Buy LIC Housing Finance Ltd For Target Rs. 685 By JM Financial Services
LIC HF reported a beat in PAT of +6% JMFe at INR 13.7bn (+25%/-4% YoY/QoQ) led by margins inch up of +16bps QoQ. NIM expansion was driven by ~19bps decline in CoF and one-off interest recoveries of INR 160mn from NPA accounts. NII grew -3%/+8% YoY/QoQ while higher other income from recoveries from write-offs led to further beat in PPoP (- 1%/+7%YoY/QoQ, +7% JMFe). Disbursements growth was healthy at +5%/+24% YoY/QoQ; with loan book reaching INR 3.1trn (+7%/+3% YoY/QoQ). Asset quality improved with decline in GNPA and credit cost of only ~14bps. Management guided for double digit AUM/disbursements growth in FY26, slight decline in margins and credit costs of ~9-15bps. Given the improvement in growth/asset quality trends, we revised our EPS estimates upward by ~5% for FY26E/FY27E. We expect LICHF to deliver avg. return ratios of ~1.6%/13% RoA/RoE over FY26E/FY27E and hence maintain BUY on the stock with a revised TP of INR 685 valuing at 0.8x FY27E BVPS (vs. earlier TP of INR 590 valued at similar target multiple).
* Healthy disbursements growth: Disbursements during the quarter was healthy at INR 192bn (+5%YoY, +24% QoQ); with loan book reaching INR 3.1 trn (+7% YoY, +3% QoQ). The individual home loans grew (+7% YoY/ +3% QoQ) and LAP grew (+6% YoY, +3% QoQ). Project loans grew +15% YoY, +5% QoQ, however, management guided for a cautious approach in the segment with focus only on quality customers with BBB and above ratings. Management guides for double digit AUM and disbursements growth in FY26 backed by higher growth in affordable housing and project loans. The company disbursed ~INR4.3bn affordable housing loans in FY25 and will be focusing more on infrastructure, support and training in this segment aiming at INR 25bn AUM in FY26. We estimate AUM CAGR of ~9% over FY25-27E.
* Strong operating beat led by margins inch up; credit costs favourable: NII growth during the quarter was healthy at +8% QoQ, -1% YoY led by margins inch up of +16bps QoQ. This was led by interest recoveries of INR 160mn during the quarter (total interest recoveries of INR 4bn in FY25). CoFs declined -19bps QoQ and yields moved up +2bps QoQ. Higher other income (+57% QoQ) largely from recoveries from write-offs led to further beat in PPoP (-1%/+7%YoY/QoQ, +7% JMFe). Opex increased to INR 4.5bn (+18% YoY, +27% QoQ) which was elevated due to advertisement, publicity, CSR, contest/competitions, fees and commission, etc. Lower than estimated credit costs of 14bps of total loans (vs -6bps QoQ) was offset by lower tax which led to PAT beat of +6% JMFe at INR 13.7bn (+25% YoY, -4% QoQ). Mgmt. guided for NIMs of ~2.6-2.8% for FY26E (vs 2.9% in 4Q25) as company took 25bps cut in PLR rates in Apr’25 which will be fully transmitted by 1Jul’25. Management aims to keep spreads in the range of ~2% (1.95% in Q4FY25). We expect margins to decline by ~20bps in FY26.
* Healthy asset quality: Gross stage-3/ Net stage-3 fell by -28bps/ -24bps QoQ to 2.5%/ 1.2%. Gross stage-3 for individual housing book improved -11bps QoQ to 1.1%, nonhousing individual loans improved to 3.9% (-74bps QoQ) and project loans improved - 248bps QoQ to 24.5%. PCR on stage-3 moved up +376bps QoQ and stage-2 declined - 68bps QoQ. Total technical write-offs during the quarter stood at INR 1.7bn (6bps of total loans) while recovery from write-offs stood at INR 1bn. Management expects the recovery to continue as the company still has ~INR80-90bn portfolio in default in its project loans which are undergoing recoveries/resolution. Total ECL cover on the book at 1.6% remains comfortable. We build in avg. credit costs over ~24bps for FY26-27E.
* Valuation and view: We expect LICHF to deliver avg return ratios of 1.6%/13% RoA/RoE over FY26E/FY27E on the back of pick up in loan growth (largely from affordable segment) and lower credit costs led by recoveries, partially offset by margin decline. We maintain BUY on the stock with a revised TP of INR 685 valuing at 0.8x FY27E BVPS (vs earlier TP of INR 590 valued at similar target multiple).
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