Disclaimer:
The analysis and opinions provided above are for educational and informational purposes only. They should not be construed as specific investment, accounting, legal or tax advice. Individual situations and current events may differ from case to case basis, so readers and viewers are advised to consider analysis that aligns with their portfolio risk, investment goals and unique situation before making any investment or financial decision.
Company Introduction LIC Housing Finance Limited
LIC Housing Finance Limited provides housing finance services in India and is registered with National Housing Bank (NHB). It mainly provides home loans for purchase/construction of residential properties to individuals and project financing to real estate developers. The company also provides loans against property (LAP), lease rental discounting (LRD), and financing for purchase of commercial properties.
As of Sep 2023, LIC Housing Finance has served over 25 lakh families. It has a strong market presence with a loan book of Rs. 2.4 lakh crores. The company generates good profitability with 88.7% operating profit margin (OPM) and financing profit margin of 22% in latest quarter. The sales and profits have grown at 8.8% and 8% CAGR over 5 years. The balance sheet is also stable with debt/equity ratio of 8.33x.
Should We Buy, Sell or Hold?
LIC Housing Finance stock appears to be a good bet for long-term investors
Positive Parameters:
- Low valuation – The stock is trading at just 1x price to book value compared to industry average of 2.9x. So investors can accumulate the stock at reasonable valuations.
- Strong parentage – Being a subsidiary of insurance behemoth LIC provides strong parentage and stable operations for the company. LIC’s promoter holding has also been very steady at 45%.
- Good growth prospects – With rising incomes and increasing nuclear families, the demand for affordable housing is expected to remain strong. The company is well placed to capitalize on this demand given its pan-India presence.
- Stable financials – Key metrics like OPM, net interest margins, low NPAs indicate the company has a stable and profitable business model. The debt to equity is also at comfortable levels currently.
Concerns:
- Rising competition – Affordable housing segment is getting crowded with both banks and HFCs targeting the space aggressively. This may put some pressure on margins.
- Lower NIMs/ROEs – Compared to leading HFCs like HDFC, LIC Housing Finance has relatively lower NIMs and ROEs which impacts long term value creation.
LIC Housing Finance stock is reasonably valued currently and its long term prospects remain stable. The company is well positioned to tap rising housing demand in India. While competition and lower margins are risks to watch out for, the stock can still deliver decent 15-18% annual returns for patient investors willing to hold for long term. A “BUY” can be considered with 2-3 year investment horizon.
Vital Ratios Analysis
Here are some key ratios of LIC Housing Finance
Key Ratios:
- Price to Book Ratio: The stock is attractively valued trading at 1x its book value compared to industry average of 2.9x. Lower ratio indicates potential for re-rating.
- ROE & ROCE: The return on equity (ROE) and return on capital employed (ROCE) is decent at 11-12% but lower than leading housing finance companies. This implies scope for improvement in profitability.
- Debt/Equity: The debt/equity ratio at 8.33x indicates the company has taken sizable debt to grow its loan book but it is still at comfortable levels. Maintaining this ratio below 10x is critical from risk perspective.
- Net Interest Margins: LIC Housing Finance’s NIMs have moderated to 2.4% compared to 2.9% for HDFC. While lower NIMs impact profitability, the bigger concern is rising competition eating into spreads.
- Asset Quality: The company has maintained prudent underwriting standards with Gross NPAs below 1%. This indicates portfolio quality is healthy enabling stable credit costs.
LIC Housing Finance scores decently on critical parameters of valuation, leverage, and asset quality. ROEs could improve with better cost management. While competition is stiff, parent LIC provides strong support. At current price, the stock can deliver 15-18% long-term returns. Investors with above-average risk appetite can accumulate the stock on declines.
Promoter Holding
The promoter holding in LIC Housing Finance has been remarkably consistent at 45.24% as of Sep’23. This is held by parent company LIC which provides significant funding support and business cross-sell opportunities. The stable high promoter stake gives confidence that the business strategy will remain steady. This also reduces risks of frequent management changes impacting operations.
FII/DII Holdings
FII holding has been in 21-25% range in the last 2 years while DII holding is around 19-23% in the same period. Healthy institutional investor interest indicates confidence in the business model and promoter backing. However, FIIs can be volatile in times of stress leading to stock price fluctuations. Continuous investor education by management would be positive.
Sales & Profitability Trends
The company has delivered sales CAGR of 9% over 5 years and strong growth of 24% in the trailing 12 months due to pick up in housing demand. This growth is better than closest competitors. Key growth drivers are increasing demand for affordable housing and LIC’s distribution reach. Profitability has also shown acceleration – 33% profit growth in TTM on the back of higher volumes and better cost efficiency. Further leveraging technology would aid in improving margins.
Debt & Margin Trends
Total debt levels have gone up from Rs 1.7 lakh cr in Mar’19 to Rs 2.4 lakh cr in Sep’23, in line with industry credit growth trends. Incremental borrowing has been channelized to fund loan book expansion. Interest coverage ratio is healthy at over 2x. NIMs have improved nicely from 1.7% in Mar’20 to 2.2% in the latest quarter due to pricing power and lower cost of funds.
Latest News & Outlook
As per latest updates in Nov’22, LIC Housing Finance is targeting total credit growth of 15% in FY2024. Key focus areas would be affordable housing segment and smaller ticket LAP loans where competition from banks is lower. This strategy would help maintain margins. The housing finance industry is projected to grow at 13-15% supported by structural demand for affordable housing and government incentives for home buyers.
Valuation & Cashflows
Stock is attractively valued trading at P/B ratio of 1x compared to average industry ratio of 2.9x. The current market cap is Rs 29,280 cr. Company has strong cash & equivalents position of Rs 1,658 cr as of Sep’23 providing cushion against liquidity shocks. Dividend payout ratio is 17%.
Competitor Comparison
PNB Housing Finance (Market Cap – Rs 20,277 cr) and Can Fin Homes (Market Cap – Rs 10,525 cr) are closest competitors. While LIC Housing has delivered better sales growth compared to these players, margins and return ratios are lower. Asset quality is better than PNB Housing which had some stress. Competitive intensity remains high but LIC Housing is reasonably positioned to leverage brand and scale advantages.
Is the Stock Overvalued or Undervalued?
LIC Housing Finance appears to be undervalued based on the following:
- Trades at P/B ratio of 1x compared to industry average of 2.9x.
- There is a significant gap between intrinsic value of Rs 2,869 per share versus current market price of Rs 532. The gap is over 5 times.
- This indicates strong upside potential when the gap between intrinsic value and stock price narrows down.
The valuations are attractive owing to near term growth slowdown. However, long term growth prospects remain stable due to structural increase in housing demand. With recovery likely soon, the risk-reward is favorable for long term investors at current prices.
Should We Buy This Stock?
A “BUY” on LIC Housing Finance is considered recommended for long term investors based on:
- Leadership in fast growing affordable housing – Company is targeting 15% AUM growth till FY24 focused on low ticket housing loans where competition from banks is lower.
- Improvement in margins – NIMs have rebounded from 1.6% in Mar’20 to 2.2% in Sep’22 on back of pricing power. Further scope remains given operating leverage.
- Strong parentage of LIC – Majority stake of promoter LIC lends significant strength on capitalization, governance and access to vast distribution network of LIC agents. This is a key competitive advantage.
- Reasonable valuations – Price to book ratio of 1x makes valuations reasonable considering long growth runway ahead. Stock also offers approx. 2% dividend yield.
While growth has slowed down recently impacting sentiment, structural factors of housing shortage and financialization of savings into housing remain strong. As a leading HFC, LIC Housing Finance is considered a safe bet to ride this wave over the long run. 12-24 months investment horizon is ideal.
Industry Outlook
- Indian housing finance industry has grown at 18% CAGR over the past 5 years.
- Currently pegged at Rs 14 lakh crore market size, comprising 70% mortgages and 30% non-housing loans.
- Structural trends like urbanization, nuclearization, financialization of savings, and government sops continue to aid growth.
- Central bank RBI is also focused on affordable housing and has provided various incentives on capital and liquidity front to support lending activities. RBI eyes housing penetration going up from the current 37% to over 75% by 2030.
- Industry is projected to reach Rs 35-40 trillion market size by 2025 based on estimates from CRISIL, Motilal Oswal.
- While there have been near term headwinds for HFCs like rising bond yields and lower demand, the long term runway remains intact.
- LIC Housing Finance as one of the largest HFCs is well placed to tap this opportunity leveraging the parentage of LIC.
In summary, the housing finance industry is poised for multi-fold growth over the next 5-7 years. For investors with a long term horizon, LIC Housing stock offers a reasonably good play on this secular trend.
Long Term Outlook
Promising Factors for LIC Housing Finance
Low Mortgage Penetration – India’s mortgage penetration, defined as mortgage debt as a percentage of GDP, stands at a mere 11%. This is way below other developing countries like China (20%), Thailand (20%), Malaysia (33%), highlighting the huge growth potential. Government initiatives like affordable housing for all by 2022 and Smart City program will likely improve penetration over the next decade.
Significant Runway for Growth – LIC Housing Finance is targeting a strong loan book CAGR of 15% till FY2024 by deeper penetration in tier 2/3 regions and focus on low ticket-sized affordable housing loans. As per company estimates, the total addressable opportunity in this segment is to the tune of Rs 18 lakh crores leaving substantial headroom for growth. The parentage of LIC provides ready access to underserved geographies.
Valuation Re-rating Potential – Currently trading at 1x price to book, valuations are undemanding and have scope for significant re-rating once growth picks momentum. As profitability ramps up over the coming years, the valuation discount to other listed HFCs like HDFC Ltd, Can Fin Homes should narrow down triggering PE expansion from current levels.
To summarize, India’s structural housing shortage combined with support from government reforms makes housing finance a long term structural opportunity. LIC Housing with its competitive advantages is projected to deliver 18-20% AUM growth and 22-25% profit growth over the next 5 years. This would warrant higher Price to Book multiples of 2.5x-3.0x.
Short Term Outlook
Near Term Challenges for LIC Housing Finance
Rising Interest Rates – Sharp rise in bond yields over the last 12 months has pushed up the overall cost of borrowings. As the ability to fully pass on higher rates remains limited due to weak housing demand, some margin pressure can be expected in the interim.
Property Slowdown Impacting Growth – Sluggish property sales and glut in the real estate market, especially residential housing, could negatively impact growth and asset quality. This may increase NPA provisioning dragging profitability.
Intensifying Competition – Competition is heating up with more banks and HFCs targeting the affordable home loan space which dominates LICHFL’s portfolio. This may lead to market share loss and lower pricing power.
However, strong parentage support of LIC, focus on salaried home buyers, and adequate capital/liquidity cushions would help mitigate earnings downgrade. Stock valuations already price in some of the near term concerns presenting decent accumulation opportunity for long term investors.