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Growth and Yield key monitorables

LIC HF reported higher than expected PAT mainly on lower provisions, as PPOP/NII were 4%/5% below our estimates. Disbursements were softer than expectations, GNPLs (incl. write-offs) rose in-line with typical seasonality and NIM witnessed a material fall (even on like-to-like basis) with the decline in portfolio yield. Lower credit cost was partially underpinned by provision releases on upgraded (backward flown) accounts.

Soft disbursements and significant NIM decline; asset quality moved on usual lines

Overall disbursements stood at Rs129bn (-29% qoq/+19% yoy), lower than our estimate of Rs135bn. IHL and NHI (LAP) originations grew by 16% and 28% respectively on a low base. IHL prepayment rate was at annualized 9.4% in the quarter. LIC HF’s loan portfolio grew by 0.6% qoq/4.4% yoy and the growth was marginally better before the write-off of Rs7.3bn. Adjusted for write-offs, Stage-3 assets rose 8% qoq and the level increased to 3.6%; and this movement was in-line with seasonal pattern. Stage-2 assets declined in absolute terms representing controlled flows from Stage-1 due to strengthened collection efforts. While ECL coverage level was largely maintained on Stage-3, it fell significantly on Stage 1 & 2 assets. Credit cost for the quarter was just 20 bps.

NIM decline of 39 bps qoq to 2.76% was much sharper than our expectation of 20 bps. It was caused by lower interest collection from NPLs (shortfall of Rs0.5-0.6bn from transient challenges), presence of ~Rs1bn interest recovery in preceding quarter (from lumpy NPL resolution) and pressure of BT leading to re-pricing of some existing loans. Excluding interest collection & recovery from NPLs, the portfolio yield fell by 12 bps qoq as per our computation. CoF was stable at 7.8% with incremental CoF witnessing a marginal decline and negligible impact from repricing of bank borrowings.

Management retains growth and margin guidance; expects 30 bps credit cost

Notwithstanding the soft start both on growth and margins, LIC HF continues to guide for 20-25% disbursement growth, double-digit loan portfolio growth and NIM between 2.7-2.9% for the year. Loan originations has picked-up from the second half of Q1 FY25 and July has been strong too. Basis strong momentum in Individual Loans, opportunity in Project Loans, retention of good customers through repricing and likely lower incremental write-offs, the loan portfolio growth is expected to improve through the year. Sustaining NIM around 2.8% would be a tough ask given persistent pressure on portfolio yield from lower yield of new book and challenges in retaining pricing on some of the back book. CoF is estimated to remain firm given stickiness in the cost of NCDs and Bank Loans. Management has guided for 30 bps of credit cost in current year on the back of controlled flow rates, adequate Stage-3 coverage, limited incremental write-offs and expectations of significant NPL resolutions.

Growth and Yield key monitorables; change rating to ADD

Earnings cuts of 2-4% for FY25/26 have come through on tweaking of loan growth and margin assumptions but after considering a lower credit cost. Stock trades at 7.5x P/E and near 1x P/BV on FY26 estimates. In our view, some uncertainty over stabilization of margins and delivery of double-digit growth would weigh on valuation in near term. To come back on re-rating path, LIC HF needs to deliver strong disbursements growth, steady margins and significant NPL resolutions in ensuing quarters. Rate ADD (earlier BUY) with a lowered 12m PT of Rs765.

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