LIC Housing Finance's Q1FY19 results (Neutral) - Core growth disappoints again

Q1FY19 result highlights

• PAT of Rs5.7bn was in line and grew 18% yoy. However, earnings mix was weak led by weak retail loan growth, margin pressure and higher NPLs in the developer segment.
• Individual disbursement growth was only 5% yoy, lowest since 1Q15. Individual loans grew 13% yoy and 1% qoq. Within individual loans, core retail growth was slow at 9% yoy / 1% qoq while LAP continued to grow strongly at 42% yoy / 13% qoq. Developer loan growth remained strong at 49% yoy /4% qoq. Loan repayments/prepayments appear to have stabilized. These used to be high in the last two years
• NIM declined 15bps qoq and 18 bps yoy to 2.34% despite hike in lending rates. The increase was on account of higher cost of funds based on our calculations. NII grew at a modest 6% yoy under IND AS.
• There was a sharp increase in developer NPLs that rose 17% qoq to 8.9% from 7.9%. While developers NPLs are rising, the company continues to pursue strong growth in this segment. Retail NPLs also jumped sharply from 0.42% to 0.81% but this could be due to seasonality. Overall NPLs rose sharply by 57% qoq to 1.21% from 0.72%.
• There was a sharp drop in other opex due to amortization of DSA expenses under INDAS. PPOP grew 11% yoy as the weak NII growth was offset by lower employee expenses and high amortization of DSA commissions under INDAS.
• Credit cost was 39 bps for 1Q19 versus 55bps for 1Q18 under INDAS. Credit cost under the earlier IND GAAP was 28bps for 1Q18. Under INDAS, LICHF has provided 16 bps of loans on stage 1+2 and 32% for stage-3. Cumulative provisions under INDAS for 1Q19 are Rs9.2bn. Against this, LICHF carried provisions of Rs12.7bn as of March 2018 under IND GAAP.
• Reconciliation of net income between Ind AS and Ind GAAP for 1Q18: The difference between the two is small at 2%. The higher credit cost under Ind AS has been offset by amortization of expenses and deferred tax reversals. While all NBFCs have benefitted from amortization of opex, the amount of decline for LICHF is very sharp.

Valuation and view

Continued rise in developer NPLs, pressure on NIMs and slow growth in retail are key negatives. Given that valuations are at a steep discount to other NBFCs we maintain Neutral. We are revising our earnings for FY19/FY20 to reflect higher credit cost, lower opex and lower NII. The net impact is positive because of a substantial reduction in other opex under INDAS. We cut TP to Rs545.