Affordable Housing Focus And Improved Asset Quality To Drive Earnings Growth

Key Takeaways

• New product launch targeting self-employed affordable housing aims to improve margins with higher pricing strategy.
  
• Enhanced loan disbursements in projects and improved asset quality forecast increased earnings and reduced credit costs.
  
• Competitive lending rates and lower interest margins could challenge LIC Housing Finance's profitability, while lenient risk management may increase earnings risks amidst intensified market competition.

Catalysts

A housing finance company, provides loans for the purchase, construction, repair, and renovation of houses/buildings in India.

• Steady demand and increased property prices during the peak festive season are expected to drive high levels of transactions in the residential real estate market, likely boosting future revenue growth.
  
• LIC Housing Finance has initiated steps to strengthen margins by launching a new product focused on the self-employed affordable housing segment with pricing about 250 basis points higher than standard home loans, which is expected to improve net margins.
  
• The reversal of the declining trend in project loans with a 223% year-on-year increase in disbursement, and a cautious approach to selectively finance developers with high credit ratings is anticipated to enhance earnings through higher-yielding loans.
  
• Improvement in asset quality, as evidenced by lower Stage 3 exposure at default and increased provision coverage ratios, should reduce credit costs and potentially increase net earnings.
  
• A slight decrease in the cost of funds and a focus on engaging in derivative contracts to align liabilities with asset-side repricing are strategies expected to support better net interest margins in future quarters.

LIC Housing Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LIC Housing Finance's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 65.0% today to 57.0% in 3 years time.
• Analysts expect earnings to reach ₹56.2 billion (and earnings per share of ₹101.06) by about December 2027, up from ₹48.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹68.1 billion in earnings, and the most bearish expecting ₹50.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.6x on those 2027 earnings, up from 6.8x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 17.9x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.11%, as per the Simply Wall St company report.

LIC Housing Finance Future Earnings Per Share Growth

Risks

• Declining net interest margins from 3.04% to 2.71% year-on-year and a sequential decline from 2.76% indicate pressure on profitability due to competitive lending rates, impacting net margins.
  
• The lower provision coverage ratio for Stage 1 and 2 loans compared to the previous year may indicate leniency in risk management or changes in the economic outlook, posing risks to earnings if defaults increase.
  
• The intensified competition in the home loan market with lower rates from banks could pressure LIC Housing Finance's revenue growth and margins, especially if the company continues to lend at similar or lower rates.
  
• Although there is growth in the developer finance segment, its historically higher risk and the current strategy could affect asset quality and provisions, impacting earnings if not managed prudently.
  
• The reliance on policy rate changes and continuous funding cost adjustments might not align perfectly with adjustments in lending rates, potentially leading to mismatches impacting net interest income and overall profitability.

Valuation

• The analysts have a consensus price target of ₹725.19 for LIC Housing Finance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹940.0, and the most bearish reporting a price target of just ₹450.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹98.5 billion, earnings will come to ₹56.2 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹598.95, the analyst's price target of ₹725.19 is 17.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.