As far as the main metrics of profitability go, LIC Housing Finance Ltd gets it right in the quarter ended 31 December.
The home loan company’s profit grew 19% to Rs499.26 crore for the quarter from a year ago; its margins saw the highest sequential increase; and its loan book held on to the 15% growth of the previous quarters.
Even asset quality remained unscathed in the aftermath of demonetization, which was said to have resulted in some pain to many home financiers. LIC Housing Finance’s gross and net bad loan ratios were 0.56% and 0.27%, respectively, both down from the year-ago period. A big part of this strength on asset quality comes from the fact that 86% of the lender’s loan book is made up of individual loans. The riskier loan against property (LAP) and developer loans make up only about 14%.
Of late, LAP is under analysts’ scanner, given that delinquencies have been rising and demonetization has dragged down property prices across the country. Given that LAP is usually taken by self-employed and small businessmen who rely on cash, the currency withdrawal is expected to result in higher bad assets in the coming quarters.
It is this slice of LIC Housing Finance’s balance sheet that balances the scales with the more positive parts and makes the lender’s valuation look adequate rather than cheap compared with peers.
For one, LIC Housing Finance has been steadily increasing the share of LAP and developer loans in search of higher margins. This means the lender is taking on more risk at a time when the segment itself is becoming too hot to handle. Some analysts such as those at Religare Enterprises and Antique Broking consider the price-to-book value multiple of 2.5 times the estimated 2016-17 earnings to be the peak and expect further upside in the stock price to be limited.
Given the aggression shown by banks in grabbing home loans, LIC Housing Finance is bound to face pressure on both margins and disbursals. The signs are already visible as quarterly disbursals have slowed to 15% from more than 30% in the previous fiscal year. Much will depend, however, on the impact of lower interest rates and sops, if any, given in the budget for homebuyers.