HDFC vs LIC Housing Finance: Which is a better stock for 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 a better stock?

Stock price trend

HDFC has lost 14 percent in the past 1 year whereas LIC Housing is almost in line, down 13 percent in this period. On a YTD basis, however, HDFC is down 4 percent whereas LIC Housing is completely flat.

In the 10 completed months of 2022, HDFC has fallen in 5 of them and gave positive returns in the remaining 5 meanwhile, LIC Housing has been in the red in 4 months and in the green in the remaining 6.

November so far, however, has not been a month for LIC Housing. It has lost 9 percent this month on the back of weak September quarter earnings. HDFC, on the other hand, has added half a percent in the current month.

During the year, LIC Housing gained the most in July, up 18 percent followed by August, up 6 percent. Meanwhile, it lost the most in June, down 13 percent followed by February, down 11 percent.

Whereas, HDFC gained the most in July, up 9.5 percent followed by October, up 8 percent. It has shed the highest in April, down 7 percent followed by September, down 6.5 percent.

HDFC hit its 52-week high of ₹3,021 on November 15, 2021, but then declined consistently to hit its 52-week low of ₹2,026.5 on June 17, 2022. The stock then recovered 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 corrected some from its year high and is currently trading around 370.

Profile

LIC Housing Finance Limited is a housing finance company that is engaged in the business of providing finance for purchase, construction, repairs, renovation of houses/buildings. The Company provides long term finance to individuals for the purchase or construction of house/flat 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 that is primarily engaged in providing finance to individuals, corporates and developers for the purchase, construction, development and repair of houses, apartments and commercial properties. The Company's segments include loans, life insurance, general insurance and asset management. The Company operates approximately 387 branches and service centers.

Earnings

HDFC reported a net profit of ₹4,454.24 crore for the July-September quarter, a year-on-year (YoY) increase of 17.8 percent on the back of robust loan growth. The housing finance company's total interest income was ₹13,142.93 crore, a growth of 24.2 percent from the year-ago period. Total revenue from operations was ₹15,027.21 crore, up from ₹12,215.95 crore in the year-ago period.

HDFC’s loan book grew 16 percent YoY on an asset under management basis. The individual loan book grew by a faster 20 percent to ₹5.89 lakh crore, the lender said in a release. This is the fastest individual loan book growth in eight years for the lender. Gross bad loans as a percentage of the book were down to 1.59 percent compared with 2.24 percent in the year-ago period. Bad loans were higher for the non-individual book at 3.99 percent of the book.

LIC Housing, meanwhile, posted a 23 percent on-year growth in net profit at ₹305 crore. The pure-play mortgage lender, a subsidiary of the country's largest insurer LIC, said its net interest income for the quarter declined marginally by 80 basis points to ₹1,163 crore from ₹1,173 crore, but the management did not give any reason for the same.

The company said its provisions rose to ₹6,522 crore on an expected credit loss basis and provision coverage ratio at 44 percent for Stage-3 accounts as against ₹5,355 crore in September 2021.

Which is a better stock?

Ajit Kabi, Banking Analyst at LKP Securities has picked LIC Housing Finance between the two as his top pick.

"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 around Rs6.9tn and Rs2.6tn respectively. HDFC Limited enjoys a marginally lower cost of funds compared to LICHF. Therefore, we witness better NIMs and core-operating profit. As per as asset quality is concerned, the GNPL ratio of HDFC Ltd is 1.6 percent and LICHF Ltd has a GNPA ratio of 4.9 percent.

Fundamentally, HDFC Limited is in better shape than LIC HF, factoring bigger balance sheet, better margins and lower NPA levels. However, LIC HF is consistently witnessing asset quality improvement and better loan growth," he explained.

At the current market price, HDFC Ltd and LICHF are trading at 3.8x and 0.8x Price to Book value. The inexpensive valuation of LICHF makes the stock attractive, Kabi pointed out, adding that with lower credit cost and higher return ratio, we expect a re-rating in the stock.

"In our view, LICHF has immense potential for growth and further room for improvement. Therefore, it is our top pick among housing finance companies," he said.

However, Vinit Bolinjkar, Head of Research at Ventura Securities disagrees. He has picked HDFC as his top choice.

"Between the two, we like HDFC mainly because of its underwriting processes and strict control over asset quality. Also, post the merger with HDFC Bank, HDFC will be able to expand its branch network. In terms of valuation, while HDFC is costly at 3.4x FY24 P/B v/s 0.7x FY24 P/B for LIC Housing, we believe that the premium is justified based on past consistency in earnings growth," he explained.

He further noted that he is bullish on the space given the increase in the affordability of Indians and the realization of the importance of having owned houses post-COVID. Also, the housing finance portfolio is considered less risky than other loan products. While his top pick is HDFC, he also likes Aavas financiers and LIC housing.

Meanwhile, another brokerage house Phillip Capital has given a buy call to HDFC while maintaining a neutral call on LIC Housing.

The brokerage believes that HDFC’s superior know-how of the segment, strict underwriting practices and buffer provision would help it to better manage the credit loss. With the announcement of the merger with HDFC Bank, the stock performance of the company is pegged to HDFC bank’s performance and outlook, it noted.

"We are constructive on HDFC Bank and accordingly maintain our positive stance on HDFC as well. At CMP, HDFC’s core book trades at 2.1x/1.9x our FY23e/24e core ABV of ₹601/676 per share (net of investment in subsidiaries), considering a value of ₹1,186 per share for subsidiaries. Maintain Buy with revised TP of ₹2800 ( ₹2700)," it recommended. The current target indicated an upside of 12 percent for the stock.

On the other hand, Phillip Capital remains skeptical on the company’s ability to successfully transmit the higher cost of borrowings to its customers.

"The company has had to resort to several such retention strategies despite banks and the other large HFC peer transmitting the entire repo rate increase to their customers. This could potentially lead to margins structurally stabilizing around ~2.25 percent. We remain wary of slippages from restructured loans, which can keep credit costs elevated and also result in interest income reversals in 2HFY23," it explained.

The brokerage expects an RoA/RoE of 1.0 percent/10.7 percent in FY24E and maintains its NEUTRAL rating on the stock with a target price of ₹400 (0.97x FY24E BVPS). The current target implies a potential upside of 8 percent. 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.