The acute shortage of housing, low penetration of mortgages, rising urbanisation, improved affordability, continued fiscal incentives and a young demographic profile remain assuring factors that the demand for housing finance in India will continue to remain robust over the medium term. Because of brand sharing and financial support from parent (whenever needed), LIC Housing Finance (LICHF) never has to worry about liquidity. Due to current weak economic scenario and rising competition from banks we believe that pressure on NIMs and AUM growth might increase. But the low dependence on cash collections and high proportion of salaried customers (~85%) give LICHF the ability to absorb higher credit costs. With the recent price correction stock is available at an attractive valuation, but due to near term head winds we feel that investors should add the stock only in dips.
Valuations & Recommendation:
We expect LIC Housing Finance to post 6% CAGR growth in NII and a 2% CAGR dip in Net Profit (due to rise in provision requirements) over FY20-22E, while the loan book is expected to grow by 7% CAGR over same time frame. Its RoE could rise again after dipping in FY21. Low exposure to developer loans (~7% of AUM) brings comfort. LICHF’s seasoned granular book offsets a lot of negatives (including fall in PAT, low RoE, Higher expected credit costs, pressure on NIMs etc). LICHF is currently trading at 1x FY21E and 0.9x FY22E Adjusted Book Value. We feel that investors can buy the stock on dips to Rs. 250-255 band (~0.85xFY22E ABV) and add further on Rs. 220-225 band (~0.75xFY22E ABV). We think the Base case fair value of the stock is Rs.297 (1.0xFY22E ABV) and the Bull case fair value is Rs.313 (1.05xFY22E ABV) over next 6 months.
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