Stock corner: Retain ‘buy’ on LIC Housing Finance, cut EPS by 4%

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Published: October 22, 2019 2:01 AM

Mix of non salaried HL (100 bps q-o-q) has edged higher, suggesting LICHF may be eyeing this segment to lift core HL growth by taking share from peers facing liquidity issues, protect yields and offset impact of fall in LAP/developer loans.

Stock corner, buy, LIC Housing Finance, EPS, GNPA, LIC,  LIC Housing Finance limited,  LIC Housing Finance fd,  LIC Housing Finance ltdMaintaining asset quality would be the key though. Multi-year low pre-payment rates (9.6% Q2) also aided book growth.

PBT missed our estimate slightly due to higher provision, but lower tax led to PAT beat. Asset quality disappointed, likely led by rise in both developer and retail GNPA. Stronger HL disbursal growth and better margins q-o-q despite rise in HL mix are positives. Higher developer GNPA is not surprising, but it represents ~7% of book. But, rise in retail GNPA is a concern. We cut FY20-21E EPS by 4%. At 1x FY21E BV, valuations appear reasonable. Retain Buy.

PBT miss, but PAT beat on lower tax: Q2 pre-tax profit rose 14.9% y-o-y, (2.6% miss vs JEFe) as a slight NII beat due to better margins was offset by higher operating costs and higher credit costs. Cost to income (Q2 11.2%) rose 140 bps y-o-y due to higher employee costs, higher depreciation (lease accounting change per Ind AS) and higher fee & commission. PAT grew 34.7% y-o-y to Rs 770 crore (+27% vs JEF est) due to impact of lower corporate tax. H1 effective tax rate was 18.5%.

In line loan growth; HL disbursal growth picks up: Loan book grew 14.5% y-o-y (Q1 16.5%). Core home loan (HL) growth accelerated to 12.3% y-o-y (Q1 11.4%), but LAP (20.7% y-o-y vs 26.8% Q1) and developer ( 26.2% y-o-y, Q1 62%) loan book slowed sharply. Overall disbursal fell 14.7% y-o-y. HL disbursal growth accelerated to 16% y-o-y (Q1 8.4%); while disbursal in LAP (-31.5% y-o-y) and developer loans (-84.9% y-o-y) declined y-o-y. Mix of non salaried HL (100 bps q-o-q) has edged higher, suggesting LICHF may be eyeing this segment to lift core HL growth by taking share from peers facing liquidity issues, protect yields and offset impact of fall in LAP/developer loans. Maintaining asset quality would be the key though. Multi-year low pre-payment rates (9.6% Q2) also aided book growth.

Margins surprise positively: Q2 NIM rose 7 bps q-o-q (flat y-o-y) to 2.42%, ahead of our 2.36% estimate despite lower mix of higher yielding LAP, developer loans. Avg yield (calc) rose 10 bps q-o-q. Avg cost of funds (end Sept) fell 10 bps q-o-q to 8.36% as marginal funding cost fell to 8.04% (vs 8.24% in Q1). Falling bond yields and polarisation of funding towards AAA rated NBFCs/HFCs with strong parent/ franchise is driving LICHF’s funding cost lower.

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