Buy LIC Housing Finance; target of Rs 665: Edelweiss

LIC Housing Finance’s (LICHF) Q3FY17 earnings came broadly in line with estimate. As anticipated, individual disbursement growth was soft (up 6% YoY, partial impact of demonetisation); however, the quarter saw sharp rise in LAP/LRD/projects segment disbursements (up >2x YoY/QoQ). Ergo, overall disbursement jumped 15% YoY and, consequently, overall loan growth came in at 15% YoY (retail up 14.5% YoY, project up >45% YoY). NIMs benefitted (up 7bps QoQ) from lower funding cost supported by rise in high yielding segments. Asset quality was stable with GNPLs at 0.56% (0.57% in Q2FY17). Despite near-term revenue headwinds, LICHF continues to remain 18% RoE model with limited asset quality risk. Hence, valuations of 1.9x FY19E, lends comfort. Maintain ‘BUY’.

Core mortgage segment’s profitability is soft, however better profitability of non-core segments will cushion overall profitability. Further, asset quality risks are limited in mortgage segment, especially for LICHF where LAP is also tilted in favour of the salaried segment. We roll forward to FY19 earnings estimate and the stock trades at 1.9x FY19E ABV. We maintain ‘BUY/SP’ with target price of INR665 (2.4x FY19E P/ABV).