Emkay Global Suggest Buy This Mid Cap Housing Finance Stock, Sees 21% Returns In 12 Months

Emkay Global is bullish on LIC Housing Finance Limited (LICHF), and placed a buy call with a target price of Rs 450 per share. The brokerage claims a potential upside of 21% from its current level in 12 months. LICHF, incorporated in 1989, is a mid-cap NBFC - Housing Finance company having a market price of Rs 20,509.10 crore.

LICHF is one of the largest Housing Finance Companies in India with a key objective of providing long-term finance to individuals for the purchase or construction of house/flat for residential purposes in India.

Stock Outlook & Returns on Investments

04 November 2022, the stock of LIC Housing Finance closed at Rs 372.35 apiece on NSE, gaining 0.66% compared to the previous close. Its 52-week high level is Rs 443.60 recorded on 15 September 2022 and its 52-week low is Rs 291.75 recorded on 20 June 2022, respectively.

It has given 11.38% negative returns in the past 5 days, whereas, in the past 1 month it has given 10.63% negative returns. In the past 1 year, it has given 12.55% negative returns, in 3 years 11.32% negative returns and in 5 years 38.66% negative returns, respectively.

 

Earnings miss on lower margins and higher credit costs

LIC Housing Finance (LICHF) reported Q2FY23 PAT of Rs3.05bn, much below consensus and our estimates, primarily driven by adverse asset-mix changes and higher-than expected opex and credit costs. Disbursements grew 10.4% QoQ/4.2% YoY, led by individual-loan disbursement growth of 24.7% sequentially. However, developer-loan disbursements saw a sharp decline of ~80% QoQ. AUM grew 2.6% QoQ/10.4% YoY. In terms of the asset mix, the share of LAP and developer book declined 30bps and 40bps QoQ. Calculated yields declined 50bps QoQ, despite transmission of the 60bps PLR hike from 1st July 2022. This was due to: 1) the Rs2.75bn modification-led NPV loss on conversion of Rs90bn of fixed-rate loans to floating rate in order to retain high quality customers. The yield discount availed by the customers at the time of conversion has been offset by the 175bps PLR hikes since June 2022, and 2) Rs0.95bn decline in interest income owing to repayment of higher yielding project loans and slippages from the book. Adjusted for one-offs, yield increased by 8bps QoQ. Calculated CoF rose by 30bps, in line with our estimates. As a result, calculated NIM declined 75bps QoQ to ~1.8% despite earlier management guidance pointing to stable or higher NIM sequentially. Opex grew by 28.6% QoQ, driven by higher employee benefit (+14.6% QoQ) and other expenses (+46.9% QoQ). Consequentially, PPOP came in at Rs9.44bn.

 

OTR book stood at ~Rs34.66bn

While headline asset-quality numbers improved QoQ, with GS3 and NS3 declining 6bps and 20bps QoQ to 4.9% and 2.83%, respectively, credit costs increased 39bps sequentially to 0.87% due to a technical write-off of ~Rs1.9bn on 950 retail accounts that were fully provided for. During the quarter, Rs5.4bn worth of project loans slipped into stage 3; of these, Rs3.5bn was from the OTR pool, but were out of moratorium before Q2. The OTR book stood at ~Rs34.66bn, entirely in stage 2, with Individual loans at Rs13.74bn (Q1: Rs15.44bn) and project loans at Rs20.93bn (Q1: Rs20.24bn). Management believes that any more slippages from the restructured book would be limited. GS3 on individual loans stood at 3.15%, on core housing loans stood at 1.68%, on non-core individual loans at 6.85%, on commercial loans at 22.2% and on project loans at 42.2%. PCR on stage 3 assets stood at 43.7% (Q1FY23: 40.4%). PCR on stages 1 & 2 declined 6bps QoQ to 0.36%. ECL, as a % of overall loans, rose by ~8bps QoQ to 2.49%. COVID-related provisions stood at Rs5.355bn vs. Rs6.191bn in Q1FY23.

 

 

Management guidance

i) Management expects margins for FY23 to be better than those in FY22.

ii) Management expects to maintain the current PCR on standard assets.

iii) CoFs are expected to rise by at least 15-18bps in Q3 due to the 50bps repo hike in Sep-22, while the 115bps PLR hike, effective 1-Oct-2022, is expected to translate into a 80-90bps rise in asset yields from Q3.

 

Buy with a target price of Rs 450 per share

The brokerage said, "We retain our BUY rating on the stock with Sep-23E TP of Rs450/share (earlier, Rs490), valuing the firm using the 'excess return on equity' (ERE) methodology. Our TP implies a Sep-24E P/BVPS of 0.8x. Key downside risks: Further asset quality weakening in the noncore housing loan and project loan segments. Conversion of the remaining 2% fixed loans into floating can result in a one-off negative surprise on asset yields."

Disclaimer

The stock has been picked from the brokerage report of Emkay Global. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.