Maintain REDUCE on LIC Housing Finance - Earnings beat, but challenges remain - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

LICHF's 1QFY21 operating performance was only slightly higher than estimates, but earnings were considerably higher than estimates, on account of lower-than-expected provisions (LLPs and tax). AUM growth was the slowest since FY09, and the moratorium portfolio remained sticky at 25% of loans (77% in the developer book). While we have increased our earnings, we maintain our REDUCE rating with a target price of Rs 296 (0.9xFY22E), especially after the recent run-up. LICHF faces several challenges in the near term: (1) a sticky moratorium book (particularly in the developer book), (2) inadequate coverage with minuscule Stage I & II provisions and negligible COVID-19 related provisions, and (3) stiff competition from banks, which would constrain growth and NIMs.

Asset quality and moratorium trends: LICHF's moratorium portfolio was sticky. The proportion of loans under moratorium was 25% (16%/36%/77% of individual home loans/ of the LAP book/ the project loan portfolio were under moratorium). The commentary indicates that the book under moratorium dipped by just 200-300bps between July and August. GS-III was optically stable QoQ at 2.83% (+85bps YoY) due to the standstill classification benefit. Over FY17-20, LICHF's asset quality steadily deteriorated, as GNPAs are 9.5x FY17 levels, (vs. AUM CAGR of ~13.6% over the period). Non-core segments, which have grown faster, have disproportionately contributed to asset quality deterioration. We remain cautious on LICHF's asset quality, given (1) pre-COVID-19 trends and the (2) sticky moratorium portfolio, and we expect GNPAs to hit 4.5% in FY22E.

Provisions dip YoY: Surprisingly, provisions were 77.7% lower YoY at just Rs 565mn (just 12bps of AUM, ann.). LICHF does not seem to have adequately provided for the impact of COVID-19, especially given its sticky moratorium portfolio. And while Stage III coverage may appear high at 44.9%, it is a consequence of the fact that developer loans constituted ~43% of GS-III in FY20. Stage I & II coverage was negligible. We have reduced our FY21E LLP estimates to factor in the 1Q miss. However, at 66bps ann., they are significantly higher vs. 34bps over FY17-20.

Growth slows further: AUM growth slowed to 6.1% YoY (the lowest since FY09), with individual home loan growth slowing to 7%. Disbursals were 65.3/61.7% lower YoY/QoQ at Rs 35.6bn. LICHF's performance on the growth front, especially in case of individual home loan has been disappointing. Post-IL&FS, when competition from most NBFCs and HFCs waned, the company had an advantage in terms of its ability to access funds, but it failed to gain market share. This is evident as bank credit to the sector grew at a much faster pace until FY20.

Shares of LIC HOUSING FINANCE LTD. was last trading in BSE at Rs.298 as compared to the previous close of Rs. 299. The total number of shares traded during the day was 380608 in over 5736 trades.

The stock hit an intraday high of Rs. 305.5 and intraday low of 296.05. The net turnover during the day was Rs. 114141989.

Source : Equity Bulls

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