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Growth drivers back in place; expect a normalized FY22

LIC Housing Finance (LICHF) is one of the largest Housing Finance companies in India with an extensive distribution network.

Special rates to capture demand:

LICHF extended its lowest home loan rate of 6.66% for the festive season to borrowers having a CIBIL score of 700 and above, for loans up to INR20m (the earlier limit was INR5m). By segmenting borrowers based on their CIBIL score, irrespective of the category of employment, LICHF aims to cater to a larger borrower base. This move is in tune with the demand for larger spaces and affordability, and good traction for loans in the ticket size of INR5-20m.

Disbursement growth to pick up:

Retail Home loan demand was impacted by localized lockdowns in 1QFY22. Nevertheless, individual Home loan disbursements comprehensively exceeded YoY levels. We expect pent-up demand to be pronounced in the remaining nine months of the current fiscal year, leading to healthy growth in disbursements for FY22. We expect 11% loan book CAGR over FY21-24E. Since Jun’21 there has been an improvement in economic activity, and collection efficiency has also improved to 98%, which is encouraging. The sharp rise in Stage 3 loans is concerning. The same got exacerbated due to the impact of the second COVID wave. We now estimate a credit cost of ~85bp/60bp in FY22E/FY23E.

Decline in the cost of funds helps spreads:

After the liquidity crisis in Sep’18, parentage and credit rating have been of paramount importance for NBFCs/HFCs. LICHF is well-placed on this front. Its incremental CoF stood ~5% in 1QFY22. With a decline in the CoF, it should be able to keep spreads stable in the wake of pricing pressure from Banks. 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.

Partnership to augur well for LICHF:

India Post Payments Bank (IPPB) and LICHF recently announced a strategic partnership for providing Home loan products to over 45m customers of IPPB. Through its robust and extensive network of 650 branches and more than 136,000 banking access points, IPPB will make LICHF’s Home loan products accessible to its customer’s panIndia. The alliance will also provide LICHF access to IPPB’s on-ground workforce of nearly 200,000 postal employees that are equipped with micro ATMs and biometric devices through its innovative Doorstep Banking Service. This will play a significant role in offering LICHF’s Housing loans.

Valuation and view:

With the completion of the preferential equity allotment to its promoter LIC, the capitalization/leverage concerns for LICHF now been ironed out. Given its parentage, it has been able to raise debt capital at low rates, which should keep margin healthy in a highly competitive environment. While asset quality pain has been pronounced so far, we draw comfort from LICHF’s ability to source low-cost liabilities, favorable Housing Finance cycle, and 11-12% RoE. While we expect FY22E to be impacted, we estimate ~1.1%/12% RoA/RoE in FY23E, after having penciled in the preferential allotment of fresh equity shares to the promoter. We maintain our Buy rating with a TP of INR525/share (1.1x FY23E BVPS).

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