Add LIC Housing Finance Ltd For Target Rs.475 - Yes Securities
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Re‐rating requires consistent performance
Our view
We believe that LICHF’s improved growth and asset quality performance got masked under a weak reported P&L. The latter was a result of transient factors like income reversal on OTR accounts, one‐off charge related to employee retiral benefits and restoration of ECL coverage on Stage‐3 assets. On key fundamental trends, the co. delivered a good performance that included a strong recovery in disbursements/home loan portfolio growth, marginal increase in portfolio spread and material reduction in Stage‐3 as well as Stage‐2 assets.
The traction in disbursements/growth is expected to continue due to significant increase in market volumes and impetus on competitive pricing by LICHF. NIM would likely stabilize or gradually recover aided by much higher incremental spread. With 99% collection efficiency for non‐delinquent accounts and net addition in NPL bucket likely to be benign, the credit cost should stabilize at much lower level in H2 FY22.
The stock trades at a low valuation of 1.1x FY24 P/ABV for a likely 1.2‐1.3% RoA and 13‐14% RoE delivery over FY23‐24. We retain an ADD rating with 12m PT of Rs475. The key risk factors are lower ECL coverage on Stage‐2 assets, below‐comfort capital adequacy and volatility in performance.
Result Highlights
* NII, PPOP and PAT were 11%, 19%, and 61% below our estimates respectively, despite better‐than‐expected portfolio growth of 2.2% qoq and 11.4% yoy. Key factors which dragged performance were NIM contraction and continuance of elevated credit cost.
* On growth front, performance was reasonably strong underpinned by significant recovery in individual loan disbursements (up 87% qoq/35% yoy) ‐ growth in retail home loan portfolio was robust (up 3.4% qoq/15% yoy) despite run‐off rate normalizing to 18%.
* Aided by better collection efficiency, asset quality improved with PAR 30 portfolio declining by 1.8% qoq (80 bps decline in Stage‐3 and 100 bps reduction in Stage‐ 2).
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