LIC HF stock sheds 7.3% as Q2 disappoints, but some silver lining too

Stock fell 7.3% on Friday, but some analysts remain bullish on the firm

LIC Housing Finance (LIC HF) reported a disappointing September quarter (Q2) results, which led to a sell-off on the stock market. Revenues dipped year-on-year (YoY) and quarter-on-quarter (QoQ), while profits fell sharply on account of higher provisioning.

The interest income declined to Rs 4,673 crore in Q2 from Rs 4,938 crore in the corresponding quarter of 2020-21 (FY21), and also lower than Rs 4,825 crore in Q1FY22. The net profits dropped 69 per cent YoY to Rs 247.8 crore, versus Rs 790.9 crore YoY and Rs 153 crore QoQ. Provisioning rose to Rs 639 crore, versus Rs 111 crore YoY, but it was lower than Rs 834.6 crore in provisions taken in Q1FY22.

The net interest income (NII) dropped 5.7 per cent, to Rs 1,167 crore, versus Rs 1,238 crore (YoY). This is a bad signal, given that sequential NII was also down 8 per cent compared to Rs 1,275 crore in Q1FY22, which was well below expectations. Operating expenses were also higher than expected at Rs 260.9 crore, driven mainly by elevated employee expenses.

On the positive side, it delivered growth in individual home loans, with the loan book up 11 per cent YoY and up 2 per cent QoQ. Home loans rose 15 per cent YoY and 3 per cent QoQ. They constitute over 79 per cent of the portfolio, so this is healthy. However, another way of looking at this, is that the loans against property segment and the builders’ loan segment have both stagnated, which could indicate a conscious strategy of being cautious.

Collection efficiency was back at pre-Covid levels of 99 per cent. Asset quality may have improved, with the pool of restructured loans held at Rs 7,320 crore, which is around 3 per cent of the loan book. One-third of the wholesale portfolio has already been restructured.

Standard asset provisioning remained low, but stage-3 asset provisioning (substandard/ doubtful and loss) has risen 44 per cent. The gross non-performing asset (NPA) ratio (considering stage-3 as a percentage of assets) rose to 5.1 per cent versus 2.8 per cent last year, but fell sequentially from 5.9 per cent.

The yield on loans dropped to 8 per cent from around 8.3 per cent in Q1, while cost of funds declined marginally. Other parameters such as spreads and interest margin also declined marginally compared to Q1. LIC Housing also completed a preferential allotment of equity to its promoter LIC in Q2, after an independent third-party valuation.

While the performance clearly disappointed the Street, analysts also feel the spreads, yields, and interest margins are probably bottoming out, as re-pricing of home loans should have mostly been completed. There’s also consensus that the stage-3 asset quality trends are improving, given the sequential improvement, and this would be a key number on investors’ watchlist.

Quite a few analysts have maintained a “buy” rating on the stock. CLSA has a target price of Rs 540. After the correction, it’s down to Rs 408-409, from above Rs 450 apiece. If support at current levels breaks, it could fall t0 Rs 390-395 with the next support at Rs 385.