LIC Housing: An exception among NBFC stocks

It is the only housing finance stock that is holding up to its YTD gains after the note ban

While stocks of all non-banking finance companies (NBFCs) have been reeling under severe pressure on the bourses after government banned old notes of 500- and 1,000-rupee denominations, the stock of LIC Housing Finance stands out as an exception. Stocks such as Dewan Housing Finance, Indiabulls Housing Finance and HDFC Limited have taken a hit of 11-23 per cent since November 8 till date, while that of LIC Housing has dipped by only 0.5 per cent. In fact, it is the only housing finance stock that is holding up to its year-to-date gains after the note ban. While investors may recall the 10 per cent correction post its September quarter results prior to demonetisation, analysts believe that the stock's resilience is adequately backed by fundamentals.

LIC Housing scores over its large peers on three main aspects. First, as 84 per cent of its customers are salaried employees (and 88 per cent of loans are retail home loans) whose monthly repayment instalments are directly deducted from their bank accounts, the dependence of cash-in-circulation is relatively less for LIC Housing. Second, the exposure to builder book loans or developer loans (lending to real estate developers) is relatively a minuscule proportion at 2.8 per cent of its total outstanding loans, insulating it from a probable slowdown in real estate activities. Finally, even as the exposure to loan against property (LAP) increased sharply during the past 5-6 quarters, LAP loans account for only 9.8 per cent of total loan outstanding, whereas exposure of peers to this segment is 12-25 per cent. This pads the company from registering steep losses in case of any sharp decline in property prices.

In addition, analysts at Sharekhan suggest that with yields of government securities declining by 30 basis points post demonetisation, it will impact cost of funds positively and in turn help LIC Housing maintain its net interest margin at the current level of 2.68 per cent. For these reasons, Sharekhan's research team feels that LIC Housing stands to gain materially in the medium - long term from the demonetisation drive, though they also warn of some deceleration in loan growth. But, slowdown in disbursals is likely to be in tandem with the industry.

Analysts at Motilal Oswal Securities share a similar view. While terming LIC Housing as the safest housing finance play, they say that despite factoring for an earnings cut of 1-3 per cent due to demonetisation, the analysts expect 20 per cent growth in net profit in FY16-19. "Return on equity is set to cross 20 per cent in FY18, which would drive further re-rating," they add. Analysts polled on Bloomberg ascribe a 12-month target price Rs 636 for LIC Housing indicating over 16 per cent upside from current levels.