Hold LIC Housing Finance; target of Rs 590: ICICI Direct

Asset quality for HFCs, in general, and LICHF, in particular, has stayed benign. This is since the bulk of exposure is to the salaried class, better underwriting, lower LTV and instalment-to-income ratio. GNPA ratio for industry is 0.8% while LICHF’s Q3FY17 ratio is below industry levels at 0.56% with absolute GNPA at Rs 759 crore. We expect GNPA to increase to Rs 916 crore by FY18E (GNPA ratio at 0.6%), which remains acceptable.

LICHF has maintained advances growth at 15% YoY coupled with margin improvement at 2.75%. We maintain our PAT estimate at 17.8% CAGR in FY17-18E to Rs 2303 crore. Return ratios are expected to stay healthy with 19% RoE and 1.4% RoA by FY17-18E. However, moderation in core home loan book continued and is expected to grow at a slower pace ahead. In addition, rising non-core assets (LAP & developer loans) may be margin accretive but may enhance risks on the asset quality front. Therefore, we revise our P/ABV multiple marginally lower at 2.3x (earlier 2.4x). Accordingly, we revise our target price lower at Rs 590 (from Rs 625 earlier). We maintain our HOLD recommendation on the stock.