 "LIC Housing valuation gap with peers to narrow")
Stocks of most housing finance companies have premium valuations due to demand for home loans. HDFC is trading at high valuations of five times its FY18 estimated book value (or net worth). Indiabulls Housing Finance and Repco Home Finance trade at 2.6 and four times their FY18 estimated book value, respectively. But LIC Housing Finance (LIC HF) trades at a valuation of 2.2 times its FY18 estimated book value. This valuation is at a discount to its peers. One reason for this discount is lower growth posted by LIC HF in recent quarters compared to its peers. For instance, for June quarter, its total income and net profit grew 14 and seven per cent, respectively, over a year, versus 19-28 per cent and 23-31 per cent, respectively, for its peers.
"Given LIC HF's steady performance, the company is set for a re-rating. We expect the valuation gap with its peers to narrow," say analysts at Motilal Oswal Securities. Going by Bloomberg consensus estimate, the company is likely to post healthy profit growth of 18 per cent each in FY17 and FY18. This is despite the company going slow on loans against property (LAPs) and aiming to limit the segment to 10 per cent of total loans given out. LAPs are seen as high-risk. Company says it is seeing pick-up in loan demand from individual customers.
"Given LIC HF's steady performance, the company is set for a re-rating. We expect the valuation gap with its peers to narrow," say analysts at Motilal Oswal Securities. Going by Bloomberg consensus estimate, the company is likely to post healthy profit growth of 18 per cent each in FY17 and FY18. This is despite the company going slow on loans against property (LAPs) and aiming to limit the segment to 10 per cent of total loans given out. LAPs are seen as high-risk. Company says it is seeing pick-up in loan demand from individual customers.
Further, the company's cost of funds is likely to come down, due to reduced exposure to high-cost borrowings from banks. Falling bond yields will further reduce its cost of funds as borrowings from bond market form about 90 per cent of LIC HF's total borrowings. Maturity of non-convertible debentures (bonds) worth Rs 22,200 crore over the next two years is another positive, as after the instruments ripen, the company won't have to pay interest to holders.
Importantly, its gross non-performing assets (loans, mostly) form only 0.6 per cent of total loans given out. Stable assets and high profit growth could drive gains of 100 basis points each over the next two years in return on invested capital to 21.4 per cent in FY18.
A risk LIC HF needs to watch out is rising pre-payments, which is a sector-wide phenomena. "Increased pre-payment rate due to stiff competition may affect profitability and growth. However, pre-payment rates decreased to 11.5% in June 2016 quarter from 11.9% in FY2016 (for LIC HF), indicating success in the management's efforts toward customer retention," believe analysts at Sharekhan.
