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Healthy growth in disbursements; asset quality deterioration was a disappointment

* PAT fell 5% YoY (49% miss) to INR3.9b in 4QFY21. While PPOP of INR13.4b was ~11% above our estimate, elevated credit costs of INR9.8b (est. INR2.2b) resulted in this large PAT miss. PAT grew 14% YoY to INR27b in FY21, led by ~10% growth in operating profit.

* LICHF delivered strong QoQ growth in Home loans, while collection efficiency remained stable sequentially at 98% in Mar’21. Asset quality surprised negatively with a sharp rise (+62% QoQ) in GS3 to INR96b. The increase is largely driven by the Individual segment.

* Announcement of an infusion of fresh equity capital from promoter LIC is a positive as it will mitigate the risk of low T1 capital (v/s peers) and high leverage.

* While asset quality pain has been pronounced, we draw comfort from LICHF’s ability to source low-cost liabilities (due to its strong parentage), favorable Housing Finance cycle, and 14-15% RoE. Valuation at 1x FY23E P/BV is attractive. We factor in the announcement of a capital infusion into our estimates. We reiterate BUY with a TP of INR600/share (1.2x FY23E BVPS).

Disbursements clock all-round growth

* Home loan disbursements continue to recover sharply and increased 114% YoY to INR190b. While LAP disbursements grew 6% YoY to INR22b, Builder loan disbursements nearly tripled to INR12b.

* The total loan book grew 5% QoQ and 10% YoY to INR2.32t. The share of Home loans is up ~85bp YoY to ~80% now.

* The share of disbursements from cities other than the top seven is down to 58% from 61% QoQ.

Decline in the cost of funds helps spreads

* Yields fell 33bp QoQ and 70bp YoY and cost of funds declined by 72bp QoQ and 127bp YoY to 6.7%. As a result, spreads improved by 39bp QoQ and 58bp YoY to 1.9%.

* The incremental cost of funds raised during 4QFY21 was 5.2%, down 10bp QoQ. The share of bank/CP borrowings/deposits is up ~47bp/27bp/120bp QoQ to 25%/9%/6%.

* We expect this lower CoF advantage to sustain, especially in context of higher cost NCDs of INR250-280b getting re-priced lower in FY22 and equity capital infusion from LIC.

Asset quality surprises negatively

* GS3 increased to 4.1% v/s 2.7% QoQ. The company suggested that post vacation of the SC standstill order in Mar’21, it undertook a revaluation of all loan exposures and made adequate provisions. While ECL to EAD rose to 1.7% from 1.34% QoQ, PCR on Stage 3 fell to 40% (50% in 3QFY21).

* Provisions in 4QFY21 at INR9.8b (est. INR2.3b) were a big surprise to us. LICHF provided INR2.05b to bridge the gap between IRAC norms based provision and Ind AS provisions. Even after adjusting for this, provisions were elevated due to a sharp spike in NPAs.

* We bake in elevated credit costs of ~50bp in FY22E considering the uncertain environment.

Highlights from the management commentary

* Collection efficiency from regular accounts stood over 90% in Apr-May’21. This was a positive given the severity of the second COVID wave.

* Loans worth INR30b (~1.3%) were restructured under RBI OTR 1.0. The management said an additional ~1% of the loan-book could be restructured under RBI OTR 2.0.

* No major resolutions are expected in the Project loan book in the near future.

* It has implemented e-NACH and enabled online collections, which should lead to lower delinquencies and improvement in Retail asset quality.

Capital infusion to address leverage risk

* Preferential allotment of 45.4m shares to LIC will increase the promoter stake to 48.5% from 40.3% currently. This will mitigate leverage risk hovering over the company for the past several years.

* This capital infusion should substantially address all concerns with regards to adequacy of T1 capital, with leeway to raise any new T2 capital.

Valuation and view

* Stamp duty cuts in FY21 were definite tailwinds for the Real Estate sector. We expect pent-up demand to be equally pronounced in FY22. We model a 16% disbursement CAGR over FY21-24E, leading to ~12% loan book CAGR over the same period.

* While the growth momentum has been strong, with healthy spreads, LICHF has addressed the persistent concern on capitalization, with capital infusion from promoter LIC. However, deterioration in asset quality and elevated credit costs have continued to surprise us negatively.

* Given its parentage, it will be able to borrow at lower interest rates, which should keep its margin healthy in this highly competitive landscape. We expect demand in Home loans to remain buoyant. Valuations at 1x FY23E P/BV factor in risks of a volatile asset quality profile.

* We reduce our FY22E EPS estimate by 4% and increase our FY23E EPS by 3% to factor in higher NII growth and elevated credit costs. We estimate ~1.3%/14% RoA/RoE over the next two years, penciling in likely impact of the preferential allotment of fresh equity shares to the promoter. We maintain our Buy rating, with a TP of INR600/share (1.2x FY23E BVPS).

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