Uncertainty on stress accretion, low NPA buffer…

About the stock: LIC Housing Finance (LICHF) is among the largest HFCs in India with an extensive distribution network of 282 marketing office and 2421 employees.

* Total 91% of LICHF’s customers are salaried and 9% are self employed

* Retail home loans form 78.3% of the overall book

Q1FY22 Results: Subdued overall performance; asset quality concern looming.

* NII up 4.5% YoY, down 15.3% QoQ, NIMs down 46 bps QoQ to 2.2%

* Higher provisions at | 830 crore, C/I ratio rise impacted PAT at | 153 crore

* Stage 3 assets rose 181 bps from 4.12% to 5.93% & 2.3% was restructured

What should investors do?

LICHF has given ~57% return over the past year. However, we believe a healthy recovery on stressed asset is necessary for better valuations.

* We retain our HOLD rating on the stock

Target Price and Valuation: We value LIC Housing at ~0.9 FY23E BV and revise our target price for the stock at | 400 per share from | 475 earlier.

Key triggers for future price performance:

* Exponential stress >50% in developer book remains key concern

* Low provision buffer could call for elevated credit cost ahead

* Elevated asset quality concerns to keep margin improvement limited

* Pick-up in housing demand amid soft interest rates to aid growth.

Alternate Stock Idea: Apart from LICHF, in our coverage we like HDFC Ltd.

* HDFC Ltd is largest NBFC HFC with consistent performance over various business cycles

* BUY with a target price of | 3100

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