sensitive but carry low delinquency risks, LICHFL’s home loan rates is among the lowest offered by non-banks, and competitive even HDFC Limited or PNB Housing.

Also, with the low cost of fund benefit reducing, LICHFL may have to absorb part of the rate hike to ensure growth remains buoyant. In fact, post the May 4 rate hike, LICHFL increased its lending rate by 30 bps absorbing 10 bps on its yields. Therefore, NIM may remain stagnant at 2.5 – 2.6 per cent levels (annualised) in the near-term.


At 0.9 times FY23 estimated book, valuations capture the downside risks. HDFC Limited’s standalone (core housing book) premium to LICHFL which historically was over 50 per cent has reduced. From 1.6 times one-year forward book for HDFC’s mortgage business until December 2021, the number has reduced to 1.2 times. Also, LICHFL’s premium to PNB Housing (post June 2021 correction) has increased, with the latter trading at 0.6 times FY23 estimated book. Therefore, from a long-term, LICHFL stock may not end up being a value trap.