LIC Housing Finance is one of the leading housing finance companies, engaged in providing loans for construction, purchase, of house flats, commercial properties etc. The company was formed in 1989 and was listed on the exchange in the year 1994. Company is promoted by Life Insurance Corporation of India. Company has a diverse shareholding with 40% of equity shares held by LIC, and 32% of equity is held by FIIs.
LIC Housing Finance has a loan portfolio of Rs 1,44,534 crores(As per latest Annual Report). About 97% of the total loan portfolio is composed of retail borrowers. The total gross NPA of LIC Housing Finance is less than 0.5%
LIC Housing Finance has seen healthy growth in loan portfolio from Rs. 17,882 crores in 2013 to Rs. 1,44,532 crires in 2017, a CAGR growth of 17%. Company has a low Gross NPA of 0.43% which has reduced from 0.61% in 2013. Companys Net NPA has reduced significantly from 0.35% in 2013 to 0.14% in 2017. Let us now look at the past financial performance of the company in detail.
Company generates 99% of its revenue from interest earned from lending business. Only 0.7% of the total revenue is contributed by processing fees and other sources. Almost 97% of the total loan portfolio of the company is composed by retail borrowers.
Net Operating Revenue:
Net Operating Revenue is the Net revenue generated by the business solely from its core operations, after deducting the cost of sales and other expenses.
LIC Housing Finance Net Operating revenue has seen a healthy growth of 13% CAGR in the past 5 years. While in 2013 the total Net Operating Revenue of LIC Housing Finance was Rs. 7,575.92 crores, in 2017, the numbers went up to Rs. 13,986.94 crores. The growth in Net Operating Revenue has been consistent since 2006.
Net profit is also referred to as bottom line, net income and net earnings. Net profit is the part of company’s total revenue left after paying for operating expenses, taxes, interests, preferred stock dividends.
LIC housing Finance has posted great growth in Net Profit in the past 5 years from Rs. 1,023.21 Crores in 2013 to Rs. 1,931 Crores in 2017, a CAGR growth of 13.5% The company has never posted a loss or decline in profits in the past 5 years, something rarely seen in businesses that operate in regulated environment.
Basic EPS is a measure of how much profit a company is making on per share basis. In other words, it’s a measure of how much money each share of the company will receive if all the profits earned during the year is distributed to its shareholders.
The EPS growth of LIC Housing Finance has been in line with the Net Profit Growth, from EPS of 20.23 per share in 2013, to 38.26 per share in 2017, a CAGR growth of 13.5%. The EPS growth posted by LIC Housing Finance is one of the highest in the housing finance sector.
Net Profit Margins:
Net Profit margin is the key ratio which is used to compare profitability of two or more companies working in the same sector. Net profit margin is a measure of how much percentage of total sales remains with the company as profit after all the expenses are paid.
The Net Profit Margins posted by LIC Housing Finance have been stable around 13% for the past 5 years. All the NBFC (Non Banking Finance Companies) have to raise capital at an interest and lend it to the borrower at a higher interest to earn an interest spread. Since both lending and borrowing rates move up and down in sync to each other, there is hardly any room for net profit margins to expand.
Return on Capital Employed(ROCE):
ROCE or Return on Capital Employed, is a measure of how efficiently the capital of a company is being used to generate profit. ROCE is expressed in percentage terms. A company with ROCE of 20% means out of every 100 rupees employed as capital, company is able to make a return of rupees 20.
Like Net Profit Margins, LIC Housing Finance has a stable Return on Capital Employed of around 1.63%. Most of the NBFCs have a ROCE of around 1% to 3%.
Debt to Equity:
Debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is an indication that majority of company is financed by loans and other debt (such as debentures and bonds). The Debt to Equity Ratio of LIC Housing Finance has increased from 9.06 in 2013 top 10.05 in 2017.
Since LIC Housing Finance is in the business of lending, it has to borrow or raise capital in order to lend it to its customers/borrowers. In such case having high debt to equity ratio is a positive as it shows that company is expanding its loan portfolio and is lending higher amounts to a large number of borrowers, a positive indicator of healthy business.
LIC Housing Finance is one of the least expensive companies in terms of P/E, currently trading at a PE of 12.34, while HDFC is trading at a PE of 24, DHFL is trading at a PE of 12.77 Indiabulls Housing at a PE of 14. ??
The stock price of LIC Housing Finance has seen a significant decline in the recent months, making it an attractive buy with strong long term fundamentals.
SWOT Analysis of LIC Housing Finance:
LIC Housing Finance is one of the largest housing finance companies, but like every company, big or small, all of them have some strengths, weaknesses, opportunities and threats. Understanding these four aspects of a business would give you a better understanding of the business. So here is a detailed SWOT analysis of LIC Housing Finance. ??
One of the biggest strengths of LIC housing Finance is its promoted by Life Insurance Corporation of India, one of the biggest life insurance company in the country. As per the data released on Dec 2017, Life Insurance Corporation holds 40.31% shares in LIC housing Finance. What makes LIC housing Finance a very interesting investment is that makny foreign institutional investors and international banks have bought stakes in the company, some of them even have increased their stake.
Secondly, almost 97% of the total loan portfolio of the company is in retail loans, where its net NPA is lowest at 0.14%. The Gross and the Net NPA have seen a decline in the past 5 years. While Gross NPA is down from 0.61% in 2013 to 0.43% in 2017, the Net NPA is down from 0.35% in 2013 to 0.14% in 2017.
Despite consistent financial performance, and increasing loan portfolio, LIC Housing Finance has not been able to gain significant market share of the overall home loan market. In the future however, the company may catch up with the peers.
With rapid urbanization, there is a rising demand for affordable housing which is a big positive for the housing sector, also, Government’s push to the affordable housing especially in the smaller cities will also fuel demand for house loans. In bigger cities, most consumers look for a second home in a semi urban area as a weekend getaway. Demand for such properties, especially in the metros will expand the loan portfolio of the company. The third opportunity for housing loan companies is rising real estate prices. As the price of real estate goes up, the ticket price of each loan will increase, which means the total loan portfolio of the company will increase significantly in the coming years.
Currently, the real estate market is on rise in India, but like any other asset class, real estate also has to go through its own economic cycle. In the coming years (that is may be in the next 5-10 years) the real estate market will see a slump in demand, especially in the properties used for end consumption. If any such event occurs, LIC Housing Finance, with other house loan providers will have to compete and struggle in order to expand their loan portfolio. ?
House loan is an attractive market because of low business risk as every loan is backed by an assets, and home loans have lowest NPA. This has attracted many new player in this segment, making housing loan a more competitive marketplace. With rise in number of players in this segment, there threat of losing market share is always present, especially if the competitors have better, low cost offering, that provides more value to the customer.
What makes LIC Housing Finance a Good Investment?
There are many strong reasons why LIC housing Finance is a great investment for long term.
First, The stock has seen a recent price correction, the price of the stock has corrected from the peak of Rs.773 on June 2017 to Rs. 477 on March 2018. What was the reason behind such a huge correction when business is financially so strong?
The reason behind this fall in price was a litigation between DB realty and LIC Housing Finance, where LIC housing finance went to NCLT(National Company Law Tribunal) to recover a loan of Rs.31 crores. Since litigations are lengthy and expensive, the price of the stock started to fall fearing that the case would take years to settle. The link of the news related to the same is given below:
A week later, LIC housing Finance decided to withdraw its case from the tribunal as both parties had reached a debt settlement agreement. The news related to settlement of the case between LIC Housing Finance and DB realty is given below:
The good news is.
In the past few months a lot of positive news and events took place related to ?LIC Housing Finance, such as:
Government of Singapore bought a fresh stake in LIC Housing Finance of 1.77% of the total equity on December 2017.
BNY Mellon Investment Fund bought fresh stake of 1.17% in the company in September 2017.
Fidelity Investment Trust, Fidelity Series Emerging Market Fund raised stake in the company from 1.14% in December 2016 to 1.43% in December 2017. A screenshot of all the major shareholders is given below:
Should I invest in LIC Housing Finance at current Price?
LIC Housing Finance has been a consistent performer since 2006. Company has posted consistent growth in Sales and Profit for the past 13 years, has maintained healthy profit margins, and has shown consistent growth in loan book.
LIC Housing Finance is one of the least expensive housing finance companies among the peers, trading at a P/E of 12.34, while peers like HDFC, Indiabulls Housing, PNB Housing, DHFL are trading at a PE of 23.99, 14.98, 24.1 and 12.77 respectively. A screenshot of comparative PE is given below:
The current market price of the LIC Housing Finance is trading at a price of Rs. 484 per share. The projections will be made based on two different scenarios, best case and the worst case. In the best case scenario we make projections based on the most positive assumption about the future. In the worst case scenario, we make the most conservative projections about the future growth of the company.
In the best case scenario, you can see the stock price at Rs. 556 by the end of 2018, a return of 14.88% within a year. For a longer term projections, expect the stock price to reach Rs. 700-850 by 2020 and Rs. 1,000-1,150 by 2022.
In the worst case scenario, you can see the stock price at Rs. 540 per share by the end of 2018, a return of 11.5%. For a longer term projections, expect the stock price to reach Rs. 650 per share by 2020, and Rs. 850-900 by 2022.