After an over 41 percent surge between April and September, brokerage house Markets Mojo picked LIC Housing Finance as its top pick for the month of October. The stock hit its 52-week high of ₹480.80 earlier this month on October 3, 2023. However, since then, it has consolidated a bit, down over 4 percent till date.
The brokerage advises buying the stock at ₹470. It is bullish on the stock on the back of increasing margins, attractive valuations, improving business matrix, reduction in credit costs and a new subsidy scheme by the govt.
The stock has risen around 13 percent in the last 1 year as well as in 2023 YTD. Meanwhile, in the long term (3 years), it has rallied over 53 percent.
Investment Rationale:
New home loan subsidy scheme: The Government of India is planning to introduce a ₹60,000 crore scheme to subsidise loans for small urban housing for the next 5 years. This could benefit LIC Housing significantly as the company could see an increase in loan disbursements, noted the brokerage.
“The Indian real estate market has performed very well this year between April and June with the housing price index being up by 7.21 percent in the second quarter of 2023. Prices in Metro cities saw an increase in property rates between 6-15 percent. With interest rates peaking we could see an increase in borrowing from individuals, this would mean increased business for the company as it focuses on individual home loans,” said the brokerage.
Focus on improving business matrix: As per the brokerage, LIC Housing Finance is working on various areas to improve its business matrix. It wants to expand its geographical presence in the country by opening new offices. The company is using technology to expand its loan growth book and bring efficiency to its operations. The new implementation of technology did impact the first two months of the current financial year’s performance as there were technical glitches impacting business. But management post their June quarterly numbers informed in the concall that technology is stabilised, informed the brokerage. The management is confident that they can now maintain a good growth rate. The management indicated that loan book growth could be at 12-15 percent in the current financial year as against 9 percent of FY2023, noted the brokerage.
Focus on reducing the credit cost: LIC Housing Finance has a higher credit cost. That’s one of the reasons the company did not command huge respect from the investors. The company’s project finance has always been a drag on its financials. However, the new CEO and MD have decided to focus on the credit cost to improve its ROA. The management has guided that they aim to have lower credit cost. The management has now guided that blended ROA should be in the region of 1.3 to 1.4 percent as against 1.1 percent reported in FY2023, which is another key positive, said the brokerage.
NIM: Despite LIC Housing Finance seeing its NIM increase to 3.21 percent in the first quarter, the brokerage believes it’s not sustainable. For FY2023, it had an NIM of 2.41 percent which the brokerage estimates could improve to 2.6 to 2.7 percent for the current financial year. Also, the company enjoys a AAA rating that helps to raise funds at a competitive rate.
Attractive valuations: LIC Housing is the industry leader in the housing lending business in India. The company has a Price to Book Ratio of less than 1 which is very attractive as compared to its peers who are commanding a higher price to book. Improving ROA should help the company command a higher price to book, stated the brokerage. It strongly believes that there is huge room for capital appreciation in the coming months due to improving financials, government measures, and higher fancy for the PSU stocks. The downside risk of this investment is low with good potential for upside.
Earnings: The company has reported positive results in the last two quarters with revenue and net profit expanding by 28 percent and 43 percent, respectively. The company has also witnessed significant improvement in the ROE over the last few quarters and improved on other metrics such as net interest income, which saw a 39 percent rise compared to last year, and the individual home loan business, which is their core business, grew by 10 percent, highlighted the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 23 Oct 2023, 01:06 PM IST