Published on 3/06/2020 12:37:57 PM | Source: Emkay Global Financial Services

Sell L&T Finance Holdings Ltd For Target Rs. 48 - Emkay Global

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* The less said the better

* We have been Negative on LTFH even before the Covid-19 crisis, citing sluggish growth trend, cyclicality in the business model and uncertainties over asset quality. Moreover, elevated exposure to developer finance (~15% of AUM) and delinquencies from nonfocused book (~5% of AUM) were other concerns. Q4 performance reflects the same.

* LTFH has reported a dip in AUM by ~1% yoy to Rs983bn (-1% qoq), while disbursements continued downward momentum at Rs82.1bn (down by ~36% yoy, ~14% qoq). Reported PAT declined by ~30.3% yoy (-8.7% qoq) amid a fall in margins, low fee income and elevated operating expenses and provisioning charges.

*  The company provided Rs2.1bn as Covid-19-related provisions (~0.25% of AUM), with total provisions on book (excluding GS3 provisions) at Rs10.6bn (~1.19% of book). However, considering the existing book under moratorium (~37% as on March’20 and increasing Q1FY21) as well as riskier asset exposure, the same is far lower.

* We remain appreciative of liability franchise, however we expect AUM decline to continue. We have cut our estimates by 7%/1.9% for FY21/22E and have introduced FY23E. We reiterate Sell, with a revised TP of Rs48 (Rs55 previously), corresponding to 0.6x P/FY22E book. We maintain UW stance in our NBFC EAP.


Weak performance amplified by weak demand; trend likely to continue:

LTFH reported a weak quarter with AUM de-growth of ~1% yoy and ~1% sequentially (Rs983bn). We understand that the environment was challenging due to the lockdown in the last week of March, however our worries accentuate on the back of disbursement de-growth of ~36% yoy and ~14% qoq to Rs82.1bn. Disbursements have been weak even in the rural portfolio, which has tailwinds of good rabi season. Considering weak economic trends and the reshuffling of the lending portfolios, the growth trajectory should remain under pressure, in our view. NIM and fees during the quarter tapered to ~687bps due to rate cuts and fewer sanctions.

Asset quality has improved sequentially as with GNPLs stood at 5.36% and NNPLs at 2.28%, with an overall provision coverage of ~59%. The defocused book forms 5.3% of the AUM (~Rs52bn) and the developer book stands at ~15% of AUM. We continue to remain concerned about the potential slippages emanating from this piece of the book.


Outlook and valuation:

The management is evaluating a merger of the operating entities and we are watchful of the developments in this regard. We maintain Sell, with a TP of Rs48 (Rs55 earlier) based on ~0.6x FY22E P/B.

We maintain UW in NBFC EAP. We are confident of LTFH management’s ability to manage the liability franchise due to its strong parentage, which should support margins.


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