LIC Housing Finance - NIMs normalise; earnings volatility to stay - ICICI Securities

LIC Housing Finance's (LICHF) Q1FY21 earnings beat expectations (PAT of Rs8.2bn versus I-Sec estimate of 35% YTD and valuations reset lower at 0.7xFY22E book renders risk-reward favourable. Maintain ADD with a revised TP of Rs325 (earlier Rs303, assigning 0.75x target multiple).

- Restructuring will defer credit cost provisioning to FY22E: Availing benefits of DPD freeze and moratorium, stage-3 assets were flat at 2.83%. However, positively with improved collections, stage-2 assets declined 70bps QoQ to 3.97%. Moratorium at 25% (June) was similar to last disclosed numbers (May) though it has been improving gradually MoM post June. It is constantly engaging with customers but eventually which portfolio is restructured (given significant proportion is developer loans and LAP), is difficult to gauge. Provisioning at 10bps in Q1FY21 is significantly lower and will need some catch up. Larger part of stress recognition will also be deferred to FY22. We are building in credit cost of 80-90bps for FY21/FY22.

- NIMs continue to be volatile: Decline in funding cost, better yield amidst low competition intensity supported NIMs at 2.32%. Management also highlighted that downward pressure on yields due to resetting of rates lower is almost done. However, launch of low rate housing loans to prime borrower passing benefit of better borrowing cost, stress recognition and restructuring will tend to keep NIMs volatile in near term.

- Disbursements to normalise; growth in single digit in the interim: Disbursements in Q1FY21, though one-third of Q1FY20, touched 60% of last year in June. Since then, rebound has gained further momentum to be back in growth mode in H2FY21, further aided by launch of lowest rate products. Cautious stance prevails for developer segment (focus more on affordable home and mid-segment developers). We are building in growth of ~7-8% for FY21/FY22 as repayment would also start kicking in once the moratorium is lifted.

- Franchise is still a major strength despite concerns on leverage: Low capital adequacy and high leverage mean balance sheet is vulnerable to any stress and imminent equity infusion is needed. Still the company scores high on franchise strength (quasi-sovereign status) and consistency of return ratios.

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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