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Strong margins and asset quality but meek growth

LIC HF delivered NII/PPOP/PAT beat of 4%/6%/3% on our estimates, notwithstanding a) muted growth performance, b) augmentation of ECL coverage and c) one-off provision on AIF exposure. The operational performance was buoyed by margin resilience and asset quality improvement.

Loan portfolio grew by modest at 1.2% qoq/4.8% yoy with overall disbursements at Rs151bn (7% below expectation) and portfolio run-off being higher. Home Loan (HL) lumpsum pre-payment rate was elevated for second consecutive quarter. HL disbursements were only marginally higher than preceding quarter (despite major festive season falling in Q3 FY24), reflecting gradual stabilization after significant changes in operational structure and tech/systems. Management was also averse to being aggressive at the cost of margins and asset quality.

NIM stood at 3% v/s expectation of 2.9% with both the portfolio yield compression and funding cost increase being milder than expectation. The reported portfolio yield declined by 7 bps qoq and CoF increased only by 4 bps with NCD cost being largely stable. Incr. CoF rose by 6 bps qoq to 7.79% in the wake of borrowing mix shifting towards bank borrowings. Stage-2 assets declined by 9% in abs. terms (after declining by 11% in Q2), and Stage-3 assets were flat depicting-controlled slippages and equivalent recoveries & collections. Write-offs were nil in the quarter. Credit cost was elevated at 60 bps owing to significant augmentation of Stage-3 ECL coverage and Rs0.5bn provision on AIF investment.

Management expects growth to pick-up and credit cost to moderate

Management expects business volumes to be much better in Q4 FY24 with efficiencies improving from the changes done in operational structure and tech/systems. Monthwise disbursements trajectory since October also depicts a secular improvement. Though not sharing an explicit guidance for FY25, the co. expressed confidence on delivering significant growth improvement from hereon. NIM is likely to moderate by 10-15 bps in Q4 FY24 on expectation of marginal increase in CoF and slight decline in portfolio yield. The recent decline in 10-yr G-Sec yield after the Budget has lowered LIC HF’s borrowing cost through NCDs by ~10 bps. LIC HF expects its asset quality to improve in coming quarters through collections, usual recoveries, one-time settlements, and legal resolutions of some legacy project NPLs. The co. is also evaluating selling some large written-off loans to ARCs on cash basis which would cause some provision write-backs. Credit cost in FY25 is estimated to be lower than FY24 (likely 50-55 bps)

Earnings upgraded; growth improvement key for further valuation rerating

Even with conservative growth estimates, earnings estimate for FY24/25/26 have got upgraded by 5-7% on a less-sharper margin decline trajectory and an improved core credit cost trend. Delivery of higher disbursements volume/growth would be keenly watched along with the expected high-ticket NPL resolution/ARC Sale. In the mediumterm, a combination of 10-15% growth, reduced risk on the BS (share of HL having substantially increased) and 13-15% RoE delivery can re-rate valuation towards 9x P/E and 1.1x P/BV on FY26 basis. Retain BUY with enhanced 12m PT of Rs760.

Disbursements & Growth

Company has made significant changes in its operational structure and tech/systems which has impacted disbursements so far in the year.

44 new Cluster Offices have been opened and have been made the centre of operations for marketing and underwriting - operational workload has been taken away from the 24 Back Offices - these changes are reducing TAT.

HL demand remains strong, but the co. does not want to be over aggressive at the cost of margins and asset quality in view of the past experiences.

Spread & Margins

NIM guided to moderate by 10-15 bps in Q4 FY24 on expectation of marginal increase in CoF and mild decline in portfolio yield.

With the recent decline in 10-yr G-Sec yield after the Budget, LIC HF’s borrowing cost for NCDs has come down by 8-10 bps.

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