LIC Housing: Current valuation offers better risk-reward

While strong parent support and transformation of loan book to floating rate is positive, asset quality concern is key

With concerns over profitability amid competitive intensity and the recent liquidity crunch, valuation of the LIC Housing Finance (LICHF) stock corrected sharply from 2.5 times of 1-year forward book value to around 1.4 times now. This is attractive when compared to its peers (valuation of 1.6 times to 4 times) and is also close to its historical low level of around 1.1 times.

According to analysts at Motilal Oswal Securities, the current valuation is attractive with favourable risk-reward.

The stock has surged 20 per cent since January 30, when the company had announced its December 2018 quarter results. What cheered investors is 16 per cent year-on-year growth in loans as against a dismal performance by some of its close peers. Also, the company could raise ~20,000 crore via non-convertible debentures alone in Q3 when the debt market felt the effect of the IL&FS default in September. Both these data points clearly show the strength of good-quality non-banking lenders and strong parent support.

The brokerage says given liquidity conditions, NBFCs with strong parentage will benefit disproportionately over peers in terms of access to a larger quantum of capital from the debt market at more competitive rates. This would reduce competitive intensity from low-rated peers. This along with expected rising housing demand amid lower goods and services tax (GST) on retail housing should support loan book growth.

Further, the company also raised its base lending rates cumulatively by 70 basis points during April-December 2018, and it converted all its retail loans to floating rates. Thus, any upward pressure of funding cost would largely be mitigated as retail loan book is about 94 per cent of its loan pie. Analysts expect the spread to remain stable at around 1.3-1.4 per cent despite liquidity crunch.

Yet, the concern is asset quality pressure, mainly from retail lending (including loan against property), as was the case in Q3. The company’s gross non-performing assets (NPAs) jumped over two times to 1.3 per cent, the highest in a decade. The company, however, has a healthy NPA (stage 3) provision coverage ratio of 68 per cent.