LIC Housing Finance saw improved traction in individual business during the quarter while operating performance was steady. NII for LICHF saw flattish growth of 2.2% YoY at Rs 1281 cr, mainly on account of 6 bps YoY decline in margins to 2.36%. Recent management commentary indicated that margins benefited from lower funding cost which was down by 36 bps in Q3 FY21 and 83 bps in current fiscal, as the liquidity environment remained favourable for the company. Other income jumped 73% YoY to Rs 48 cr aiding topline. Cost-to-income sequentially was steady at 13.4% vs. 13.2%. Provisions declined YoY by 54% to Rs 181 cr but QoQ were up 75%. Total provisions for Covid related and a standstill account is to the tune of Rs 400 cr. PAT for the quarter was up 22% YoY to Rs 727 cr. The current share price of LIC Housing Finance is Rs 467, down Rs 3 or 0.7%. 
 
Asset quality manageable; buffer relatively lower:
 
LIC Housing Finance saw largely stable asset quality during Q3 FY21 with stage 3 assets declining 11 bps QoQ to 2.68%. On a proforma basis, there was slight deterioration though, as proforma GNPA increased from 3% to 3.7%, as the management had indicated that 1% of loans would have been recognised as NPA if not for standstill norms. NPA in individual category fell from 1.7% to 1.62% QoQ while in project loans it was down 30 bps QoQ to 16.22%. Collection efficiency improved from 96% to 98% QoQ. Thus, asset quality remains steady but the provision buffer at 1.3% of advances seems to be relatively lower, which is seen partially impacting earnings two to three quarters ahead.
 

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Gradual pick-up in business traction to continue ahead:
 
LIC Housing Finance saw a pick-up in business activity as total disbursement was up 28% YoY to Rs 16857 cr, of which disbursement in individual home loan jumped 36% YoY to Rs 14511 cr. Advanced growth was at 6% YoY. Affordable housing contributing remained healthy at 30% in total disbursements during the quarter. Low interest rates, stable home prices and incentives like stamp duty reductions have spurred some demand. Key centres like Mumbai saw healthy registrations.
 
Valuation & Outlook of LIC Housing Finance:
 
Business growth is seen picking up with low interest rates, stable property prices and government’s push for growth aiding demand for housing. Margins are expected to remain steady with a competitive environment keeping yields in check but softening of costs to cushion NIMs. Improvement in collection provides comfort on asset quality, though a relatively lower provision buffer is seen keeping near term credit cost higher. Strong parentage and higher proportion of individual loans provide comfort. However, with the recent run up in the stock price, we believe there is limited room for upside. Thus ICICI Securities downgrade their rating from BUY to HOLD with a revised target price of Rs 475 (from earlier Rs 345)