Buy LIC Housing Finance Ltd For Target Rs. 821 By Elara Capital Ltd
Growth vs margin conundrum stays
LIC Housing Finance (LICHF) Q3 profit was healthy, aided by NPA recoveries; however, the company continues to face the conundrum of growth vs margin. With LICHF finding solutions via product diversification, its forays into the affordable segment and re-strategizing project loan portfolios being in initial stages do not address the challenge of growth and margin. It has taken a beating on valuation. But, given a favorable risk-reward at 0.8x FY27E P/ABV, we reiterate Buy with a TP of INR 821.
Growth vs margin challenge remains:
PAT at INR 14.3bn was ahead of our estimates, rising 7.8% QoQ and 23.1% YoY, driven by recoveries despite a flat NII of 1.3% QoQ and down 4.6% YoY, as NIM for 9MFY25 declined to ~2.7% vs ~3.1% YoY. Yield for 9MFY25 fell YoY to ~9.7%, primarily due to increased competition in home loans, competitive rates demanded by higher-rated developers and the lag effect of the recent 10bp Prime Lending Rate (PLR) hike. While loan mix remains stagnant for 9MFY25, management is pinning hopes on traction in developer and affordable housing loans and NPA resolution to lift margin. On the other hand, a Cost of Borrowing (COB) spike of 8bp YoY and 5bp QoQ for 9M, low-cost wholesale debt and 55-65% floating rate borrowings should aid margin with a downward revision in the rate cycle. While growth vs margin issue stays and affordable built still distant, LICHF might see near-term margin pressures, We expect a 2.7-2.8% NIM, keeping ROA in check at 1.5-1.6% during FY25-27E.
Portfolio diversification to garner volume:
AUM grew 1.5% QoQ and 6.5% YoY to INR 2,991bn, prompting a FY25 guidance cut to 9% from 10%. NHI + Others rose 3.3% QoQ, IHL 1.4%, while project loans fell 1.8%. Disbursements (a 6.1% QoQ drop) were hit by INR 7- 8bn portfolio of Bengaluru & Hyderabad challenges, with revival likely by Q4 and increased competition in prime housing loans. LICHF is focused on affordable housing (AUM target at 10% for the next three years) while leveraging its pan-India reach. A robust Q4 is likely, with monthly disbursement of INR 60bn, led by Bengaluru’s INR 6bn sanctions pipeline. After factoring in sustained competition, high base and new portfolios built underway, we expect a 13% loan CAGR during FY24-27E.
Price chart
Good visibility on asset quality improvement:.
Asset quality improved, with Stage 3 GEAD at ~2.8% (vs ~4.3% in Q3FY24) and Stage 2 at 4.0% (vs ~4.5%). PCR declined 100bp QoQ to 48%, but further improvement is likely. A stressed exposure of INR 5.7bn (fully provided) was sold to an ARC for INR 2.5bn, while 4-5 large cases in the advanced resolution stage, with 1-2 nearing closure. Management overlay of INR 1.5-1.6bn was undertaken, with a negative impact of INR 440mn in P/L. Credit cost was negative in Q3, with Q4 likely to remain low, targeting a steady-state of 20bp. With more visibility on asset quality, we expect <3% GNPA with a 30bp credit cost during FY25E-27E.
Risk-reward favorable, business turning around:
We raise our EPS by 5.0% for FY25E, 3.7% for FY26E and 3.5% for FY27E, after factoring in anticipated accounts resolutions. LICHF is set to deliver 1.5% ROA, with a ROE of 14-15% during FY24-27E. While beaten down valuation provides comfort from a risk-reward perspective, and the underlying trends remain upbeat for the sector, we retain Buy with a TP of INR 821 based on 1.2x PABV FY27E. Although we have a BUY rating, we have reservations about margin improvement, which is a key driver of stock rerating.
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SEBI Registration number is INH000000933
