Why We are Optimistic on LIC Housing Finance?

LIC Housing Finance with the stock code (LICHF) has raised equity capital of Rs. 2,340 crore (11.4% of March 2021 net worth) on 8th September from LIC. This increased LIC’s stake in the company to 45% from 40% earlier. This reduces the risk of hitting the regulatory cap as its growth picks up. Further, it reduces the risk of a rating downgrade. 

We believe the improving real estate sales, reducing inventory levels, and developer consolidation in metros leading to potential price rise/new launches will augur well for lenders, both on retail and developer loans (a trend likely to play out in 1-2 years). 

LICHF is likely to benefit from home loan disbursements. The company has slowed down on developer loans post an increase in stress. Market sources suggest strong retail home loan disbursements for housing finance companies (HFCs) in the past two months. 

We believe that the quarter-on-quarter (QoQ) rise in stress in 1QFY22 is partially akin to lockdown-driven delinquencies and hence expect some reduction in the near term. We increase fair value (FV) to Rs. 600 (from Rs. 575 earlier); we raise our estimates to reflect capital issuance in September 2021 and higher net interest margin (NIM). 

At our RGM-based FV, the stock will trade at undemanding multiples of 1.1X book and 8.4X earnings September 2023E.

We are optimistic that LIC Housing Finance can hit levels of 600 from present levels of 400+. 

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