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Our view  ‐  Valuation re‐rating requires better and consistent performance

LICHF’s Q1 FY22 performance had multiple disappointments and more importantly it was below management’s expectations alluded during Q4 FY21 earnings call in early June. Most dejecting highlights of the quarter were a sharp contraction in NIM and a significant deterioration in GNPL. Disbursements in Individual Home Loan segment at Rs76.5bn were below our estimate too. Growth in the home loan portfolio (78% of AUM) held‐up at 13% yoy due to a lower run‐off. While incremental funding cost remained benign (despite reduction in CP share), the portfolio yield witnessed a material cut on income reversals and lower incremental lending rate. NIM declined from 2.6% in Q4 FY21 to 2.2% in Q1 FY22, causing 17% decline in the NII. Opex rose 20% qoq on Rs1.25‐1.3bn one‐time charge pertaining to wage revision (once in four years), and thus PPOP fell by 23% qoq.

Gross Stage‐3/GNPL increased from 4.1% as of March to 5.9% as of June, exhibiting second wave impact on portfolio quality. The adverse movement in overdue buckets mandated significant augmentation of ECL provisions leading to second successive quarter of elevated credit cost. Despite higher provisions taken, the ECL coverage on Stage‐3 assets has come down from 40% as of March to 34% as of June. There has been some reduction in ECL coverage on the standard portfolio (Stage 1 & 2) as well. With collection efficiency reverting to normal 98% in June (similar to March and December), incremental deterioration in dpd construct is unlikely during Q2 FY22. However, prudential provionsing (augmenting ECL which stands lower than peers across buckets) would call for more than usual credit cost for next couple of quarters.

Gross Stage‐3/GNPL increased from 4.1% as of March to 5.9% as of June, exhibiting second wave impact on portfolio quality. The adverse movement in overdue buckets mandated significant augmentation of ECL provisions leading to second successive quarter of elevated credit cost. Despite higher provisions taken, the ECL coverage on Stage‐3 assets has come down from 40% as of March to 34% as of June. There has been some reduction in ECL coverage on the standard portfolio (Stage 1 & 2) as well. With collection efficiency reverting to normal 98% in June (similar to March and December), incremental deterioration in dpd construct is unlikely during Q2 FY22. However, prudential provionsing (augmenting ECL which stands lower than peers across buckets) would call for more than usual credit cost for next couple of quarters.

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