LIC Housing: Should you buy into correction?

Stock trading at 24% lower than its peak on concerns of loan losses from non-individual loan book

Things have lately not been in favour of LIC Housing, given that the stock has lost momentum after it peaked at Rs 794 in August with the decline accentuating after its September quarter (Q2) results were declared on October 30.

Now trading at Rs 601, the stock has corrected 24 per cent since its peak, and is among the underperformers in recent times. The question is how much pain it entails for investors and whether the selling seen in the counter is overdone.

Operationally, Q2 was disappointing on most fronts, except it managed to curb its loan loss provisioning after a big spike in the June quarter. Net interest income grew at 2.5 per cent year-on-year (y-o-y), despite a 15.5 per cent increase in the loan book. The unsettling factor is the dip in profitability or net interest margin (NIM) from 2.7 per cent a year ago to 2.4 per cent in Q2. While even historically LIC Housing hasn’t reported NIMs equivalent to that of HDFC or its smaller peers such as Cholamandalam Investment, Repco Home Finance or even PNB Housing, investors of late were used to seeing the housing financier’s profitability at upwards of 2.5 per cent.

The show was marred because of interest income reversal and downward repricing of loans. As these pressures may persist, the company has revised its NIM forecast downwards from 2.7 per cent to 2.5 per cent for FY18. This, coupled with the increasing share of non-individual loan book, has tempted the Street to turn cautious on LIC Housing. Consisting of loans to developers and loans against property (LAP), the two segments grew 62 per cent and 57 per cent, respectively, y-o-y; the steepest growth recently, lifting the share of non-individual loans to a fresh high of 17 per cent, from 12.5 per cent last year. 

Given the asset quality stress the segment is throwing up, a further expansion in the non-individual book will not go down well. While the company is treading cautiously on the LAP exposure, incremental pain from the segment means more trouble. Gross non-performing assets (NPA) ratio for loans to individuals was curtailed at 0.4 per cent, while the non-individual book witnessed an increase from 9.3 per cent a year ago to 9.6 per cent. At these levels, it is only marginally lower than the 10 per cent peak in FY16. The overall slump in the real estate sector might elevate the pain.

Therefore, even if the recent correction increases the investment appeal of LIC Housing (trading at two times its FY19 estimated book value), investors would be better off being on the sidelines before taking fresh exposure. But, for those already owning the stock, it may still be early to press the panic button. Things should, hopefully, normalise in a quarter or two.