* Operating performance mixed:
L&T Finance Holdings (LTFH) has posted a better-than-expected bottomline number for Q4FY2017, but this was mainly due to Rs228 crore of tax write-back that helped the company to beat estimates. The Net Interest Income (NII) grew by 20.9% YoY to Rs1,004.6 crore, owing to a 14.4% YoY growth in Advances and steady Net Interest Margins (NIM) of 6.0% QoQ. The company’s unwavering focus on increasing the Fee Income and Other Income using its strong underwriting capabilities and selling down loans has started showing positive results, with the Fee Income during the quarter rising by 86.8% YoY to Rs284 crore.
* Loan book growth regains momentum:
Post the demonetisation-marred quarter, LTFH has shown improvement in its business momentum, as the loan book growth stood at 14.4% YoY versus 10.4% YoY in the previous quarter. The Focused Business Loan Portfolio expanded by 19.9% YoY, driven by a 16% YoY growth in Rural Finance, a 28% YoY growth in Housing Finance and a 19% YoY growth in Wholesale Finance. Within the Rural Finance segment, Microfinance and 2W Finance grew by 59% YoY and 20% YoY, respectively while the Wholesale Finance growth was fueled by a 21% YoY uptick in the Infrastructure Finance segment. The management expects to grow its loan portfolio at a CAGR of ~20% over the next 2-3 years. The company’s focus would be on 2W loans and Tractor loans in the Rural Financing segment while Infrastructure Financing would be driven by segments like Renewable Enegry, Roads and Power Transmission.
* Asset quality deteriorates slightly:
During the quarter, asset quality deteriorated slightly, with Gross NPA increasing by 9BPS QoQ to 4.95%, mainly on account of growing stress in the Wholesale segment (wholesale GNPA stood at 4.28% versus 3.88% QoQ). However, the Rural Finance and Housing Finance books saw an improvement in asset quality, with their GNPAs falling by 208BPS to 7.66% (9.74% QoQ) and by 16BPS to 0.63% (0.79% QoQ), respectively. Provisions surged to Rs688.5 crore (up 233.7% YoY and 109.8% QoQ), as the company made accelerated provisions of Rs491 crore pertaining to the principal amount and Rs47 crore for interest.
* Valuation and outlook:
Despite a challenging quarter, LTFH has managed to put up a decent show during Q4FY2017, with continued improvement in RoE (up 391BPS/253BPS YoY to 14.70%/12.31% for Q4FY2017/FY2017), spurred by efficient cost management (Cost/Income down 608BPS YoY to 23.3%) and clear focus on the core businesses. The management appears more confident about their new strategy, execution capabilities and recovery in the various segments. We maintain our ‘positive’ view on LTFH and expect a 15% upside potential.
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