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Fortifying position in retail; contingent buffer to cushion credit cost

L&T Finance Holdings’ (LTFH) Q4FY21 performance was skewed towards its targeted objective of improving the retail mix in overall AUM (43% now). Company further fortified its position in tractor and 2W segments, focused on salaried home loans and heavily pushed MFI lending (to almost 40% of overall disbursements) based on collection-driven strategy. Nevertheless, cautious stance in LAP, real estate lending and modest infra disbursements derailed AUM growth much below expectations. Stage-3 assets looked optically lower, but the decline was attributable to de-focused businesses rather than the operating ones.

On a positive note, collection efficiency has reached pre-covid levels across businesses while contingency buffer of 1.1% of AUM will protect against elevated credit cost. Further, improving retail mix (re-energising housing segment with new leadership and launch of new products), leveraging liability strength, and managing stage-3 will aid RoA of 1.7%/2.3% and RoE of 10%/12% by FY22E/FY23E, thereby commanding a multiple of 1.2x FY23E adjusted book. Maintain ADD with a target price of Rs99.

* Earnings marred by one-off tax adjustments and derailed AUM growth; credit cost settles low: Adjusting for exceptional items (tax for L&T IDF and stamp duty on merger), LTFH reported PAT of Rs4.3bn (up 47% QoQ and 11% YoY), lower than our expectation of Rs4.7bn. Positively, credit cost came in below estimate at Rs6.5bn (2.7% run-rate against our expectation of >3.75%). However, this was offset by a relatively higher run-down in AUM and revenue trajectory was below expectations. Opex too was higher than estimated - up 24% QoQ / 16% YoY. Exceptional items amounting to Rs1.6bn for Q4 FY21 include: 1) tax for L&T IDF pertaining to earlier years (FY15, FY16, FY17) of Rs730mn pursuant to notification by CBDT; 2) Rs880mn related to stamp duty expense on LTF merger cost.

* Stage-3 pool settled at <5%; decline largely due to de-focused businesses than the operating ones: Consolidated stage-3 pool came off QoQ from 5.12% to 4.97% primarily due to decline in stage-3 assets for de-focused businesses (estimated to be down Rs4bn in absolute terms). Otherwise, rural financing gross stage-3 was up QoQ from 3.5% to 4% (up Rs1.8bn in absolute terms) and housing finance gross stage-3 too was up from 1.27% to 1.46% (up Rs1.4bn). In infra financing segment, stage-3 was down Rs2.1bn in absolute terms (but run-down in book made it look higher in percentage terms from 7.92% to 8.09%). LTFH has written-off close to Rs7bn in Q4FY21 primarily towards 2W and MFI segments (Rs19.64bn in FY21, of which Rs6.4bn was in defocused businesses). Incremental stress in MFI due to covid second wave, or farm equipment (contingency on below-normal monsoon) and real estate financing will be key to watch out for in coming quarters. We are building-in stage-3 assets at 4.5/4.6% for FY22E/FY23E.

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