LIC Housing Finance: BUY at Rs. 326

LIC Housing Finance

(CMP Rs. 327 as on 22nd Nov 2007)

BSE 500, BSE MIDCAP, BSE Code: 500253
LIC Housing Finance is a housing finance arm of Life Insurance behemoth LIC. The company operates in home loan, loans for construction, repair and renovation and loan to purchase plot.

Also, the company targets new business opportunities such as reverse mortgage, credit card venture tie up with its parent LIC and most importantly LIC Care Homes to target senior citizens for their second home or retirement home.

Financially LICHF is doing reasonably well with net profit up by 53% y-o-y in Q2 FY08 and 44% y-o-y in H1 FY08. Whereas interest income earned has been rising in each quarter taking it to Rs 512 cr in Q2 FY08 (up 35% y-o-y).

This translates its Q2 FY08 EPS at Rs. 13.7 and estimated FY08 EPS should be in the range of Rs 38 – 42.Considering EPS of Rs 40 for FY08 LICHF stock is trading at PE multiples of 8, which is at significant discount to its competitors such as leader HDFC (more than 30) and Dewan Housing (more than 12). Note that LICHF is 2nd largest housing finance company in India.

Key Drivers:

Ø Second largest player in housing finance
Ø Focused only on Housing segment (secured and least risky segment)
Ø Strong distribution network and presence across country
Ø Housing loan rates are not likely to move up triggering demand
Ø The company plans to raise Rs 400 cr through private placement in Jan 2008, which will be at premium to market price. (short term trigger)
Ø LICHF holds 40% in LIC Mutual Fund
Ø Reverse mortgage segment may act as big growth driver as aged people are more likely to mortgage their properties with PSU Banks and LIC rather than private and foreign banks which are struggling with their image!
Ø LICHF has strong parent like LIC which will help cross-selling for products such as life insurance for home loan borrowers
Ø Proactive steps for recovery of NPAs (Net NPAs down by 30% to 1.3%)
Ø The current RBI guidelines for commercial banks to GO SLOW on housing loans may also help players like LICHF
Ø The loan to purchase vacant land may also act as a boost considering soaring land prices across the country.
Ø The entry of LIC in real estate space will certainly help LICHF in medium term
Ø The combined promoter and Institutional holding is up to 83% in Sep 2007 from 78% in Sep 2006

Ø Government of India's increasing focus on housing for all.


The only concerns are slowdown in housing market (with flat of 2100 sq ft at Nariman-Point selling at Rs 34 cr seams unlikely) and rise in interest rates (with currency appreciating beyond the comfort levels of Govt and inflation well under control are very less likely)


Considering favorable macroeconomic scenario in housing market, encouraging visibility of sector in near to medium future Housing Finance companies are likely do well. LICHF being the 2nd largest player is in better positioned as it has presence across geographies and demographics. At CMP of Rs 326 stock trades at PE multiple of 8 at its FY08 earnings making it one of most attractive and cheap investment option for the 2-3 year time frame for the target of Rs 400+ by 2007 year end to Jan 2008 end (23% return), Rs 500 + by 2008 year end (53% return in 13 months). The downside form current levels are limited.

BUY LIC Housing Finance at CMP 326. (Medium Risk High Reward)

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