What is the best stock for a long-term investment?
Housing Development Finance Corporation Ltd (HDFC) and LIC Housing Finance are two of the largest housing finance companies in India. But let’s find out which is the best stock?
Stock price trend
In the full 10 months of 2022, HDFC fell in 5 of them and gave positive returns in the other 5, while LIC Housing was in the red for 4 months and in the green for the remaining 6.
However, so far November has not been a month for LIC Housing. It lost 9% this month due to weak results in the September quarter. HDFC, on the other hand, added half a percent in the current month.
Over the year, LIC Housing gained the most in July, up 18%, followed by August, up 6%. Meanwhile, it lost the most in June, down 13%, followed by February, down 11%.
While HDFC gained the most in July, up 9.5%, followed by October, up 8%. It lost the high in April, down 7%, followed by September, down 6.5%.
HDFC reached its highest level in 52 weeks ₹3,021 on November 15, 2021, but then steadily declined to its lowest level in 52 weeks of ₹2,026.5 on June 17, 2022. The stock then rallied and is currently trading around ₹2,497.
LIC Housing, on the other hand, hit its 52-week low of ₹292 on June 20, 2022, but then recovered to hit its 52-week high of ₹443.50 on September 15, 2022. The stock has corrected somewhat from its high for the year and is currently trading around 370.
LIC Housing Finance Limited is a housing finance company engaged in the business of providing finance for the purchase, construction, repairs and renovation of houses/buildings. The Company provides long-term finance to individuals for the purchase or construction of a house/apartment for residential purposes in India, as well as finance on existing property for business/personal needs.
Housing Development Finance Corporation Limited is an India-based holding company principally engaged in providing finance to individuals, companies and developers for the purchase, construction, development and repair of houses, apartments and of commercial properties. The Company’s segments include Lending, Life Insurance, General Insurance and Asset Management. The Company operates approximately 387 branches and service centers.
HDFC recorded a net profit of ₹4,454.24 crores for the July-September quarter, an increase of 17.8% year-on-year (YoY) thanks to robust loan growth. The housing finance company’s total interest income was ₹13,142.93 crores, a growth of 24.2% over the prior year period. Total operating revenue was ₹15,027.21 crores, against ₹12,215.95 crore in the prior year period.
HDFC’s loan portfolio grew 16% year-on-year based on assets under management. The individual loan portfolio grew 20% faster to ₹5.89 lakh crore, the lender said in a statement. This is the fastest individual loan portfolio growth in eight years for the lender. Gross bad debts as a percentage of the portfolio fell to 1.59% from 2.24% a year ago. Bad debts were higher for the non-individual book at 3.99% of the book.
LIC Housing, meanwhile, posted 23% year-on-year growth in net profit at ₹305 crores. The pure-play mortgage lender, a subsidiary of the country’s largest insurer, LIC, said its net interest income for the quarter edged down 80 basis points to ₹1,163 crores of ₹1,173 crore but management gave no reason for the same.
The company said its provisions amounted to ₹6,522 crore based on expected credit losses and provision coverage ratio at 44% for Stage-3 accounts vs. ₹5355 crores in September 2021.
What is the best action?
Ajit Kabi, banking analyst at LKP Securities, chose LIC Housing Finance between the two as his top choice.
“HDFC Limited and LIC Housing Finance Limited are the largest housing finance companies in India. The AUM size of HDFC Ltd and LICHF Ltd is approximately Rs6.9tn and Rs2.6tn respectively. HDFC Limited enjoys a slightly lower cost of funds than LICHF In terms of asset quality, HDFC Ltd’s GNPL ratio is 1.6% and LICHF Ltd has a GNPL ratio of 4.9%.
Basically, HDFC Limited is in better shape than LIC HF, with a bigger balance sheet, better margins and lower NPA levels. However, LIC HF consistently sees improved asset quality and better loan growth,” he explained.
At current market price, HDFC Ltd and LICHF are trading at 3.8x and 0.8x Price to Book value. LICHF’s inexpensive valuation makes the stock attractive, Kabi pointed out, adding that with a lower cost of credit and higher rate of return, we expect the stock to revalue.
“In our view, LICHF has immense growth potential and room for further improvement. Therefore, it is our top choice among housing finance companies,” he said.
However, Vinit Bolinjkar, head of research at Ventura Securities disagrees. He chose HDFC as his first choice.
“Between the two, we like HDFC primarily because of its underwriting processes and tight asset quality control. In addition, after the merger with HDFC Bank, HDFC will be able to expand its branch network. In terms of valuation, while HDFC is expensive at 3.4x FY24 P/B versus 0.7x FY24 P/B for LIC Housing, we believe the premium is warranted based on past consistency of earnings growth.” , he explained.
He further noted that he was bullish on the space given the increase in Indian affordability and the realization of the importance of having owned homes post COVID. Additionally, the housing finance portfolio is considered less risky than other lending products. While his top choice is HDFC, he also likes Aavas financials and LIC housing.
Meanwhile, another brokerage Phillip Capital gave HDFC a buy call while maintaining a neutral call on LIC Housing.
The brokerage believes that HDFC’s superior know-how in this segment, its strict underwriting practices and buffer provision would help it better manage credit loss. With the announcement of the merger with HDFC Bank, the performance of the company’s shares is linked to the performance and prospects of HDFC Bank, he noted.
“We are constructive on HDFC Bank and accordingly maintain our positive stance on HDFC as well. ₹601/676 per share (net of investment in subsidiaries), considering a value of ₹1,186 per share for subsidiaries. Maintain purchase with a revised TP of ₹2800 ( ₹2700), “he recommended. The current target indicated a 12% upside for the stock.
On the other hand, Phillip Capital remains skeptical of the firm’s ability to successfully pass on the higher cost of borrowing to its clients.
“The company has had to resort to several such retention strategies despite the fact that banks and other major HFC peers pass on the entire repo rate increase to their customers. This could potentially lead to structural stabilization spreads around around 2.25% lending, which may keep credit costs high and also lead to interest income write-offs in 2HFY23,” he explained.
Brokerage expects RoA/RoE of 1.0%/10.7% in FY24E and maintains NEUTRAL rating on the stock with target price of ₹400 (0.97x FY24E BVPS). The current target implies a potential increase of 8%.
Disclaimer: The opinions and recommendations made above are those of individual analysts or brokerage firms, and not of MintGenie.
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