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Earnings beat on higher NIMs; provision cover improves

* LIC Housing (LICHF) reported Q3 earnings of Rs7.6bn (+5.5% yoy), much above our estimate of Rs5.7bn and consensus estimate of Rs4.7bn. The earnings beat was driven by higher-thanexpected NIMs and lower credit costs. The sequential improvement in NIMs was aided by the absence of interest reversals (due to restructuring) and the re-pricing of the liability back book. Lower gross stage 2/3 assets, along with higher ECL provisions, should provide comfort to investors. The pickup in disbursements and improving NIMs augur well for profitability.

* From a medium-term perspective, we think that improving real estate sales by developers, reducing inventory levels and the increasing trend of developer consolidation bode well for an entrenched housing finance player like LIC Housing. We factor in a ~13% AUM CAGR over FY23-24E, resulting in an 18% CAGR in operating profit and RoE of 13-14%.

* We retain our Buy rating on LICHF at a Mar'23 TP of Rs550, valuing the firm using the excess return on equity (ERE) method. Our TP implies a Mar'24E P/BV of 1x for FY24E RoE of ~14%. The current price multiple of 0.7x FY23E BVPS offers excellent risk-reward for investors. Key downside risks: asset quality deterioration in non-core housing and project loan portfolios; slippage from one-time restructured (OTR) asset pool.

* Q3 result highlights: AUM grew by 10.5% yoy/2.4% qoq, driven by 5.4% qoq growth in disbursements across all segments. The share of core housing loans within the portfolio increased by 120bps qoq on the back of higher recoveries in the developer and non-housing loan book. LICHF restructured ~Rs4.9bn in loans in Q3 vs. Rs21.4bn in Q2. As there weren't any interest reversals in Q3 due to restructuring, asset yields moved back up to their normal trajectory, while the back book liability re-priced down by 7bps qoq. Computed NIMs, thereby, increased by 44bps qoq. With ~60-65% of liabilities being fixed in nature and asset yields subject to quarterly revisions, we expect NIMs to sustain even in a rising rate environment. LICHF recategorized ~1% of AUM to GNPA due to the RBI's IRACP clarification. As per IndAS, these loans are in Stages 1 and 2. In Q3, LICHF took an incremental provision of Rs2.3bn for these loans. Total ECL provisions stood at 2.35% of AUM.

* We forecast a disbursement CAGR of 18% over FY22-24E, resulting in an AUM CAGR of 13%. NIMs are expected to revert to their normal 2.4% levels from FY23E. LICHF has already taken up the actuarial valuation on benefits for its retiring employees in FY22. We expect the opex-to-AUM ratio to normalize to 32bps over FY22-24E from 39bps in FY22E. We raise the PCR from the current 39% level to 45% by FY24, with stage 2/3 assets retaining their current standard asset provisioning ratios. Consequently, credit costs are expected to decline from 84bps in FY22E to 33bps by FY24E. We forecast LICHF's RoA to average 1.2-1.3% over FY23-24E, resulting in RoE of 13-14%.

* We retain our Buy rating on LICHF with a Mar'23 TP of Rs550, valuing the firm using the ERE method. Our TP implies Mar'24E P/BV of 1x for FY24E RoE of ~14%. Key downside risk: further asset quality deterioration in non-core housing and project loan portfolios.

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