Buy LIC Housing Finance Ltd For Target Rs.500 - Yes Securities
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Improved outlook on NIM and Asset Quality
Our view
LIC HF delivered a better-than-expected performance in Q4 FY22 with NII/PPOP/PBT beat of 12%/14%/22%. Notably, this performance was aided by material NIM expansion (largely driven by CoF decline) and lower credit cost (underpinned by 15%/5% qoq reduction in Stage-2/Stage-3 assets). Collection efficiency was strong through the quarter (March at 99%) and there were significant NPL recoveries in builder/high-value loan segments. Stage-2 ECL coverage was maintained while Stage3 coverage was raised. Portfolio construct has reverted to pre-pandemic level and ECL coverage is better, which provides visibility of moderate credit cost for coming quarters.
NIM expansion in Q4 FY22 was driven by a) positive re-pricing of liabilities (CoF down by 20 bps), b) lending rates hike effected in January across products (restricted Portfolio Yield decline) and c) significant recoveries of NPLs/w-off loans (likely would include interest recovery). While the incremental CoF (declined in Q4 FY22) could harden in coming quarters, the overall CoF is expected to move up gradually considering that 60%+ of liabilities are on fixed rate. On asset side, 90% of the portfolio is on floating rate and back-book re-pricing takes place quarterly. The co. has increased lending rates by 20-25 bps recently across product categories. Thus, NIM outlook is encouraging in a rising rate environment.
On growth front, disbursements were below expectations in the quarter due to 3rd wave impact in the initial part. Lumpsum pre-payment rate in home loans was stable at 10.5-11%. Management expects 15% disbursement growth in FY23, with project loans pegged at 10% of incremental business v/s 5% of loan portfolio currently. Loan portfolio is estimated to grow in double-digits in the current year. NIM for FY23 has been guided at 2.4-2.5% v/s 2.3% in FY22.
We raise FY23/24 earnings/BV estimates materially by lifting NIM assumptions and marginally moderating credit cost estimates. Hence, we now expect average RoA/RoE delivery of 1.4%/14% over FY23-24. In the context of enhanced outlook and undemanding valuation (0.8x/4.7x FY24 PBV/PE), we upgrade the stock to BUY (from ADD) with a 12m TP of Rs500.
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