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Volatility to stay; visibility and certainty lacking

LIC Housing Finance’s (LICHF) Q1FY22 performance once again exhibited volatile operating metrics: 1) stage-3 rose 180bps to 5.93% and 2.3% of portfolio was restructured; 2) exponential stress in corporate developer segment at >50% (24% stage-3 + 30% restructuring); 3) despite 140bps credit cost, cumulative provisioning was only 2%; 4) disbursements were down 60% QoQ and loanbook was flat; 5) NIMs contracted >40bps to 2.2%; 6) Rs1.2bn of wage revision arrears (w.e.f. Apr’17) was accounted now. Retail restructuring has not been fully implemented and there will be further flows in Q2FY22.

Ageing of restructured and stress pools (unless upgraded / recovered) will call for higher provisioning. Also, growth momentum and provisioning risk buffer advances the need for fund-raising. LICHF is awaiting instructions from stock exchanges on preferential issue to LIC. Valuation will be capped below book till visibility improves. Downgrade to HOLD (from Add) with a revised target price of Rs435 (earlier: Rs543, assigning 0.9x FY23E ABV). Key risks: 1) earlier resolution of the existing stress pool, and 2) capital requirement to support growth momentum.

* Stage-3 up 180bps to 5.93%; cumulative stress pool at 11.3%: Stage-3 assets have risen from 4.12% to 5.93%; of this, individual home loan stage-3 has grown from 1.9% to 2.6% (Rs47.3bn), individual non-home loan from >9% to >15%, while stress in developer portfolio spiked (18% to 24.4%). Stage-2 pool has moderated from 6.19% to 5.38% (cumulative stress pool {stage-2/3} is up 100bps to 11.3%). Management indicated that ~30% of customers in the stress pool are making part or full payments; however, the payments are not enough to meet overdues and get upgraded. Also, collection efficiency on regular accounts was sustained at 98% (similar to Mar’21 and Dec’21 levels as was indicated earlier).

* Restructuring at 2.3%; provisioning towards it routed through impairment reserves: Restructured pool further spiked to Rs53.5bn (from Rs30bn in FY21) constituting 2.3% of the loanbook. Of this, Rs47bn of corporate developer loans across 127 accounts (vs Rs23.6bn in 93 accounts) were restructured. This is almost equivalent to 30% of the corporate developer book. Within retail segment, LICHF has invoked restructuring of Rs14.34bn under OTR 1.0 (Rs12bn in FY21, Rs2.34bn in Q1FY22) and Rs400mn under OTR 2.0. However, of this, merely Rs6.5bn has been implemented (only 30bps of individual loans). We believe retail restructuring (outstanding at a paltry 30bps) has not been fully implemented and there will more flows in Q2FY22. Also, restructured assets are categorised under stage-1 and stage-2 pools. Excess provision on the restructured pool is appropriated out of P&L account into impairment reserves. ECLGS disbursements in Q1FY22 were at Rs1.4bn and cumulative outstanding under ECLGS schemes was hardly Rs4.5bn.

* Corporate stress pool at >50%: Corporate GNPAs further increased to 24% (from 18% in FY21). In addition, there was incremental restructuring of 15% of the developer book during the quarter. Cumulative stress pool in corporate developers book now stands at 54% (24% GNPA + 30% restructuring).

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