LIC Housing: Valuation attractive, but asset quality a concern

The LIC Housing stock has appreciated over 32 per cent in a year, but its valuation at 0.8x FY22 estimated book is still below its three-year average of 1.4x, making it an attractive value proposition.

However, the December quarter (Q3) was a mixed bag for the housing financier, and, hence, analyst recommendations/forecasts too are mixed. For instance, analysts at Motilal Oswal Financial Services and Emkay Global revised their FY22 estimated earnings upwards by 5 per cent and 14 per cent, respectively, while Kotak Institutional Equities reduced the FY22 earnings estimates by about 4 per cent, and ICICI Securities downgraded the stock from ‘buy’ to ‘hold’. Shweta Daptardar of Prabhudas Lilladher notes that she doesn’t see any trigger for a rating upgrade.

The reason for these mixed views lies in LIC Housing Finance’s asset quality, which has been under pressure for over a year. At 2.68 per cent, gross non-performing assets (NPAS) in Q3 appear to be better than Q2’s 2.79 per cent. However, if judged without considering the Supreme Court’s stay on asset classification, gross NPAS would have been higher by a percentage point or 100 basis points. Much of the problem emanates from LIC Housing’s wholesale loan portfolio, which stood at 7.2 per cent of the total book in Q3.

While there hasn’t been any addition to wholesale stress during Q3, at 16 per cent gross NPA for the segment, the number breaches the 5-10 per cent range for the industry. Individual loans posting 1.62 per cent gross NPA is also above industry threshold.

The mortgage lender’s stressed assets pool stood at 4.68 per cent in Q3, comprising of gross NPAS at 2.68 per cent, proforma NPAS at 1 per cent and restructured book at 1 per cent — this includes accounts that could possibly be restructured in the current quarter. “While expected credit loss has climbed to 50 per cent, the financials do not factor in the asset quality pain fully as provision run-rate remains low,” Daptardar notes.

What’s working for now is the sharp 28 per cent improvement year-on-year (YOY) in loan disbursements and retail disbursements increasing by 36 per cent YOY. Therefore, while overall loan growth was muted at 6 per cent YOY in Q3, analysts expect the loan book to grow 8-12 per cent in FY22.

Faster growth though will depend on capital availability. At 14.5 per cent capital adequacy, LIC Housing’s buffer is the lowest among top three housing financiers (upwards of 18 per cent). Analysts at Emkay Global note that the need for equity infusion remains necessary, though given the inexpensive asking rate, it may not be a valuation dilutive proposition.