LIC Housing Finance remains the top pick despite persisting issues

Share of developer loans is lower than that of other HFCs, while that of retail loans stands at 80%

LIC Housing Finance, the country’s second largest housing finance company, had a muted September quarter (Q2). The financials reveal some areas of concern, such as increasing developer loan exposure and profitability pressures. 

Notwithstanding these, LIC Housing remains one of the top picks for brokerages, among housing finance companies (HFCs). 

Despite the not-so-great Q2 show, the stock has been in the green since its results a month ago. 

There are three positives that keep LIC Housing a notch above other HFCs and explain the Street’s optimism on the stock.

First, as the sentiment turns unfavourable for financiers with exposure to large builder books, those with a strong grip over pure-play retail customers find more acceptance among investors. 

While LIC Housing has seen the share of developer book, or wholesale loans, increase to 20 per cent in Q2 from 5 per cent a year ago, it is still lower than peers like HDFC, Indiabulls Housing and Dewan Housing, which have over 22–25 per cent exposure to the developer segment.

Second, the share of retail loans stands at a tall 80 per cent and most of it is constituted by the salaried class at about 86 per cent of the retail portfolio. 

 

Therefore, while growth of the underlying assets may moderate in the near-to medium-term, which is in sync with the prevalent  trend in the residential real estate sector, the salaried class exposure covers LIC Housing from significant default risks.

Third, with the bond market turning unfavourable for HFCs, LIC Housing saw its profitability fall to 2.35 per cent  in Q2, from 2.6 per cent earlier. 

Analysts believe net interest margins or NIMs should be maintained at these levels as the full impact of the recent interest rate hikes flow through in subsequent quarters.

Coupled with its decade-low valuation of 1.4 times its FY20 book value, LIC Housing does make for an attractive bet. 

However, investors shouldn’t have super-normal expectations from the stock as seen in the past, given how the Street believes that days of high asset growth may be tough to replicate over the medium-term.