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India's second-largest housing finance company, LIC Housing Finance, is better placed as the global economy is going through an interest rate hike cycle, according to brokerage firm Jefferies. The brokerage maintained its "buy" recommendation on the company and raised its price target to Rs 510 from Rs 450, citing attractive valuations for the company. The revised price target is a 20 percent upside from Wednesday's closing levels.

LIC Housing Finance has an outstanding loan book of Rs 2.52 lakh crore as of March 2022 with over 30 lakh customers. Life Insurance Corporation of India (LIC) is the company's promoter and holds a 45 percent stake in the housing finance lender. The promoter infused a sum of Rs 2,335.5 crore in its subsidiary during the previous financial year.

The company also raised rates for new and existing home loans by 125 and 110 basis points respectively, including a 50 basis points hike last month. Jefferies expects an increase in the company's portfolio spread, driven by 96 percent floating rate loans and 51 percent fixed rate liabilities, which in turn will aid overall spreads. It anticipates a 6 percent increase in the company's Earnings Per Share with every 10 basis points rise in spreads.

In common terms, a spread is defined as the price a borrower pays above a benchmark yield to get a loan.

Jefferies anticipates 13 percent compounded growth over FY22-25 due to tepid growth in the Loan Against Property (LAP) book and a marginal decline in the developer book.

The company expects asset quality to improve in FY23 with Gross Stage 3 assets seen in the 3.2 percent to 3.5 percent range from 3.6 percent to 3.8 percent in FY22. With asset quality in retail housing stabilising, Jefferies anticipates incremental stress to moderate. However, Jefferies expects slippages in its wholesale book, especially the restructured one. It also projects credit costs to fall by 44 basis points over the next three years. "A 500 basis points change in wholesale NPA would impact credit costs by 15 basis points and book value by four percent," the note said.

Other Key Takeaways:

Expect compounded EPS growth of 26 percent and Return on Equity of 13.5 percent to 14.5 percent over FY22-25

Higher spreads could support better valuations multiple

Should benefit from strong housing momentum in housing demand

Shares of LIC Housing Finance trade 0.6 percent higher at Rs 423.15. The stock is 8 percent away from its 52-week high.

First Published:Sept 22, 2022 12:47 PM IST