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Research meet extracts: LIC Housing - Views on News from Equitymaster
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Research meet extracts: LIC Housing
May 30, 2005

Mortgage industry
Anticipated growth: Given the demographic conditions and improving per capita income, the mortgage industry in India is well poised for exponential growth. The low penetration of mortgage credit in the country (3% of GDP) as compared to the other developing nations of the world and the shortage of dwelling units (estimated at 33 m units) makes the conditions benign for the growth in this sector. The government’s fiscal policy (read tax sops) also seems to favour this industry. Even on a conservative basis, it is expected to grow at the rate of 25% for the next couple of years. The total disbursals in the industry are estimated at Rs 600 bn for FY06.

HFCs vs. Banks: Banks stand to gain against HFCs due to their extensive reach, captive base of customers and diversified asset base. Besides home loans, they have access to high yielding assets such as credit cards, personal loans and auto loans. Also on the funding side, access to low cost demand deposits helps banks improve their net interest margins. The minimum capital adequacy requirement for banks (9% as per RBI guidelines) is lower than that for HFC (12% as per National Housing Bank guidelines). Looking at the other side of the coin, banks have to accord higher risk weightage to home loan assets. The cost to income ratio of banks (average 50% in FY05) is disproportionately higher than that of HFCs (average 17% to 18%) due to the high operating overheads.

LIC Housing Finance (LICHF)
Balance sheet restructuring: As against its earlier asset portfolio (80% of which was on a fixed rate basis), LICHF has reversed the fixed to floating ratio over the past couple of years. In FY05, more than 80% of the loan book comprised of floating rate assets. In a rising interest rate regime, such asset constitution makes the HFC well positioned to pass on the margin pressures to the customers, rather than taking the hit in its own books. Also on the liability side, the HFC has done away with the ‘bucket to bucket’ system of asset liability management (wherein assets were matched against the same duration liabilities) and resorts to (lower cost) short-term borrowing.

Corporate lending – renewed focus: The HFC has over the last couple of years exhibited a clear shift of focus from retail to corporate clients. This is because not only are the corporate loans higher yielding but also of lower duration. While the share of retail advances has reduced to 93% of total advances as against 96% in FY01, that of corporate advances (corporate and housing societies) has notched up to 7%. The YoY growth rate in LICHF’s retail segment remains stagnant at 23%, but the corporate segment is catapulting at over 100% in the last 2 years. However, as per the company this segment is unlikely to cross 10% of total advances in the next 2 years.

NPA legacy: LICHF is saddled with the NPA legacy inherited from LIC. Also, the risk appraisal systems during its initial years were not very stringent. This led to high rate of fresh slippages that plagued the HFC with poor asset quality. However, over the last few years while the HFC has tried to improve its coverage ratio, the Net NPA to advances ratio remains almost stagnant (2.7% in FY01 and 2.4% in FY04). Considering that home loan assets are typically with lower slippage propensity and contemporaries like HDFC have clean balance sheets, the asset quality at LICHF leaves a lot to be desired.

How is LICHF tackling banks?
  • Reach: Instead of opening additional branches (to avoid high operating overheads) LICHF has appointed 4,000 direct selling agents (besides the 113 branches) to garner business from all geographies across the country. It also has the option of using all 1.2 m agents of parent LIC to improve its reach. Not to mention the option of tapping the 130 m policyholders of LIC to grow is business.

  • Diversification: To de-risk its balance sheet and diversify from being a single product entity, LIC has initiated LICHFL Care Homes (an old age care home centre). It has been commissioned as a pilot project in Bangalore with a capacity of 100 dwelling units. The project is of the nature of ‘owning and letting out’ business model which is a relatively novel concept in India. Although, the said project constitutes only 1% of the balance sheet at present, going forward the HFC hopes this business segment to considerably aid its growth. The company hopes to reach breakeven point in this business in the next 2 – 4 years.

Our view
At the current price of Rs 237, LICHF is trading 1.9 times its FY07E adjusted book value. Although we continue to be bullish on the prospects of the housing finance industry, LICHF does not feature in the same league as that of HDFC because of poor asset quality, diminishing market share and declining disbursement to sanction ratio. Also, the corporate lending side, which is expected to garner better yields, is yet a negligible proportion of balance sheet. LICHF, as against its competitor HDFC, has neither considerable fee income nor profitable subsidiaries to fall back on. We thus consider this stock a high-risk proposition in the longer term.

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Feb 23, 2018 (Close)


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