MOSL: LIC HOUSING FINANCE (Buy)-Beneficiary of a tight liquidity environment

LIC Housing Finance: Beneficiary of a tight liquidity environment; Moderating competition to lead to better growth and spreads

(LICHF IN, Mkt Cap USD3.3b, CMP INR462, TP INR550, 19% Upside, Buy)

• We believe the business environment for LIC Housing Finance (LICHF) is turning favorable. With tightening liquidity and rising cost of funds, we expect a shake-up in the system, resulting in changing competitive dynamics going forward.
• Smaller players with lower credit ratings will not be as competitive as they were in times of abundant liquidity. This would lead to slowing balance transfers and moderating price wars for the industry on the whole. Going forward, competition is expected to be rational unlike that witnessed in the past two years.
• LICHF’s parentage and AAA-credit rating gives it two key benefits in this scenario: (a) It has easier access to multiple sources of debt capital at competitive rates, and (b) It can assume higher leverage than peers – thus, even with lower RoA, its RoE would be better than most peers.
• The company has hiked its PLR four times in the past six months cumulating to 60bp. We believe this should largely offset the rise in cost of funds. Hence, spreads should be largely stable at 1.2-1.3% going forward. Upside to spreads could accrue from cost of funds cooling off, driven by liquidity easing measures.