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Add L and T Finance Holdings Ltd For Target Rs.99

Lagged AUM growth, elevated credit cost drag earnings

Credit cost at 4%, 6% QoQ decline in AUM and normalisation of NII + fees (from a high base) resulted in lower-than-expected earnings trajectory for L&T Finance Holdings (LTFH) in Q1FY22. Post restructuring of 1.1% of AUM under OTR 2.0, stage-3 assets rose 78bps to 5.75% and retail stage-2 assets too settled higher to 7.5%. Sharp uptick in collection efficiency in June and additional momentum in July give confidence on better asset quality trajectory in coming quarters.

This, coupled with additional overlay provisioning at 1.75% of the standard book, may contain credit cost build-up for the rest of FY22. Normalisation of overall disbursements and build-up of AUM momentum (down 6% QoQ/11% YoY) seem some time away. However, it stays put on its strategic priorities of retailisation of portfolio (45% now vs 40% YoY) and fortifying its market position in tractor and 2- wheeler financing. Re-energising housing segment, launch of new products and digital consumer lending will be incremental growth levers. Maintain ADD with an unchanged target price of Rs99.

* Earnings dragged by elevated credit cost, AUM decline and margin normalisation:

LTFH’s reported consolidated PAT of Rs1.8bn (compared to Rs2.66bn in Q4FY21 and Rs1.5bn in Q1FY21) was lower than our expectations. We would say QoQ lower NII + fees at 7.52% was more of normalisation from one-off high base. Actually, elevated credit cost and AUM decline in growth weighed on earnings.

Prudence measure to strengthen balance sheet through creation of additional overlay provisions of Rs3.7bn resulted in credit cost of 4.0%. Stage-3 in absolute terms rose 8% to Rs48.8bn in Q1FY22. In percentage terms, it rose to 5.75% (from 4.96%) post the implementation of restructuring under OTR 2.0 pool of Rs9.8bn (1.1% of AUM). AUM decline of 6% QoQ and 11% YoY surprised negatively.

* Stage-3 pool rose 78bps QoQ to 5.75%, infra contributed the most to rise:

Consolidated stage-3 pool rose from 4.97% to 5.75% primarily due to forward flow of stress in infra finance portfolio. Couple of road assets (a legacy account underwritten 10 years back and other one originated 3 years back) totalling Rs3bn slipped due to disruption in toll collections. These assets would take some time to recover. Infra financing stage-3, consequently, was up 173bp QoQ to 7.94% (almost back to Q1FY21 levels). Stage-3 pool in rural financing too increased to 4.4% (from 3.96% QoQ and 3.43% YoY).

However, the company is carrying provisions worth Rs10.5bn (3.73% of standard book) on this portfolio. On the contrary, housing finance stage-3 fell 6bp to 1.4% from 1.46% QoQ. Stage-2 assets witnessed substantial movement from Q4FY21 to Q1FY22 – retail stage-2 assets spiked to 7.5% (other than restructured) from 3-4%. There was no write-off resorted to during the quarter. Going forward, incremental stress in rural (particularly MFI), infra and real estate financing will be key to watch out. We are building-in stage-3 assets at 5.2/5.3% for FY22E/FY23E respectively.

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