Brokerage houses remained positive on LIC Housing Finance after stable December quarter earnings but expect pressure on margin and home loan yields going ahead.
With maintaining buy rating and target price of Rs 693 (implying 33 percent upside), Motilal Oswal cut its EPS estimates for FY17/18 by 4/3 percent to account for lower yields in the home loan segment due to the recently announced rate cuts, though it believes a company with decent growth, superior asset quality and around 19-20 percent consistent return on equity (RoE) deserves a better multiple.
The brokerage house says an incremental spread of 2.5 percent will be hard to sustain, unless the company focuses much more on loan against property and builder loans, which it believes is unlikely. It expects incremental spreads to settle in range of 1.8-2 percent after considering the impact of the rate cuts announced last week, driven by lower cost of funds on refinancing of non-convertible debentures (NCDs).
Reported margin increased 17 basis points YoY and 7bp QoQ to 2.75 percent in the quarter gone by. Improvement in margin was driven by change in liability mix in favour of bonds.
Incremental spreads increased 40bp YoY and 32bp sequentially to 2.5 percent in Q3.
Nomura, which retained buy rating with unchanged target price at Rs 700, also says cut in MCLR (marginal cost of funds based lending rate) & mortgage rates by banks will impact mortgage spreads and re-financing could impact company's core mortgage growth as well.
IDFC, the only brokerage house downgraded LIC Housing to neutral and cut target price to Rs 600 from Rs 670, too, expects pressure on company's yields on individual home loans. It lowered net interest margin target & cut earnings by 5 percent for FY18, saying the best is over in terms of decline in borrowing cost.
Morgan Stanley, too, expects margin to come under pressure in FY18. The brokerage house has equal-weight rating on the stock with a target price of Rs 560.
The country's second largest housing finance company's third quarter profit increased 19.2 percent to Rs 499.3 crore compared with year-ago period, aided by net interest income but fell short of expectations due to higher provisions and operating expenses. NII grew by 22.6 percent year-on-year to Rs 915.4 crore during the quarter with loan growth of 15 percent.
Loan growth was driven by loan against property (up 88 percent YoY) and builder loans (up 45 percent YoY) but retail home loan book growth remained modest at 9.2 percent.
Provisions or write-off increased 31.7 percent year-on-year and 49.5 percent quarter-on-quarter to Rs 45.3 crore in Q3FY17.
Asset quality remained largely stable. Gross non-performing assets for the total loan book stood at 0.56 percent while gross NPA for individual loan book stood at 0.32 percent. Prepayment rate continued to decline marginally (10.7 percent year-to-date compared to 10.9 percent in Q2FY17 against 11.5 percent in Q1FY17).
Bank of America Merrill Lynch has retained buy rating on LIC Housing Finance with a target price of Rs 655 and JPMorgan is overweight on the stock with a target price of Rs 650.