LIC Housing Stock Trades Near 52-Week High After Nomura Hikes Target
Nomura has also raised its growth estimates for LIC Housing Finance.
Shares of LIC Housing Finance Ltd. are hovering near their 52-week high after Nomura raised its price target on the mortgage loan company, citing favourable demand and collection efficiency, among other tailwinds.
The research firm raised its price target on the stock to Rs 550 apiece from Rs 350, according to a note, implying a potential upside of 25.6% from Tuesday’s closing.
Favourable macros for mortgage demand, improvement in collection efficiency and reasonable valuation are some of the key catalysts that, Nomura said, can drive a further re-rating for the housing finance lender.
“We think the macros do favour a sustainable pick-up in growth,” Nomura’s Amit Nanavati and Tanuj Kyal said in the note. “Furthermore, while competitive intensity from banks has increased, within NBFCs/HFCs (non-bank finance companies/housing finance companies) competitive intensity has declined meaningfully after the IL&FS crisis and we expect top HFCs, including LIC Housing to benefit from the same,” the note said.
Negative interest rates, lowest mortgage rates, elevated inflation, three-four years of property price stagnation and government push in real estate are the key factors favouring a sustainable pick-up in growth, the brokerage said.
Nomura also expects a reduction in bond yields and a compression in NBFC bond spreads as compared to the G-sec to drive margin expansion for the company. “LIC Housing has been raising funds below 5.5% in the past few months and we think the benefit of improving spreads will outweigh the credit cost impact arising out of Covid-19,” the note said. That will also lead to an expansion in the company’s return-on-equity.
But there are concerns as well.
The company, Nomura said, has disappointed on asset quality in the past, with 16.5% builder [financing loan portfolio] gross NPAs and no provisions on stage-2 assets. “We think weak builder book performance and higher moratorium levels do remain a concern.” It also sees listing of its parent Life Insurance Corporation of India Ltd. posing a near-term uncertainty for LIC Housing’s stock though the current valuations price in the risk.
Nomura has raised its growth estimates for LIC Housing. It expects the company’s operating profit to rise 15% and 9% in FY22 and FY23, respectively. The firm’s RoE is expected to improve to 14% by FY23. Nomura expects valuations to re-rate further as they still are 30% below the five-year average.
Shares of LIC Housing gained as much as 5.7% on Wednesday to Rs 463.8 apiece. Of the 42 analysts tracking the company, 28 have a ‘buy’ rating and seven each suggest a ‘hold’ and a ‘sell’. The stock trades 11.6% higher than its Bloomberg consensus 12-month price target of Rs 407.1 apiece.