Emkay Global Suggests Buying This Mid-Cap Housing Finance Stock, Sees 21% Returns in 12 Months

Stock market outlook and investment returns

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

It gave 11.38% negative returns in the last 5 days, while in the last month it gave 10.63% negative returns. Over the past year, it has given 12.55% negative returns, in 3 years 11.32% negative returns and in 5 years 38.66% negative returns, respectively.

Profits miss out on lower margins and higher borrowing costs

Profits miss out on lower margins and higher borrowing costs

LIC Housing Finance (LICHF) announced a PAT of Rs 3.05 billion for Q2FY23, well below consensus and our estimates, mainly due to adverse changes in asset mix and operating and credit higher than expected. Disbursements increased 10.4% quarter-on-quarter/4.2% year-on-year, driven by individual loan disbursements growth of 24.7% sequentially. However, loan disbursements to developers saw a sharp decline of around 80% QoQ. Assets under management increased by 2.6% over one quarter and by 10.4% over one year. In terms of asset mix, the share of LAP and developer portfolio decreased by 30 basis points and QoQ by 40 basis points. Calculated yields fell by 50 bps QoQ, despite the transmission of the 60 bps rise in PLR from 1 July 2022. This was due to: 1) the loss of Rs 2.75 billion in NPV following the conversion Rs90 bn of fixed rate floating rate loans in order to retain high quality customers. The reduction in yield enjoyed by customers upon conversion was offset by the 175 basis point increases in PLR since June 2022 and 2) a Rs 0.95 billion decline in interest income due to repayment higher yielding project loans and book slippages. Adjusted for one-time items, yield increased 8 basis points quarter-on-quarter. The calculated CoF increased by 30 basis points, in line with our estimates. As a result, the calculated NIM declined by 75 QoQ basis points to ~1.8% despite prior management guidance indicating a stable or higher NIM sequentially. Operating expenses rose 28.6% quarter-on-quarter, driven by higher employee benefits (+14.6% quarter-on-quarter) and other expenses (+46.9% quarter-on-quarter). Hence, the PPPOP came in at Rs9.44bn.

Book OTR was ~Rs34.66bn

Book OTR was ~Rs34.66bn

While the overall Asset Quality figures improved QoQ, with GS3 and NS3 down 6 bps and 20 bps QoQ at 4.9% and 2.83%, respectively, credit costs have rose 39 basis points sequentially to 0.87% due to a technical write-off of around Rs 1.9 billion across 950 retailers. fully funded accounts. During the quarter, Rs 5.4 billion of project loans moved to Stage 3; of these, 3.5 billion rupees came from the OTR pool, but were out of moratorium before the second quarter. The OTR portfolio stood at ~Rs 34.66 billion, fully in phase 2, with individual loans at Rs 13.74 billion (T1: Rs 15.44 billion) and project loans at Rs 20.93 billion (T1 : Rs 20.24 billion). Management believes that any further slippage from the restructured portfolio would be limited. GS3 on individual loans stood at 3.15%, on basic housing loans at 1.68%, on non-core individual loans at 6.85%, on commercial loans at 22.2% and on project loans at 42.2%. The PCR on stage 3 assets was 43.7% (T1FY23: 40.4%). The PCR on steps 1 and 2 decreased by 6bp QoQ to 0.36%. ECL, as a % of total loans, increased by ~8bps QoQ to 2.49%. Provisions related to COVID stood at 5.355 billion rupees compared to 6.191 billion rupees in Q1FY23.

Management tips

Management tips

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

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

iii) CoFs are expected to rise by at least 15-18 basis points in Q3 due to the 50 basis point rise in repo on September 22, while the 115 basis point rise in PLR, effective 1 October 2022, should result in an 80 to 90 basis point rise in asset returns from Q3.

Buy with a target price of Rs 450 per share

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 (previously Rs490), valuing the business using the ‘excess return on equity’ methodology. (ERE) Our TP implies a Sept- 24E P/BVPS of 0.8x Key downside risks: further weakening of asset quality in the non-core housing and project loan segments The conversion of the 2% of fixed loans remaining in floating loans can result in a one-time negative surprise on asset returns.”

Disclaimer

Disclaimer

The stock was selected in Emkay Global’s brokerage report. Greynium Information Technologies, the author and the respective brokerage are not responsible 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.