LICHF has underperformed NIFTY by 48% and peer HFCs by 10-80% in last 12 months, due mainly to pressure on incremental spreads. Historically, LICHF has been more sensitive than peer HFCs to incremental mortgage spreads, leading to the larger de-rating. While incremental mortgage spreads have remained under pressure for some more time, we now see value in LICHF, as: Back book assets reprice faster than liabilities – LICHF is different in this cycle with +70% floating loans vs 40-45% floating loans in last cycle; improving core mortgage trend; with a 50% de-rating from the peak, valuations at 1.4x FY20 book are undemanding with +15% growth CAGR and at least 16-17% ROEs. Our revised TP of Rs 600 is based on 1.75x June-20F book.
LICHF’s individual mortgage book is now 75% floating rate vs 35-40% floating in the last cycle when rates spiked (CY13). With +85% of funding in bonds vs 65% in last cycle (fixed rate liability), the existing book repricing should have a favourable impact on NIMs and aid in offsetting the pressure seen on incremental mortgages . So while we believe that incremental spread pressure will remain for FY19F, the back book repricing should help offset the negative from lower incremental spreads. Thus, we now expect overall spreads to remain flat at ~140bps over FY19-20F.
With stable spreads, we expect LICHF’s ROEs of ~17% and with ~15% CAGR growth expectations, valuations at 1.4x FY20 book is undemanding. Incrementally, core mortgage growth trend for LICHF has improved and on a system level demonetisation/ GST/RERA drags on mortgage growth are behind. In CY2013, LICHF multiples cracked to 1.1-1.2x 1 year fwd book but given the higher share of floating rate assets now, we expect spreads and multiples to hold up better for LICHF in this cycle. Improvement in liquidity situation should spread further and could lead to upside medium to long term.