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Weak quarter; keeping the faith

In 2QFY23, LICHF delivered a muted PAT of INR 3.1bn (-67% QoQ/ +23% YoY), driven by tepid NII (-28% QoQ/ flat YoY). Interest income was impacted (INR 2.75bn) by re-pricing of fixed-rate loans to the floating rate to retain high quality customers. Additionally, Project loans with high yields (12-13%) declined by INR 7.2bn QoQ, which led to a loss of ~INR 950mn in interest income. Operating profit was at INR 9.4bn (-35% QoQ/ flat YoY). Further, higher elevated credit costs also impacted bottom-line (ann. provisions % of avg. loans: 0.6% vs. 0.5% QoQ). Other highlights of 2QFY23 are: i) disbursement was at INR 168bn (+10% QoQ/ +4% YoY) as Individual formed 85% of disbursement, ii) loan book was at INR 2.62trn (+3% QoQ/ +10% YoY), led by individual home loans – share of retail home loans in the mix increased to c.83% (+70bps QoQ), iii) margins dropped to 1.8% (-74bps QoQ/ - 20bps YoY), iv) collection efficiency (CE) stabilised at 99% in Sep’22; GS3 ratio slightly improved to 4.9% (-6bps) and GS2 ratio was broadly stable QoQ at 4%, thus GS2+GS3 was at 8.9% (largely unchanged QoQ). OTR (restructured assets) book stood at 1.3% (vs. 1.5% QoQ) of loans, v) Coverage on GS3 expanded to c.44% (+330bps QoQ). Mgmt. believes FY23 NIM should improve YoY (FY22 NIM: 2.3%) as the HFC has hiked interest rates by 175bps since Jun (impact to be visible from 3QFY23) and will pass-on further increase in CoF. We expect LICHF to deliver loan CAGR of 12% over FY22-24E, however we reduce our earnings estimate for FY23E/ FY24E by 6%/ 7%, respectively, on account of slower NIM uptick. Maintain BUY with TP of INR 470 valuing the HFC at 0.9x FY24E ABV.

* AUM growth continued the momentum: In 2QFY23, disbursement was at INR 168bn (+10% QoQ/ +4% YoY). Individual home loan disbursement (+9% QoQ/ flat YoY) constituted 85% of disbursement. The share of disbursements from small cities (excl. the top 7) inched-up 100bps sequentially to 58%. As of 2QFY23, the loan book stood at INR 2.62trn (+3% QoQ/ +10% YoY), led by individual home loans (+3% QoQ/ +15% YoY), while weighed down by LAP (flat, QoQ/ YoY) and project finance (-6% QoQ/ -23% YoY). Resultantly, the share of retail home loans in the mix increased to c.83% (+70bps QoQ). Reported prepayment rates slid to 9.7% (vs. 10.4% QoQ). In 2QFY23, LTV was at 48% (vs. unchanged QoQ) and IIR was at 29% (vs. 28%). We forecast a loan book CAGR of 12% over FY22-24E.

* Subdued operational performance, impacted by margin compression: 2QFY23 PPOP was subdued at INR 9.4bn (-35% QoQ/ flat YoY), impacted by tepid NII (-28% QoQ/ flat YoY). Interest income was impacted (INR 2.75bn) by re-pricing fixed-rate loans with a vintage of at least 4yr to the floating rate to retain high quality customers. Additionally, Project loans with high yields (12-13%) declined INR 7.2b QoQ, which led to a loss of ~INR 950mn in interest income. During 2QFY23, incremental Cost of funds was 6.9% (vs. 5.4% QoQ). Hence, margins dropped to 1.8% (-74bps QoQ/ -20bps YoY). Mgmt. believes FY23 NIM should improve YoY (FY22 NIM: 2.3%) as the HFC has hiked interest rates by 175bps since Jun (impact to be visible from 3QFY23) and will pass-on further increase in CoF. We forecast NII growth of 12% over FY22-24E.

* Asset quality broadly steady QoQ; coverage ratio improved: Collection Efficiency (CE) stabilised at 99% in Sep’22 (steady QoQ). GS3 ratio slightly improved to 4.9% (-6bps) and GS2 ratio was broadly stable QoQ at 4%. Thus, GS2+GS3 was at 8.9% (largely unchanged QoQ). OTR (restructured assets) book stood at 1.3% (vs. 1.5% QoQ) of loans. Coverage on GS3 expanded to c.44% (+330bps QoQ).

* Whole OTR book is classified under GS2 and in moratorium

* Retail book constituted largely 2/3rd of the OTR book

* GS3 ratio for individual housing stood at 1.7% (-20bps QoQ) while developer rose to 42.2% (+724bps QoQ), partly impacted by reduction in the denominator

We estimate avg. credit cost of 35-45bps over FY22-24E vs. historical average of 25- 30bps.

* Maintain BUY with TP of INR 470: LICHF will benefit from strong parent support, robust retail franchise across the country, and moderate borrowing costs which should aid growth. Also, how margin trajectory will move given easing competitive intensity in housing finance is to be closely looked at. We expect LICHF to deliver loan CAGR of 12% over FY22-24E, however we reduce our earnings estimate for FY23E/ FY24E by 6%/ 7%, respectively, on account of slower NIM uptick and slight upmove in credit costs. We value LICHF at 0.9x FY24E ABV for a TP INR 470.

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