LIC Housing Finance (LICHF IN)

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13 January 2021 India

EQUITIES LIC Housing Finance (LICHF IN)

LICHF IN Outperform I.D.E.A.: Deep dive on builder AUM and margins Price (at 14:18, 08 Jan 2021 GMT) Rs434.95

Valuation Rs 600.00 Key points - Gordon Growth  In-Depth Equity Analysis on LICHF. Increase TP to Rs600 (~40% upside). 12-month target Rs 600.00  Deep dive on builder loans busts myths about potential stress in the book. Upside/Downside % +37.9  See no margin pressure given multi-year low cost of funds, growth pick-up. 12-month TSR % +40.5 Volatility Index High GICS sector Banks Event Market cap Rsm 219,503 Market cap US$m 2,997 • In this report, we present a deep dive on LICHF’s corporate AUM and margins. Free float % 100 Impact 30-day avg turnover US$m 36.4 Number shares on issue m 504.7 • Data from PropStack provides colour on builder loans: Analysis of active loan sanctions by LICHF shows the book is fairly well diversified across Investment fundamentals different cities and unique builder groups (Figs 6-7, 18-21). Analysis of project Year end 31 Mar 2020A 2021E 2022E 2023E sales from RERA websites and extensive, specialized channel checks of Net interest Inc m 48,998 55,350 59,946 68,528 Non interest Inc m -44 1,366 1,507 1,673 largest exposures show minimal, undiagnosed stress (Figs 10-15). 50% of Underlying profit m 42,738 50,668 54,300 62,079 builder NPLs can be resolved if approved for SWAMIH fund (see here), Reported profit m 24,003 26,256 31,671 39,652 indicating high project completeness (Fig 17). We expect incremental credit Adjusted profit m 24,003 26,256 31,671 39,652 costs of ~60bps, roughly equivalent to one quarter’s operating profits (Fig 22). EPS rep Rs 47.53 46.71 56.34 70.54 EPS rep growth % 58.8 -1.7 20.6 25.2 • A very granular loan book: LICHF’s exposure to builder loans (7% of AUM) EPS adj Rs 47.53 46.71 56.34 70.54 EPS adj growth % 58.8 -1.7 20.6 25.2 is between a half and a third of large peers’ (18-24%). Similarly, the top 20 PER rep x 9.2 9.3 7.7 6.2 exposures (4% of AUM) are a quarter to a third that of larger peers (12-15%). PER adj x 9.2 9.3 7.7 6.2 Note that LICHF is largely retail (93% of AUM), with a high contribution of Total DPS Rs 9.51 9.34 11.27 14.11 home loans (77%) and the rest being LAP/LRD (16%). 87% of home loan Total div yield % 2.2 2.1 2.6 3.2 ROA % 1.1 1.2 1.3 1.5 recipients are salaried, with the rest self-employed. LICHF LAP loans are also ROE % 14.0 13.1 13.6 15.2 quite different from those typically granted by peers – a very high share of P/BV x 1.2 1.1 1.0 0.9 salaried customers (74%) and small average ticket size of Rs1.6mn.

LICHF IN rel BSE Sensex performance, & rec • Why margins may see some stability, finally: Competitive pressure from history banks has been lower than expected, with banks not being too aggressive with reducing risk spreads on home loans. Competition from peer HFCs has also waned. Our analysis of debt maturity patterns, along with a multi-year low incremental cost of funds, shows 30-35bps decline in cost of funds in CY21. With a return of pricing power in non-core loans, this can allow LICHF to offset downward pressures from back book repricing and lower incremental yields.

Earnings and target price revision

• Minor tweaks to EPS and a rise in BVPS primarily from a capital raise of Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Rs20bn at Rs350/share. Increase TP to Rs600 from Rs440 on bringing down Source: FactSet, Macquarie Research, January 2021 (all figures in INR unless noted) elevated Ke in valuation model from 14% to 13%. Refer Figs 61-63 for details.

Price catalyst

Analysts • 12-month price target: Rs600.00 based on a Gordon Growth methodology.

Macquarie Capital Securities (India) Pvt. Ltd.

Nishant Shah, CFA +91 22 6720 4099 • Catalyst: capital raise, pick-up in growth, stabilization in asset quality. [email protected] Action and recommendation Suresh Ganapathy, CFA +91 22 6720 4078 [email protected] • LICHF trades at 1x PBV, its lowest in the past decade. This is a 25-40% discount to long term and ten-year average multiples. We value LICHF at 1.3x Parth Gutka +91 22 6720 4043 [email protected] Sept ‘22E PBV for a TP of Rs600, with expected catalysts from 1) capital

raise, 2) recovery in retail loan growth, and 3) stabilization in asset quality.

Please refer to page 24 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

Macquarie Research LIC Housing Finance (LICHF IN)

SECTION 1: ASSET QUALITY Sharp rises in NPLs over the past few quarters have rightly created concerns on LICHF’s underwriting quality, not only in the builder segment but also in the individual segment. We see the problems in the builder portfolio emanating largely from loans sanctioned in CY18. The period between (1) demonetization-led liquidity abundance and (2) the IL&FS insolvency-led liquidity crisis was a period of very high growth in builder loans across NBFCs and HFCs. Banks (except YES and IIB) had vacated the space, and the cost of funds for NBFCs/HFCs had declined. This led to high growth in builder loan sanctions with large upfront moratoriums. A typical builder term loan has 3-5 years of upfront moratorium and 2-3 years of repayment period thereafter. As loans across the industry have started coming out of moratoriums, reported builder NPLs have risen. The market is thus worried about the eventual NPLs that may materialize as more loans come out of moratorium, given the recent track record. 36% of LICHF’s builder loans (not including LRD loans) by value (24% by number) are currently under moratorium. Management has also indicated that ~30% of builder loans may require restructuring too.

Data from PropStack provides colour on builder loans: Our analysis of active loan sanctions by LICHF shows the book is fairly well diversified across different cities and unique builder groups (Figs 6-7, 18-21). No one city has more than 16% exposure, and the contribution from NCR is only ~8%. The highest exposures are to cities like Bangalore, Thane + Navi Mumbai and Chennai, which have strong real estate markets. LICHF’s exposure to builder loans (7% of AUM) is between a half and a third of large peers’ (18- 24%). Similarly, the top 20 exposures (4% of AUM) are a quarter to a third that of larger peers (12-15%). RERA Websites + specialized channel checks: We have also analysed project sales and stage of completion from RERA websites for some of LICHF’s largest exposures. We have supplemented our analysis with extensive and specialized channel checks. Most large projects have a high degree of visibility on completeness and sales. We see minimal undiagnosed stress, as large exposures are to well- performing, ring-fenced SPVs (See Fig s10-15). As an anecdote, exposures to the Lodha Group are restricted to a project (Kiara – The Park, Lower Parel) which has achieved substantial degree of completeness and already recorded 85% sales of housing units available for sale. There is no exposure to Lodha’s Upper Thane project, which is stressed and stuck.

SWAMIH Fund can resolve half of the developer loans: As per mgmt., 14 projects worth Rs11 bn have been referred to the SWAMIH fund. This fund was set up by the government to help resolve real estate NPLs where the projects have completed a substantial amount of construction and need only last-mile funding to get the project completed. So far, the fund has approved funding for 136 projects with sanctions of Rs132bn. Roughly half of LICHF’s builder NPLs can be resolved if approved under the SWAMIH fund, indicating meaningful project completeness (Fig 17). This means that likely haircuts for these projects would not be substantial. We build ~25% haircut on these loans nonetheless for conservatism. We expect incremental credit costs of ~60bps (over and above base line credit costs of ~35bps p.a.) over FY21-22E. This is roughly equivalent to one quarter’s operating profits (Fig 22).

Fig 1 Asset quality has deteriorated significantly over the past six quarters

20.0 18 18.0 17 16.0 14.0 12.0 9 9 10.0 8 7 8.0 6 6.0 4.0 1.1 1.7 1.7 2.0 0.2 0.2 0.2 0.4 - 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q FY15 FY16 FY17 FY18 FY19 FY20 FY21 Individual Builder Loans

Source: Company data, Macquarie Research, January 2021

13 January 2021 2 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 2 Most builder loans were sanctioned during CY18 (between demonetization and IL&FS)

35.0 31.7 (%) 14.0% (Rs bn) 13.3% 13.3% 13.3% 30.0 13.5% 12.7% 13.0% 25.0 12.3% 12.5% 12.5% 20.0 16.4 15.7 12.0% 15.0 11.7 10.0 10.8 11.5% 10.0 11.0% 5.0 10.5% - 10.0% CY15 CY16 CY17 CY18 CY19 CY20 Amount Sanctioned (Rs bn) Weighted Avg. Interest Rate (%) - RHS

Source: PropStack, Macquarie Research, January 2021

Fig 3 17% of developer loans (incl. LRD) are already NPL Fig 4 36% of builder loan sanctions (excl. LRD) by value are and management expects further restructuring required still under moratorium

NPL 17% Potential Under Restructuring Moratorium 31% 36% Standard LRD Out of 19% Moratorium 64% Standard Builder 33%

Source: Company data, Macquarie Research, January 2021 Source: PropStack, Macquarie Research, January 2021

Fig 5 ~55% of sanctioned accounts were slated to come out of moratorium in CY21, but will most likely see delayed exit given proposed restructuring.

9.0 8.3 8.4 (Rs bn) 8.0 7.0 6.3 6.0 5.0 4.0 3.5 3.0 2.3 1.8 2.0 1.6 1.5 1.1 0.8 1.0 - - - 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

CY21 CY22 CY23 Source: PropStack, Macquarie Research, January 2021

13 January 2021 3 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 6 LICHF’s builder loan (excl. LRD) concentration is low Fig 7 …with projects across various geographies.

Others Bangalore 18% 16%

Pune Group 1-5 Others Thane + Navi 28% 4% 38% Hyderabad Mumbai 4% 14% Mohali 4% Group 6-10 Lucknow 15% 5% Mumbai Group Kolkata 11% 11-15 6% NCR Chennai Group 11% 8% 10% 16-20 8%

Source: PropStack, Macquarie Research, January 2021 Source: PropStack, Macquarie Research, January 2021

Fig 8 Due to large share of retail loans (93%), concentration of top 20 exposures is significantly lower than peers. Fig 9 A similar trend in concentration of Top 10 NPLs too.

18 70 65 16 15 16 15 56 60 54 50 14 12 48 47 50 47 44 45 12 11 11 11 11 10 10 9 40 30 32 27 30 8 30 26 6 20 4 4 20 4 2 3 3 2 10 - - HDFC PNHHF LICHF HDFC PNHHF LICHF FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20

Source: Company data, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

Fig 10 Top 10 developer exposures (ex-LRD) for LICHF (outstanding active sanctions)

8.0% 7.1% 7.0% 6.4% 6.0% 5.3% 5.0% 4.6% 4.6% 4.0% 4.0% 3.1% 2.9% 2.8% 3.0% 2.5% 2.0% 1.0% 0.0% Runwal Lodha Shriram Adhiraj Mantri Ansal API Janata Casa Cybercity SPR Housing Grande Builders India

Source: PropStack, Macquarie Research, January 2021

13 January 2021 4 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 11 Project loan – Runwal Greens (Dombivali)

Source: PropStack, MahaRERA, Project Brochures, Macquarie Research, January 2021

Fig 12 Project loan – Lodha The Park (Lower Parel)

Project Sales

Unsold 17%

Sold 83%

Completion of construction Project Sales 120 1000 939 100 100 100 99 847 100 87 74 800 80 65 597 600 60 48 490 459 40 400 351 20 162 200 102 0 8 3 0 2 BHK 3 BHK 3 BHK 4 BHK 5 BHK (Basic) (Premium)

Sold Unsold

Source: PropStack, MahaRERA, Project Brochures, Macquarie Research, January 2021

13 January 2021 5 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 13 Project loan – Marathon Nextown (Thane)

Source: PropStack, MahaRERA, Project Brochures, Macquarie Research, January 2021

Fig 14 Project loan – Shriram 107 Southwest (Hosur Road, Bangalore)

Source: PropStack, Project Brochures, Macquarie Research, January 2021

13 January 2021 6 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 15 Project loan – Naman Premier (Andheri East) – approval under SWAMIH Fund

Source: PropStack, MahaRERA, Project Brochures, Macquarie Research, January 2021

What is the SWAMIH Fund? In Nov ‘19, the government cleared a proposal to set up a ‘Special Window’ in the form of an Alternate Investment Fund (AIF) to provide priority debt financing for the completion of stalled housing projects. A project should satisfy the following criteria to be eligible for funding from SWAMIH: • Is stalled or likely to be stalled if no funding is made available • 90% of available floor space (FSI) is being developed as affordable housing or mid-income housing units

• Is net worth positive – value of sold receivables plus unsold inventory is greater than cost to complete construction and to service the investment by the fund

• has completed at least 30% of the construction and development • requires only last-mile funding – sufficient to complete construction • is a part of a RERA registered project.

13 January 2021 7 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 17 ~50% of LICHF’s developer NPLs can get resolved if Fig 16 SWAMIH Fund has gathered pace in 2HCY20 referral to SWAMIH Fund is approved

160 136 140 132.1 123 120.8 120 100 90 87.7 88.9 81 80 SWAMIH NCLT & Fund 60 others 43% 50% 40 20 - No of projects Amount sanctioned (Rs bn) Std. Projects Jul-20 Aug-20 Oct-20 Dec-20 7%

Source: Government of India, Macquarie Research, January 2021 Source: Company Data, Macquarie Research, January 2021

We note a similar granularity in Lease Rental Discounting (LRD) loans too. LICHF has ~Rs 80bn of LRD loans, of which Rs35bn are in the corporate segment. Our analysis of corporate LRD loans shows a highly diversified geographical base, smaller ticket sizes vs. peers and ~70% exposure to IT parks and offices.

Fig 18 CY18 saw more LRD sanctions than the 2 years Fig 19 As per mgmt., ~70% of LRD exposures are to IT before and after combined. Parks and Office Buildings.

40 11.8 12.0 (%) 35 30 11.2 11.5 Malls & 25 (Rs bn) warehouses 10.9 10.8 30% 20 10.7 11.0 15 10 10.5 IT Park & 5 1.4 9.7 36.3 13.2 2.2 Offices 0 10.0 70% CY16 CY17 CY18 CY19 CY20

Sanctions (Rs bn) Avg. interest (%) - RHS

Source: PropStack, Macquarie Research, January 2021 Source: Company Data, Macquarie Research, January 2021

Fig 20 We note that the corporate LRD book is well- diversified, with no one account contributing more than 15% Fig 21 Geographically too, the diversification is evident.

Wadhwa Others Noida 9% 13% 0% Others Pune 26% New Delhi 6% Mumbai NSL 3% 25% 11%

Gurgaon Marathon 9% Oasis Realty Realty 9% 4% Bangalore Navi 9% Mumbai & Amanora Butta ESSEL Thane 4% 5% Anant 8% 17% Raj Rattha Hyderabad Chennai 6% Lodha 7% 11% 11% 7%

Source: PropStack, Macquarie Research, January 2021 Source: PropStack, Macquarie Research, January 2021 13 January 2021 8 Macquarie Research LIC Housing Finance (LICHF IN)

Calculating incremental provisions required: LICHF is largely retail (93% of AUM), with a high contribution of home loans (77%) and rest being LAP/ LRD (16%). Out of the Rs60bn of NPLs for LICHF as of 2Q21, Rs34bn are retail loans and Rs25bn are builder loans.

• Home Loans: 87% of home loan recipients are salaried, with the rest self-employed. Ideally, given low LTVs, there would not be any scope for losses in the home loan book. As per mgmt., LICHF has historically had single-digit basis points of crystalized losses from this segment. However, we have concerns on home loans given for purchase of under-construction residential units in stuck projects. These loans can potentially see haircuts if the borrower refuses to make repayments and the project is not completed. Hence, we still build ~15% loss given default (LGD) on home loans.

• LAP loans for LICHF are quite different from the typical LAP done by peers. LICHF’s LAP loans have a high share of salaried customers (74%) and significantly lower ticket sizes of ~Rs1.6mn. We build 30% LGDs on these NPLs, considering comfort from low LTVs of 45%.

• Builder Loans: We build ~60% haircuts on non-SWAMIH builder NPLs and ~25% on the ones referred to SWAMIH. Loan covenants usually also cross-collateralize project loans with land, which ranges between 25-40% of project valu,e depending on the city.

Fig 22 We estimate the incremental provisioning requirement will be Rs12.5bn (roughly equal to 60bps of AUM or one quarter’s PPOP). However, timing of these provisions is harder to determine. Standard Slippage NPLs LGD Provisions As of 1HFY21 Assets (Rs mn) (%) (Rs mn) (%) Reqd. (Rs mn)

Current NPLs Individual (HL + LAP) 34,145 23% 7,967 Builder 25,380 41% 10,298 - referred to SWAMIH Fund 11,000 25% 2,750 - standard assets of stressed builders 1,800 0% - - others 12,580 60% 7,548 Total 59,524 18,265 Further Slippages Individual Loans 1,886,529 3.3% 62,410 22% 13,861 - Home Loans 1,620,720 2.0% 32,414 15% 4,862 - LAP & other retail loans 299,954 10% 29,995 30% 8,999

Wholesale Loans 128,250 10.6% 13,574 60% 8,144 - Standard LRD 35,000 0% - 0% - - Standard Builder 67,871 20% 13,574 60% 8,144 Total 2,014,779 75,984 22,005 Total Provisions required (Rs mn) 40,270 Provisions o/s as of 1HFY21 (Rs mn) 27,717 Additional Provisions over FY21-23E (Rs mn) 12,553 (% of AUM) 0.62% Source: Company data, Macquarie Research, January 2021

Fig 23 95% of LICHF’s AUM is retail, 7% is builders (2Q21) Fig 24 Far more granular vs. similar sized peers (2Q21)

Builder Loans 100% 7% 6 7 90% 18 16 25 24 80% LAP & other 70% 8 25 retail 60% 16% 50% 94 40% 77 75 68 30% 57 Home Loans 20% 77% 10% 0% CANFIN LICHF AAVAS HDFC PNBHF HL LAP & others Corporate

Source: Company data, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

13 January 2021 9 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 25 87% of home loans (by volume) are salaried (2Q21) Fig 26 74% of ‘LAP & Others’ book is salaried (3Q20)

Professionals 2% Self- Employed Self- Employed 11% 26%

Salaried Salaried 74% 87%

Source: Company data, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

Fig 27 Hence, despite significantly worse-off builder NPLs, Fig 28 Capital appears to be a bottle-neck for upfronting of overall NPLs are similar to large-sized peers provisions in our view.

3.0 2.8 2.8 2.8 30.0 2.6 24.8 2.5 2.2 2.2 25.0 20.7 2.0 20.0 18.7 13.9 1.5 15.0

1.0 0.8 0.7 10.0 0.5 0.5 0.5 5.0 12.2 16.1 19.5 22.5 - - AAVAS CANFIN HDFC PNBHF LICHF LICHF PNBHOUSI HDFC CANFIN

1Q21 2Q21 Tier 1 (%) Tier 2 (%)

Source: Company data, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

Fig 29 LICHF has high Stage 3 provision coverage (PCR) Fig 30 But, Stage 2 PCR is non-existent and rather volatile.

49 2 1.9 50 47 48 2 1.7 44 45 1.6 1.6 45 2 40 1 40 36 1 34 1 35 32 1 0.7 30 0.5 30 1 0.4 0 0.3 25 0 0 0 - 20 LICHF AAVAS Bajaj HDFC PNBHF AAVAS CANFIN PNBHF LICHF HDFC Housing

1Q21 2Q21 1Q21 2Q21

Source: Company data, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

13 January 2021 10 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 31 Volatility in Stage 2 PCR despite formulaic approach Fig 32 Stage 3 PCR has inched up over the past year

1.6 1.5 52 1.3 1.4 50 1.4 50 1.1 1.2 48 47 1.0 0.9 45 46 45 45 0.8 44 44 43 0.6 0.4 42 40 0.2 0.0 0.0 0.0 0.0 0.0 - 38 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q FY19 FY20 FY21 FY20 FY21 Stage 2 (%) Stage 3 (%)

Source: Company data, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

Fig 33 Expect provisions to be elevated in FY21-22E, but return to long-term avg. (35bps) in FY23

180 160 153 140 120 100 75 80 72 69 61 59 55 60 47 42 40 40 27 21 28 10 12 11 13 15 20 3 1 0 -2

-20 -9

FY02 FY04 FY05 FY08 FY09 FY11 FY12 FY15 FY16 FY18 FY19 FY03 FY06 FY07 FY10 FY13 FY14 FY17 FY20

FY22E FY23E FY21E

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5%

0.0%

FY02 FY03 FY05 FY06 FY08 FY10 FY11 FY13 FY16 FY18 FY19 FY04 FY07 FY09 FY12 FY14 FY15 FY17 FY20

FY21E FY23E FY22E

GNPA (%) NNPA (%)

Source: Company data, Macquarie Research, January 2021

13 January 2021 11 Macquarie Research LIC Housing Finance (LICHF IN)

SECTION 2: MARGINS & COMPETITION

A long history of volatile spreads: LICHF’s spreads have historically been quite volatile, gyrating to the whims of the interest rate cycle. CASA-funded banks like SBIN and ICICI and more recently Kotak Bank have leveraged their low cost of funds to wrestle away market share of in the top-quality home loan borrower segment. Coupled with RBI’s progressive steps to implement better transmission of interest rates, with floating rate loans moving from base rates to MCLR to now repo-rate linkages, this has meant that yields on home loans have progressively fallen to new lows. On a long timeline, we can see three distinct phases of how incremental spreads have moved:

• Phase A (3Q14 to 3Q17): Spreads increased from 1.0% to 2.0% (100bps): During this time period, cost of funds steadily declined from 9.9% to 8.9% (~100bps decline), given the downward interest rate cycle (three-year G-Sec came down from 8.6% to 6.4%). However, a changing AUM mix helped to cushion overall yields – which fell only 30bps during the period from 10.9% to 10.6%. AUM mix changed from 3% non-core (LAP + Builder) to 17% non-core. Yields in home Loans (HL) during this period fell ~65bps, but the changing AUM mix, cushioned overall yields. There was no material change in competitive environment during this time.

• Phase B (4Q17 to 3Q19): Spreads decreased from 2.0% to 0.9% (110bps): This time period started immediately after demonetization – where large MCLR cuts by SBI and other banks led to a significant compression in yields for mortgages. LICHF’s yields fell from 10.2% to 9.7% during this time period (9.2% at the lowest point) despite continuing support from changing AUM mix towards non-core loans. Cost of funds increased from 8.4% to 9.1% (70bps) during this time.

• Phase C (3Q19 to 2Q21): Spreads increased from 0.9% to 1.5% (60bps): The early part of this time period saw a rise in CoF from the IL&FS default-led liquidity crisis; however, the interest rate cycle had turned favourably downward. Three-year G-Sec came down from 8% to under 5% during this time, and LICHF’s CoF fell from 9.1% to 7.8% (aided in the last couple of quarters by TLTROs). Yields remained resilient initially at 9.8-9.9% due to reduced competition from other HFCs (DHFL, IHFL, long tail of small HFCs), but as bank competition picked up, pricing power waned. Yields corrected 60bps to 9.3%, and spreads came off to 1.5%. There was no change to the AUM mix during this phase, and although NPLs were rising, they do not affect yields due to IndAS accounting.

13 January 2021 12 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 34 LICHF’s spreads (calculated) have been very volatile, given fixed rate liabilities and floating rate assets…

11.5% AUM mix change SBI big MCLR cuts from 3% non-core 10.9% 11.0% 10.6% to 17% 10.5% 9.9% 9.9% 10.0% 9.4% 9.5% 9.9% 9.3% 9.1% 9.0% 9.0% 8.5% 8.4% 8.4% 8.0% 8.3% 7.5% 7.8% Liquidity crisis Interest rate

7.0% down cycle

1Q12

2Q12

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

4Q19

1Q20

2Q20

3Q20

4Q20

1Q21

2Q21

3Q 3Q 12

4Q 4Q 12

1Q 13

2Q 13

3Q 3Q 13 4Q 4Q 13 Yield on Total Loans Calculated cost of funds

2.1% 2.0% 1.9% 1.7% 1.7% 1.5% 1.5%

1.3% 1.0% 1.1% SBI big MCLR cuts

0.9% Liquidity crisis 0.7% 0.9%

0.5%

1Q14 2Q14 3Q14 4Q14 4Q16 1Q17 2Q17 3Q17 4Q17 1Q20 2Q20 3Q20 4Q20 1Q12 2Q12 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q21 2Q21

4Q 4Q 13 3Q 3Q 12 4Q 12 1Q 13 2Q 13 3Q 13 Calculated loan Spreads (%) - RHS

Source: Company data, Macquarie Research, January 2021

Fig 35 LICHF has supplemented yields over the years through diversification into non-core assets

9.0 8.1 8.0 8.0 7.0

6.0 6.5 5.4 5.0 4.9 4.0 4.0

3.0

2Q12 3Q14 1Q15 3Q15 1Q16 2Q17 4Q17 2Q18 4Q18 1Q20 3Q20 1Q21 1Q12 1Q14 2Q14 4Q14 2Q15 4Q15 2Q16 3Q16 4Q16 1Q17 3Q17 1Q18 3Q18 1Q19 2Q19 3Q19 4Q19 2Q20 4Q20 2Q21

4Q 4Q 12 2Q 13 3Q 3Q 12 1Q 13 3Q 13 4Q 13

RBI Repo 5YR GSEC 3YR GSEC

100% 5 5 4 4 3 3 3 3 3 3 2 3 3 2 3 3 3 3 3 3 4 4 4 4 5 5 8 7 6 3 6 6 7 7 7 6 7 7 7 95% 4 4 5 5 6 6 9 9 10 10 90% 13 13 13 13 14 16 85% 16 17 17 17 17 16 16 16 16 80% 75% 95 95 96 96 97 97 97 97 97 94 92 93 94 94 93 93 93 92 91 70% 88 88 88 86 84 65% 83 83 83 81 79 78 77 76 76 76 77 77 77 76 60% 55%

50%

1Q14 2Q14 3Q14 4Q14 1Q15 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 1Q12 2Q12 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q20 1Q21 2Q21

2Q 2Q 13 3Q 13 4Q 13 3Q 3Q 12 4Q 12 1Q 13

Home Loans LAP & others Builder & Corporate LRD

Source: Company data, Macquarie Research, January 2021

13 January 2021 13 Macquarie Research LIC Housing Finance (LICHF IN)

After every liquidity crisis in debt capital markets, we have been banks aggressively cut Marginal Cost based Lending Rates (MCLRs) and thereby lower yields on home loans. While there is a worry that this can lead to HFCs being priced out of the market, we have also seen large HFCs like LICHF and HDFC Ltd also benefit from the liquidity events as funding moves from smaller NBFCs and HFCs to large NBFCs/HFCs backed by strong promoters. In recent years, we have seen the banking system home loans and AUM for HDFC and LICHF move in tandem. The market has either contracted or expanded for all the large players in unison. This is because (1) banks have chosen to remain disciplined on risk spreads for riskier customers and (2) vacating of competitive space by two large HFCs and a slew of smaller HFCs from the home loan market.

Fig 36 SBI has always cut MCLR after a liquidity gush following crises in wholesale debt markets

9.5 9.2 DEMON. IL&FS (%) 8.9 9.0 8.6 8.5 -80bps 8.0 -90bps 8.0 7.8 -80bps 7.5 7.0 7.0 6.5 COVID 6.0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q FY17 FY18 FY19 FY20 FY21

Source: Company data, Macquarie Research, January 2021

Fig 38 …but it has not been a function of balance transfers Fig 37 LICHF’s loan growth has come off in recent years… out of LICHF in the home loan segment.

2.2 2.1 2.1 2.1 20% 14.0 2.1 2.1 2.0 18% 11.9 1.9 2.0 12.0 10.9 11.0 2.0 16% 10.2 10.1 9.9 1.9 1.8 14% 1.8 10.0 1.8 1.7 1.7 12% 1.7 10% 8.0 1.6 1.6 1.5 8% 1.5 6.0 1.5 6% 1.4 4% 4.0 1.3 2% 2.0 1.2 0% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q - FY16 FY17 FY18 FY19 FY20 1H21 FY18 FY19 FY20 FY21 Advances (Rs trn) YoY Growth (%) - RHS Pre-payment rate (%)

Source: Company data, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

13 January 2021 14 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 39 HFCs and banks in recent quarters have seen similar growth rates and moved in tandem

25% Shakeout Recovery Covid ??

20%

15%

10%

0% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q FY18 FY19 FY20 FY21 HDFC (Home Loans) LICHF (Home Loans) Banking Industry

Source: Company data, Macquarie Research, January 2021

Fig 40 Banks have been far more sensible in loan pricing Fig 41 LICHF has matched top banks’ best-in-class rates

6.95 (%) 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.90 6.9 6.9 6.85 6.8 6.8 6.80 CIBIL Score Current Earlier Hike 6.75 > 775 7.00% 6.85% 0.15% 6.75 726 - 775 7.35% 6.95% 0.40% 701 - 775 7.55% 7.15% 0.40% 6.70

650 - 700 7.90% 7.50% 0.40% BOI

PNB

BOB

KMB

SBIN

TATA

AXSB

UNBK HDFC LICHF < 650 8.35% 7.95% 0.40% BAJAJ ICICIBC Source: Company data, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

LICHF has been able to match the best rates offered by banks on home loans given the significant reduction in incremental cost of funds. As per our discussions with credit bureaus, 65-70% of home loan borrowers for banks are categorized as ‘Prime and above’, while the number for HFCs is closer to 60-65%, with a wide range among individual HFCs.

Fig 42 LICHF: Best in class interest rates for customers across different risk scores & ticket sizes

CIBIL Score < Rs 5mn Rs 5-10mn Rs 10-30mn Rs 30mn+ >= 700 6.90% 6.90% 6.90% 6.90% 650 – 699 7.10% 7.30% 7.40% 7.50% Salaried 600 - 649 7.30% 7.60% 7.70% 7.70% < 600 7.50% 7.70% 7.70% 7.80% >= 700 7.00% 7.00% 7.00% 7.00% Non- 650 – 699 7.20% 7.40% 7.50% 7.60% Salaried 600 - 649 7.40% 7.70% 7.80% 7.80%

< 600 7.60% 7.80% 7.80% 7.90% Source: Company data, Macquarie Research, January 2021

13 January 2021 15 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 43 Other large HFCs have either altered their business Fig 44 New HFC licenses have also dried up, reducing models or gone bankrupt, easing competitive pressures competition from new entrants

Source: Media Reports, Macquarie Research, January 2021 Source: RBI, NHB, Macquarie Research, January 2021

Fig 45 LICHF has launched new products to boost growth Fig 46 LICHF has launched new products to boost growth

Source: Company data, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

Fig 47 LICHF has seen reduction across all liability sources, Fig 48 Due to this, the proportion of bonds in overall except bonds so far, but that is now changing… liabilities fell from 73% to 60% in 6 quarters

10 100% 9.0 8.7 8.9 9 8.5 90% 8.2 8.3 8.3 8.3 80% 70% 8 7.4 60% 65% 7 6.6 50% 73% 72% 68% 62% 60% 6.3 40% 5.7 6 30% 20% 5 23% 10% 14% 15% 19% 22% 20% 0% 4 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 Bank Bonds NHB Tier-2 CP /CD Deposits Loans Refin. bonds Bank Loans Bonds NHB Refin. FY19 FY20 1H21 Tier-2 bonds CP /CD Deposits

Source: Company data, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

13 January 2021 16 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 49 Incremental debt costs have come to multi-year lows Fig 50 ~35% of existing NCDs will mature in CY21-22.

40 10.0 40% 8.6 8.8 8.4 35 9.0 35% 8.4 8.0 8.1 30 30% 8.1 8.0 8.2 25 25% 8.0 20 7.0 20% 7.8 15 5.5 7.7 7.8 6.0 15% 10 10% 7.6 5 5.0 5% 7.4 0 4.0 15% 19% 12% 18% 35% 0% 7.2

CY21 CY22 CY23 CY24 CY25 &

Apr-19 Oct-19 Apr-20 Oct-20

Jun-19 Jun-20

Feb-19 Feb-20

Dec-18 Dec-19 Dec-20 Aug-20 Aug-19 beyond Amount (Rs bn) Coupon (%) - RHS % of NCDs maturing Avg. Interest Rate (%) - RHS

Source: NSE, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

Fig 51 2/3rds of bank loans for LICHF are from PSU Banks Fig 52 SBI has cut MCLR by 90bps this year

FB 8.0 7.9 5% PVT 7.7 28% 7.4

7.1 7.0 7.0

6.8

PSU 6.5

67%

Jul-20

Apr-20 Oct-20

Jan-20 Jun-20

Mar-20

Feb-20

Sep-20 Aug-20 Nov-20 Dec-20 May-20 Source: Company data, Macquarie Research, January 2021 Source: Company data, Macquarie Research, January 2021

We build 50bps/100bps increase in cost of funding via NCDs and CP, respectively, from current incremental costs as government and RBI measures begin (eg: TLTRO) begin to wane. Nonetheless, incremental the cost of funds will still be ~200bps lower than the weighted average yield of maturing debt. (See Fig 49-50). As per our calculations, we see ~30bps decline in cost of funds without accounting for favourable borrowings mix change and growth in borrowings at lower incremental costs.

Fig 53 Calculation of expected reduction in CoF in CY21 Amount Mix CoF Maturing in New CoF Reduction 2Q21 (Rs bn) (%) (%) CY21 (%) (%) in CoF (bps)

Bank Loans 434 23% 6.6% 21% 6.3% 2 NCDs 1,140 60% 8.2% 17% 6.0% 23 Tier 2 NCDs 10 1% 9.0% 0% NA - NHB Refinance 96 5% 6.3% 0% NA - Commercial Paper 59 3% 5.7% 100% 4.5% 4 Deposits 164 9% 7.4% 20% 6.3% 2 Total 1,903 100% 7.6% 30 Source: Company data, Macquarie Research, January 2021

13 January 2021 17 Macquarie Research LIC Housing Finance (LICHF IN)

SECTION 3: RISKS TO THESIS

Risk of merger with IDBI Bank (low risk): • RBI permitted Life Insurance Corporation of India (LIC) to become the promoter and hold a 51% stake in IDBI Bank (IDBI), subject to the condition that only one of its subsidiaries (either IDBI Bank or LIC Housing Finance) can carry on the housing finance business in India. RBI gave LIC five years for the re- organization of business models, which expires at the end of CY23.

• RBI does not allow multiple entities of any promoter group to be engaged in the same line of lending business as this opens the possibility of evergreening. LICHF is a monoline housing finance company and IDBI Bank has a substantial portion of its non-stressed loans in the form of mortgages. The way out is thus unclear.

• As per media reports, LIC is looking to re-organize the business model of IDBI Bank and set up a sourcing arrangement similar to HDFC Bank and HDFC Ltd.’s arrangement to comply with RBI regulations. In their arrangement, HDFC Bank sources home loans which are directly placed on the balance sheet of HDFC Ltd. for a sourcing fee. HDFC Bank does not have any home loans sourced directly by it on its own balance sheet. It also has an exclusive option to purchase a part of the loans sourced by it from HDFC Ltd. to comply with its priority sector lending (PSL) norms.

• A similar arrangement, as cited in the media report, would require IDBI Bank to source loans for LIC Housing and not have any home loans directly on its own balance sheet. We are not sure how the economics of such an arrangement would work, but the bigger point is that it would be regulatorily compliant and should quash the merger talk weighing on LICHF’s stock. LICHF is a significantly bigger company with a large distribution network as compared to IDBI Bank and does not rely on the latter for sourcing of loans.

• We have always maintained (see reports) that in any case, a merger would not fructify given (1) LICHF’s large, diversified shareholding and (2) the fact that parent LIC, being a related party in merging companies, cannot vote on such a proposal. A merger would require majority of minority shareholder approval, which we can’t see materializing.

Fig 54 FIIs own 60% of non-promoter stake in LICHF (2Q21) Fig 55 Top non-promoter shareholders of LICHF (2Q21)

3.0 2.8 Others 6% Retail 2.5 2.3 10% 2.0 1.9 2.0 1.8 DII LIC 9% (Promoter) 1.5 40% 1.2 1.0 0.9 1.0

0.5 FII - 35% ICICI MF Bank Norges HDFC Life Fidelity Prudential Highclere AQR EM Muscat Bank Assurance Intl Equity

Source: BSE, Company data, Macquarie Research, January 2021 Source: BSE, Company data, Macquarie Research, January 2021

Sharp increase in incremental cost of funds (low risk): • LICHF’s profitability has a high sensitivity to margins. As discussed in earlier sections, we are projecting ~200bps lower incremental costs vs. on-book costs and a ~30bps YoY reduction on CoF in the current year. However, if there is another liquidity shock to the system and cost of funds rises sharply, LICHF’s ability to grow and maintain spreads will take a big knock.

• In Fig 56 below, we present a sensitivity table showing potential impact of no reduction in cost of funds vs. our current base case assumptions. For every 100bps increase in cost of funds, ROE is impacted by ~600bps.

13 January 2021 18 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 56 Sensitivity of profitability to margins… BASE BEAR Change (%) FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E

Yields (%) 8.9% 8.8% 8.6% 8.9% 8.8% 8.6% CoF (%) 7.4% 7.2% 7.0% 7.5% 7.5% 7.5% 0.1% 0.3% 0.5% NIM (%) 2.5% 2.5% 2.6% 2.4% 2.2% 2.1% -0.1% -0.3% -0.4% PAT (Rs bn) 26.3 31.7 39.7 25 27 30 -6% -16% -23% ROE (%) 13% 14% 15% 12% 12% 12% -0.7% -2.0% -3.2% Source: Company data, Macquarie Research, January 2021

1. Higher than expected slippages from small developers (moderate risk):

• Our analysis of developer and LRD loans is based on data from PropStack, which in turn obtains data from the Ministry of Corporate Affairs (MCA). The analysis is based on sanctioned amounts (which amortize after the upfront moratorium period) and hence may not be an accurate representation of current outstanding loans.

• Further, we cannot be certain that data from MCA is comprehensive, as the onus of filing of charges is on the borrower. If charges are not filed, or withdrawn on repayment or transfer of the loans, then the data may have inaccuracies.

• We have also not been able to independently verify all project sales from RERA websites, especially for smaller regional developers. LICHF in its 2Q21 concall has guided for Rs20-30bn of restructuring due to Covid-related construction delays, which in our view will largely comprise smaller developers. 2. Adverse regulatory changes (moderate risk):

• Recently, the RBI has been speaking about better regulating large NBFCs and HFCs and plugging the regulatory arbitrage between banks and large non-banks. The RBI deputy governor in charge of regulation has mentioned they will likely take steps to encourage large non-bank lenders to either (1) convert to banks or (2) scale down operations.

• In our view, this can manifest in terms of higher capital adequacy requirements for large HFCs such as LICHF as well as SLR and CRR requirements, similar to banks, on certain borrowing components of NBFCs. This in theory can have an adverse impact on LICHF’s spreads and consequently its ROE.

• We think it would be unfair to impose SLR and CRR requirements on all borrowings of HFCs, especially considering a large part of their fund raising comprises bonds with 3-5-10 year maturities, raised from institutional investors. HFCs are not allowed to raise CASA, which offsets the margin drag from SLR/CRR for banks – hence such an imposition on the entire borrowings of HFCs would be debilitating to business models.

13 January 2021 19 Macquarie Research LIC Housing Finance (LICHF IN)

SECTION 4: VALUATION & FINANCIALS • We increase TP to Rs600 from Rs440 from bringing down elevated Ke in valuation model from 14% to 13%, as we believe our analysis of the builder loans provides significant visibility on asset quality, especially in the corporate segments. If we further decrease Ke to 12% (normalized level), then there would be further ~25% upside to our TP.

• LICHF trades at 1x PBV, the lowest it has traded at in the past decade. This is 25-40% discount to long- term and ten-year average multiples and offers a substantial margin of safety, in our view. We value LICHF at 1.3x Sept ‘22E PBV for a TP of Rs600, with expected catalysts from (1) a capital raise, (2) recovery in retail loan growth and (3) stabilization in asset quality.

Fig 57 1YR fwd PBV chart: Valuations are the still lowest they have been for a decade.

2.9 2.9 3.0 2.5 2.3 2.0 1.8 1.5 1.0 1.2 1.0 1.0 0.5 0.5 0.5

Jul-16 Jul-09

Apr-11 Oct-14 Oct-07 Apr-18

Jan-06 Jun-19 Jun-12 Jan-13 Jan-20

Mar-14 Mar-07

Feb-17 Feb-10

Dec-08 Sep-10 Nov-11 Aug-13 Dec-15 Sep-17 Aug-20 Aug-06 Nov-18

May-08 May-15

P/BV 10YR AVG +1 STd. Dev -1 STd. Dev

Source: BBG, Company data, Macquarie Research, January 2021

Fig 58 LICHF at 25% discount to long-term average, 41% discount to last ten years’ average. Peak Average Current Discount to Discount to PBV PBV PBV Peak multiple avg. multiple (x) (x) (x) (%) (%)

Long term 2.9 1.4 1.0 65% 25% 5YR 2.9 1.6 1.0 65% 36% 10YR 2.9 1.8 1.0 65% 41% Source: BBG, Company data, Macquarie Research, January 2021

Fig 59 Correlation of Valuations and ROE Fig 60 Correlation of Valuations and AUM Growth

3.0 30 3.0 40 2.5 25 2.5 35 30 2.0 20 2.0 25 1.5 15 1.5 20 1.0 10 1.0 15 10 0.5 5 0.5 5

- - - -

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Current Current P/BV (x) RoE (%) P/BV (x) AUM Growth (%)

Source: BBG, Company data, Macquarie Research, January 2021 Source: BBG, Company data, Macquarie Research, January 2021

13 January 2021 20 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 61 LICHF – Key ratio forecasts for FY21-23E FY18 FY19 FY20 FY21E FY22E FY23E

AUM Growth (%) 15.1 16.0 9.1 6.9 9.6 12.1 EPS Growth (%) 3 (24) 59 4 14 25 NIM (%) 2.3 2.1 2.3 2.4 2.4 2.5 Credit Costs (%) 0.2 0.3 0.5 0.8 0.6 0.4 RoE (%) 16.7 10.4 14.0 13.1 13.6 15.2 Source: Company data, Macquarie Research, January 2021

Fig 62 Calculation of Intrinsic value for LICHF Risk free rate 6.5%

Market risk premium 5.0% Beta 1.3x g (Perpetual growth rate) 5.0% r (Cost of equity) 13.0%

Calculation of Blended RoE FY22E ROE 13.6% Weightage (%) 20.0% Sustainable RoE 14.3% Weightage (%) 80.0% Blended RoE (%) 14.1%

Calculation of Justified PBV Multiple Blended RoE 14.1% g (initial growth) 11% r (CoE) 13.0% gn (perpetual growth rate) 4% n (initial growth period, yrs) 10 payout1 20% payoutn 75% K1 1.8 K2 7.4 Justified P/BV (x) 1.29

Calculation of Intrinsic Value Sept 22E BVBPS (Rs) 463 Justified Multiple (x) 1.29 TP (Rs) (Rounded off) 600

CMP 434 Upside (%) 38% Source: Company data, Macquarie Research, January 2021

Fig 63 Summary of EPS and TP changes Old New Change (%)

FY22E EPS (Rs) 54.0 56.3 4.3% FY23E EPS (Rs) 71.4 70.5 -1.2% Cost of Equity (Ke) 14% 13% -1.0% Justified Multiple (x) 1.01 1.29 27.7% Sept-22E BVPS (Rs) 435 463 6.6% TP (Rs) 440 600 36.4% Source: Company data, Macquarie Research, January 2021

13 January 2021 21 Macquarie Research LIC Housing Finance (LICHF IN)

Fig 64 Summary Financials Balance Sheet FY18 FY19 FY20 FY21E FY22E FY23E

Share Capital 1,010 1,010 1,010 1,124 1,124 1,124 Reserves 125,897 161,583 179,945 219,917 244,145 274,478 Net Worth 126,907 162,593 180,955 221,041 245,269 275,603 Borrowings 1,453,285 1,841,049 1,913,317 2,055,745 2,263,982 2,492,355 Other Liabilities & provisions 138,328 18,667 101,146 73,859 66,840 117,604 Total Liabilities 1,718,520 2,022,309 2,195,418 2,350,645 2,576,092 2,885,562

Cash & Bank 44,052 49,567 33,212 36,533 40,187 44,205 Investments 9,868 35,951 54,964 60,460 66,506 73,157 Loans & Advances 1,663,629 1,929,927 2,105,780 2,252,042 2,467,629 2,766,253 Fixed & Other Assets 971 1,330 1,463 1,609 1,770 1,947 Total Assets 1,718,520 2,022,309 2,195,418 2,350,645 2,576,092 2,885,562

Income Statement Interest earned 148,967 180,362 196,834 202,360 215,649 235,241 Interest expended 111,247 146,697 147,836 147,010 155,703 166,713 Net interest income 37,721 33,665 48,998 55,350 59,946 68,528 Other income 1,762 2,247 (44) 1,366 1,507 1,673 Total Income 39,483 35,912 48,954 56,716 61,452 70,201 Operating expenses 6,475 7,679 6,700 6,580 7,737 8,765 PPOP 33,007 28,233 42,254 50,136 53,715 61,435 Provisions 2,389 4,984 9,527 16,474 13,111 10,600 PBT 30,619 23,249 32,727 33,662 40,604 50,835 Tax 10,723 8,137 8,724 7,406 8,933 11,184 PAT 19,896 15,112 24,003 26,256 31,671 39,652

Key Ratios Shares o/s (mn) 505 505 505 562 562 562 EPS (Rs) 39 30 48 47 56 71 BVPS (Rs) 251 322 358 393 436 490

Growth (%) AUM 15 16 9 7 10 12 NII 2 (11) 46 13 8 14 PPOP 2 (14) 50 19 7 14 PAT 3 (24) 59 9 21 25

Operating ratios (%) Cost to Income 16.4 21.4 13.7 11.6 12.6 12.5 Opex. to Assets 0.40 0.41 0.32 0.29 0.31 0.32

Profitability ratios (%) Yields 9.2 9.7 9.4 8.9 8.8 8.6 Cost of funds 8.2 8.9 7.9 7.4 7.2 7.0 Spread 1.0 0.8 1.5 1.5 1.6 1.6 NIM 2.3 1.8 2.3 2.4 2.4 2.5 ROAA 1.2 0.8 1.1 1.2 1.3 1.5 ROAE 16.7 10.4 14.0 13.1 13.6 15.2

Asset quality & capital (%) GNPA 0.8 1.5 2.8 3.9 3.9 3.3 NNPA 0.4 0.8 1.6 2.3 2.1 1.5 PCR 45.4 51.3 43.8 41.9 46.2 54.5 Credit Costs 0.2 0.3 0.5 0.8 0.6 0.4 Tier I Capital 13.1 13.9 13.7 15.7 15.9 15.9 Total Capital 15.5 16.2 16.1 18.2 18.5 18.7

DuPont (% of avg assets) Net interest income 2.3% 1.8% 2.3% 2.4% 2.4% 2.5% Total Income 2.4% 1.9% 2.3% 2.5% 2.5% 2.6% Operating expenses 0.4% 0.4% 0.3% 0.3% 0.3% 0.3% PPOP 2.0% 1.5% 2.0% 2.2% 2.2% 2.2% Provisions 0.1% 0.3% 0.5% 0.7% 0.5% 0.4% PBT 1.9% 1.2% 1.6% 1.5% 1.6% 1.9% Tax 0.7% 0.4% 0.4% 0.3% 0.4% 0.4% ROA 1.2% 0.8% 1.1% 1.2% 1.3% 1.5% Leverage 13.6 12.9 12.3 11.3 10.6 10.5 ROE 16.7% 10.4% 14.0% 13.1% 13.6% 15.2% Source: Company data, Macquarie Research, January 2021

13 January 2021 22 Macquarie Research LIC Housing Finance (LICHF IN) Macquarie Quant Alpha Model Views

The quant model currently holds a reasonably negative view on LIC Housing Attractive Displays where the Finance. The strongest style exposure is Earnings Momentum, indicating company’s ranked based on this stock has received earnings upgrades and is well liked by sell side s

l the fundamental consensus a analysts. The weakest style exposure is Price Momentum, indicating this t

n Price Target and stock has had weak medium to long term returns which often persist into the e

Macquarie’s Quantitative m

future. a

Alpha model.

d n

682/740 u Two rankings: Local market F (India) and Global sector Global rank in (Banks) Banks Quant % of BUY recommendations 68% (23/34) Local market rank Global sector rank Number of Price Target downgrades 0 Number of Price Target upgrades 3

Macquarie Alpha Model ranking Factors driving the Alpha Model A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their (higher is better). contribution to the current overall Alpha score.

JPMorgan Chase & Co 2.2 JPMorgan Chase & Co

Goldman Sachs Group 1.7 Goldman Sachs Group

Citigroup 0.7 Citigroup

LIC Housing Finance -1.0 LIC Housing Finance

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 Valuations Growth Profitability Earnings Price Quality Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple. revisions. Current score shown below.

JPMorgan Chase & Co JPMorgan Chase & Co 0.0

Goldman Sachs Group Goldman Sachs Group 1.2

Citigroup Citigroup -0.1

LIC Housing Finance 0.4 LIC Housing Finance

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -30% -20% -10% 0% 10% 20% 30% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is returns over the last 5 years. better) and the percentile rank relative to the sector and market. ⇐ Negatives Positives ⇒ Normalized Percentile relative Percentile relative Operating Margin NTM 28% Score to sector(/740) to market(/423) Alpha Model Score -0.95 Price Upside 20% Valuation -0.79 Price to Cash NTM 18% Growth 0.22 Sales to EV FY0 18% Profitability -0.76 Earnings Momentum 0.47 Relative Turnover -20% Price Momentum -0.79 Net Income Margin FY0 -22% Quality -0.43 Capital & Funding 0.08 ROIC FY1 -25% Liquidity -1.08 CPS Growth FY1 -25% Risk -0.42 Technicals & Trading 0.73 -30% -20% -10% 0% 10% 20% 30% 0 50 100 0 50 100 0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Quant. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

13 January 2021 23 Macquarie Research LIC Housing Finance (LICHF IN)

Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie – Asia and USA This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – expected return >10% price movements. adjustments made: Neutral – expected return from -10% to +10% Added back: goodwill amortisation, provision for Underperform – expected return <-10% Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Macquarie – Australia/New Zealand – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property Outperform – expected return >10% speculative. revals, appraisal value uplift, preference dividends & Neutral – expected return from 0% to 10% minority interests Underperform – expected return <0% High – stock should be expected to move up or down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Note: expected return is reflective of a Medium Volatility be aware this stock could be speculative. ROA = adjusted ebit / average total assets stock and should be assumed to adjust proportionately ROA Banks/Insurance = adjusted net profit /average with volatility risk Medium – stock should be expected to move up total assets or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average move up or down at least 25–30% in a year. number of shares

Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks down at least 15–25% in a year. are modelled under IFRS (International Financial * Applicable to select stocks in Asia/Australia/NZ Reporting Standards).

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Recommendation proportions – For quarter ending 31 December 2020 AU/NZ Asia USA Outperform 51.86% 68.50% 66.67% (for global coverage by Macquarie, 5.67% of stocks followed are investment banking clients) Neutral 36.27% 20.84% 33.33% (for global coverage by Macquarie, 5.45% of stocks followed are investment banking clients) Underperform 11.86% 10.66% 0.00% (for global coverage by Macquarie, 3.17% of stocks followed are investment banking clients)

LICHF IN vs BSE Sensex, & rec history

(all figures in INR currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2021

12-month target price methodology LICHF IN: Rs600.00 based on a Gordon Growth methodology

Company-specific disclosures: LICHF IN: Macquarie Group Limited together with its affiliates may have a beneficial interest in the debt securities of the companies mentioned in this report. Important disclosure information regarding the subject companies covered in this report is available publicly at www.macquarie.com/research/disclosures. Clients receiving this report can additionally access previous recommendations (from the year prior to publication of this report) issued by this report’s author at https://www.macquarieinsights.com.

Date Stock Code (BBG code) Recommendation Target Price 13-Nov-2020 LICHF IN Outperform Rs440.00 23-Jun-2020 LICHF IN Outperform Rs375.00 22-May-2020 LICHF IN Outperform Rs400.00 27-Mar-2020 LICHF IN Outperform Rs420.00 31-Jan-2019 LICHF IN Outperform Rs550.00 31-Oct-2018 LICHF IN Neutral Rs457.00 25-Apr-2018 LICHF IN Neutral Rs608.00 30-Jan-2018 LICHF IN Neutral Rs600.00

Target price risk disclosures: LICHF IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

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13 January 2021 26

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