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Growth and Margins remain key monitorables’

Earnings higher on lower credit cost; disbursements in-line, margin contracts

LIC HF delivered a material 8% beat on our PAT estimate on benign credit cost and asset quality improvement. NII/PPOP were marginally lower than our expectation with NIM dipping sequentially and opex being higher, even as the disbursement/loan portfolio growth were in-line with expectation and recoveries from written-off loans were larger.

Disbursements stood at Rs165bn (up 28% qoq/12% yoy), comprising of IHL Rs130.5bn (up 19% qoq/4% yoy), NHI-LAP Rs19bn (up 36% qoq/15% yoy), and wholesale (DF + HFC) Rs14bn (up 168% qoq/223% yoy). Portfolio run-off rate in IHL was lower in Q2 FY25 at 13.5% (14.4% in Q1) and the lumpsum prepayment rate for H1 FY25 stood at 9.4% (10.4% in FY24). Loan portfolio growth improved to 6% yoy (4.4% in Q1) with IHL growth at 7% yoy.

Portfolio Yield declined by 6 bps qoq while CoF declined by 3 bps, resulting in 5 bps shaving-off of NIM (2.71% v/s 2.76% in Q1). The significant increase in Opex during the quarter was driven by higher distribution cost (improvement in business volume) and provision towards wage revision. Stage-2/Stage-3 loans declined by 3%/5% qoq in absolute terms on account of resilient collections (controlled flows) and smaller NPL recoveries. Write-offs in the quarter were lower at Rs2.9bn versus Rs7.4bn in Q1. With coverage stable across buckets, the asset quality improvement underpinned a modest credit cost of Rs0.8bn/11 bps (H1 FY25 credit cost stands at 15 bps). Notwithstanding some margin compression, the RoA/RoE for Q2 FY25 was steady at 1.8%/16%.

Management continues to expect growth recovery and sturdy margins

LIC HF expects loan growth to further improve in H2 FY25 aided by 1) resilient home loan demand, 2) seasonally stronger traction in IHL, 3) a pick-up in recently launched Affordable HL product (250 bps higher pricing than prime HL), 4) renewed emphasis on wholesale lending through selective/prudent credit (not chasing yield) for project finance and HFC lending, 5) stable competition from banks (balanced aggression) and 6) continuance of palatable trends in lumpsum prepayment/BT Out. NIM in H2 FY25 is expected around the H1 level with 1) estimated decline in funding cost (lower cost for incremental NCDs and quicker repricing of bank loans with >80% linked to Repo and other EBLRs) and 2) likely resilience demonstrated by portfolio yield (aided by product mix shift, recent tweaking of rate/pricing structure and consistent reduction in NPLs). Stage-3 improvement is expected to continue with resolution discussion in advanced stages in 4-5 large NPL accounts (one NPL of ~Rs4bn likely to be resolved in Q3). Focus also remains on collecting/resolving smaller accounts in retail/commercial segments. Credit cost would significantly undershoot the earlier guidance of 25-30 bps.

Re-rating contingent on growth improvement with margin stability

Our FY25/26 estimates get upgraded on moderation of credit cost assumptions. However, any significant re-rating of the stock depends on delivery on the growth and margin guidance. We estimate 8% loan growth in FY25 and 11-12% growth in FY26/27, factoring a conservative lift in growth from scaling-up of Affordable HL and Developer/HFC financing. We expect NIM to remain resilient in H2 FY25 and afterwards declining moderately as the rate downcycle plays out. For the medium-tolonger term delivery of 11-12% loan growth and 13-14% RoE, the stock is moderately priced at 0.8x FY26 P/BV. Retain ADD rating with 12m PT of Rs765.

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