Maintain REDUCE on LIC Housing Finance - It's all going pear-shaped - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

LIC Housing Finance's (LICHF) operating performance was significantly below our expectations, primarily on account of higher provisioning (1.5% of loans, annualised) and one-off in wage revision arrears (INR 1.24bn). Asset quality continued to deteriorate across all segments, driving the total stressed pool (GS-II+III + restructured pool) to 13.6% from 11.6% sequentially, with disproportionate share from the developer portfolio (GS-II + GS-III at ~40%). With overall PCR at ~34% and a negligible provision against early-bucket assets, we believe LICHF is thinly covered. We revise our FY22E earnings downwards by 3.3% on account of wage revision arrears expensed during the quarter - we maintain REDUCE with a revised target price of INR 356 (earlier INR 357) (0.9x Mar'23 ABVPS). Low provisioning buffer and increasing competitive intensity in the core portfolio underpin our REDUCE rating.

Increasing concerns on asset quality: LICHF reported GS-II/GS-III of 5.4%5.9%, alongside an elevated restructured book at 2.3% during the quarter. Impairment (GS-III) on the core retail home loans increased to 2.6% (FY21: 1.9%), with a small restructured portfolio (INR 6.5bn, ~0.3% of loans). While the management indicated that most of the stress is emanating from tier 2/3 geographies and only 30% of the delinquent customers are making negligible payments, we believe the stress is symptomatic of sub-par underwriting across the board. The developer portfolio deteriorated further with GS-III at ~24%, an additional ~16% of loans as GS-II and INR 47bn (2% of loans) restructured, which suggests a portfolio going pear-shaped.

Disproportionate yield compression offsets funding moat: NIMs contracted 46bps sequentially to 2.2%, largely on account of yield compression, despite significant CoF tailwinds (incremental cost of funds at 5% and weighted average cost of 6.9%). This is likely driven by increasing competitive intensity and the company's aggressive pricing in the core home loan segment. We build in NIMs of 2.4% over FY22/23E.

Shares of Lic Housing Finance Ltd. was last trading in BSE at Rs. 407.75 as compared to the previous close of Rs. 410.55. The total number of shares traded during the day was 224729 in over 6878 trades.

The stock hit an intraday high of Rs. 416.7 and intraday low of 406.2. The net turnover during the day was Rs. 91761964.

Source : Equity Bulls

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