Maintain REDUCE on LIC Housing Finance - Pain around the corner - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

LIC Housing Finance (Q4FY20): Pain around the corner. Maintain REDUCE
(TP Rs 263, CMP Rs 269, MCap Rs 136 bn)

LICHF's 4Q performance disappointed across all fronts- (1) AUM growth slowed to a ~12 year low, (2) NIMs dipped sharply, to the lowest level in the ~7 years and asset quality deteriorated, with GS-III rising for the 6th straight quarter. Despite seemingly attractive valuations and strong parentage, we maintain our REDUCE rating with a TP of Rs 263 (0.9xFY22E). The co. faces several headwinds- (1) stiff competition from banks will pose increasing challenges on the growth and NIM fronts, (2) COVID-19 will exacerbate ongoing asset quality troubles (especially in the non-core book).

Asset quality: For the second consecutive year, LICHF's asset quality deteriorated in 4Q (contrary to earlier seasonal trends), with GS-III rising 93.8/6.1% YoY/QoQ to Rs 59.6bn (2.83%). The sequential deterioration was led by the developer loan segment, where GS-III rose 152.6/32.3% to Rs 25.4bn (~17.7%). In the individual segment, GS-III dipped 7.5% QoQ, but remained elevated at 1.7%. However, GS-II, which had been rising over the past 4 quarters, dipped 16.6% QoQ (nevertheless, up 15.4% YoY). We remain circumspect on LICHF's asset quality, given disproportionate growth in non-core segments seen in the past, high moratorium % in non-core segments, and an unfavourable economic environment.

Funding: Given its parental backing, the availability of debt has never been an impediment for the co. Borrowings grew at 12.1/3.4%, ahead of AUMs. As we've seen at other NBFCs and HFCs, at LICHF too, we've seen a trend of increasing reliance on bank borrowings. The share of bank borrowings increased 700/300bps to 22%, while that of NCDs dipped 1000/300bps. LICHF's last reported (1HFY20) CRAR was 14.4%, w/w Tier I was 12.5%. We believe it will be prudent for the co. to raise capital in the near term.

Provisions: After a sharp rise in 3QFY20, non-tax provisions dipped 74.1/93% to just Rs 273mn (just 5bps of AUMs, ann.). The management indicated that current provisions are sufficient as (1) it had factored for the potential impact of COVID-19 in its ECL model, and (2) that the co.'s underwriting standards (lower LTVs) and current stage III coverage provide sufficient cushion. We expect LLPs to rise, because the co. appears to have made minimal COVID-19 related provisions and stage I & II coverage is low.

COVID-19 related management commentary: (1) ~25% of LICHF's book was under moratorium, with (a) ~13% of core home loans, (2) ~35% of LAP, and (3) ~75% of the developer book under moratorium. (2) The management said that it had not considered raising capital. (3) In Jun-20, LICHF disbursed ~Rs 20bn, mainly in Tier II and III cities and mostly for affordable housing. (4) LRD (~Rs 35bn) is ~10% of the LAP book.

Shares of LIC HOUSING FINANCE LTD. was last trading in BSE at Rs.270.4 as compared to the previous close of Rs. 272.9. The total number of shares traded during the day was 343248 in over 5094 trades.

The stock hit an intraday high of Rs. 279.35 and intraday low of 269.2. The net turnover during the day was Rs. 94231590.

Source : Equity Bulls

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