Maintain ‘buy’ on LIC Housing Finance with Rs 525 TP

By: |
August 03, 2021 1:00 AM

It delivered a healthy loan growth in Home loans. However, LAP and developer book growth has slowed down. Collection efficiency improved to 98% in Jun’21.

We reiterate our BUY rating with a TP of Rs 525/share (1.1x FY23E BVPS).We reiterate our BUY rating with a TP of Rs 525/share (1.1x FY23E BVPS).

Miss across the board; asset quality surprises negatively: PAT declined by 81% YoY (78% miss) to Rs 1.5b in 1QFY22. Higher than estimated finance costs of Rs 36b led to a 13% miss on our NII estimate. Elevated credit costs of Rs 8.3b (est. Rs 4.5b) added to the large PAT miss. Large wage revisions undertaken in 1QFY22 have led to a spike in operating expenses, leading to a weak operating performance (PPOP miss of 23% at Rs 10.3b. Adjusted for wage revision, it was a 13% miss).

It delivered a healthy loan growth in Home loans. However, LAP and developer book growth has slowed down. Collection efficiency improved to 98% in Jun’21. Asset quality surprised negatively, with a sharp rise (+44% QoQ) in GS3 to Rs 138b. GS3 rose to 5.9% v/s 4.1% QoQ. The GS3 coverage ratio declined by 650bp QoQ to ~33%. Total restructured pool stood at Rs 53.5b (2.3% of loans), of which a large part (Rs 47b) is Builder loans.

While asset quality pain has been pronounced, we draw comfort from LICHF’s ability to source low-cost liabilities (due to its strong parentage), favorable Housing Finance cycle, and 11-12% RoE. Valuation at 0.9x FY23E P/BV is attractive. Even though LICHF is still working with the stock exchanges to resolve issues around the capital raise, we have it factored into our estimates. We reiterate our BUY rating with a TP of Rs 525/share (1.1x FY23E BVPS).

Second COVID wave impacts business activity; disbursements impacted: Home loan/LAP/Builder loan disbursements stood at Rs 76.5b/ Rs 7.65b/ Rs 2.4b and were 40%/ 35%/ 20% of 4QFY21 levels. Total loan book was flat QoQ at Rs 2.32t (up 11% YoY). Loan mix in 1QFY22 was tilted slightly in favour of Home loans ~78.3%. The share of disbursements from cities other than the top seven continues to decline at 56% v/s 61%/58% in 3Q/4QFY21.

Highlights from the management commentary: The management expects a higher disbursement volume run-rate in 2QFY22 (similar to 4QFY21). Once every four years, there is a wage revision. LICHF has paid Rs 1.3b in arrears in 1QFY22. It expects a 15% YoY rise in employee expenses in FY22.

Valuation and view: We expect the capitalisation/ leverage concerns for LICHF to be ironed out once they are able to resolve the stalemate on the equity capital raise with the exchanges. However, asset quality has surprised us negatively. Given its parentage, it has been able to raise debt capital at low rates, which should keep margin healthy in a highly competitive environment.

We cut our FY22E EPS estimate by ~40% to factor in higher opex (because of the one-time impact from wage revisions) and elevated credit costs. While we expect FY22E to be impacted, we estimate ~1.1%/12% RoA/RoE in FY23E, after having pencilled in the likely impact of the preferential allotment of fresh equity shares to the promoter. We maintain our Buy rating with a TP of Rs 525/share (1.1x FY23E BVPS).

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