We interacted with the management of LIC Housing Finance (LICHF) to get an update on business and demand outlook.
We interacted with the management of LIC Housing Finance (LICHF) to get an update on business and demand outlook. Loan growth to remain stable at 15% y-o-y and it plans to disburse Rs 500 billion in FY18. Split between individual and non-individual loans likely to remain stable, while affordable segment to witness strong traction (on a smaller base).Asset quality to witness improvement in the near term, as some assets that slipped in Q1 are likely to see recoveries/ upgradations. Margin to bottom out in Q2, due to recent rate reductions (PLR reduced in May’17); however, benefits from reduction in incremental borrowing costs to provide support (100 bps differential between incremental and actual cost of funds). Given that LICHF is adequately capitalised (Tier-1 ratio of 13.4%), there is no immediate capital raising plan. LICHF trades at 2.2x FY19E PBV. Maintain Buy.
LICHF is our preferred pick in the housing finance pace and price correction over last three months offers a decent entry point. We believe, despite the moderating core profitability, LICHF’s business model can deliver 18% RoE over FY19. More so, asset quality risks are limited given that share of developer loans is low at 4% and profile of LAP portfolio is unique. Maintain Buy on LICHF with TP of Rs 790 (2.7x FY19E P/ABV), implying 20% upside from CMP. Management expects to disburse Rs 500 billion and aims 15% loan growth in FY18. Overall, there is strong loan demand from western/southern/eastern regions of India. However, demand from northern India albeit weak is better than the previous few quarters. Share of individual, LAP and developer book stood at 83:13:4 in Q1FY18 and is likely to remain more or less similar in the near term.
LICHF is witnessing good traction in the affordable housing space and is optimistic on this segment given the government’s thrust. It has already disbursed 4,100 loans till date vs 4,400 loans in FY17. Management highlighted a good number of RERA-registered projects have come up in several locations but it would go selective in funding developer loans. Pre-payment rates that had spiked earlier have now stabilised over the past few quarters and will aid on-book loan growth.