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Jettisoning of non-core businesses gains pace

L&T Finance Holdings Ltd (LTFH) offers financial products and services in the corporate, infrastructure and retail finance spaces, as well as fund products and investment services.

* In Q3FY23, the company’s net interest margin (NIM) + fees margin improved to 8.80% on account of highest ever quarterly retail disbursement and prudent asset-liability (ALM) management.

* Retail mix stood at 64% vis-à-vis 58% in Q2FY23 and 50% in Q3FY22.

* The company also accelerated the sell-off of the wholesale and other noncore businesses.

* Increased retail push will drive growth over the long term, supported by yield improvement owing to rising policy rates. Maintaining a positive outlook on the company’s long-term performance, we retain our BUY rating on the stock with a rolled forward target price of Rs. 110 based on 1.1x FY25E BVPS.

NII and NIM rises; asset quality impacted, though

LTFH’s interest income grew 7.6% QoQ for Q3FY23 (+15.6% YoY) to Rs. 3,322cr and interest expense rose 4.3% QoQ (+6.7% YoY) to Rs. 1,501cr, delivering stable net interest income (NII) of Rs. 1,821cr, up 10.5% QoQ (+24.1% YoY). NIM + fee margin improved 37bps QoQ (+70bps YoY) to 8.80%, mainly owing to increased retail business momentum and prudent ALM management. However, weighted cost of borrowing rose as rate hikes resulted in higher cost of incremental debt and repricing of floating rate liabilities. Reported profit after tax, though, rose 11.6% QoQ to Rs. 454cr, (+39.2% YoY). As a result, RoE rose 100bps QoQ (+374bps YoY) to 14.97%. GNPA deteriorated 19bps QoQ to 4.21%, however NNPA saw an improvement at 1.72%, from 1.85% in Q2FY23.

Retail focus accelerated in Q3FY23

LTFH reported faster-than-expected quarterly retail disbursements in Q3FY23 owing to increased festive demand, and improved network and channel penetration. Overall disbursements grew by 13% QoQ (+53% YoY) to Rs. 11,607cr, also supported by steady build up in SME disbursement. The retail portfolio mix is now at 64%, a rise from 58% in Q2FY23 and 50% in Q3FY22. As part of its ‘Lakshya 26’ goals, LTFH plans to grow its retail business to >80% of the balance sheet and >25% CAGR for the Retail business.

Key highlights

* Collection efficiency was strong at 91.9% across the retail business through onthe-ground efforts and data analytics-based resource allocation.

* During the quarter, the company concluded the sale of its mutual fund business (L&T Investment Management Ltd) to HSBC AMC, for which it posted gains of Rs. 2,608cr in its financial results as profit from discontinued operations.

* Under its ‘Lakshya 2026’ strategy, LTFH is aiming to achieve NPA targets of GS3 <3% and NS3 <1%, with expected return on asset of 2.8-3.0% by FY26.

Outlook and valuation

LTFH’s long-term growth is promising, with continued focus and steady progress on retailisation, along with its strategy of exiting non-core businesses. Prudent ALM management has helped keep costs under control as well, while increase in policy repo rates should help improve yields hereon. The accelerated sell down of its wholesale business and focus on rapidly scaling the high margin retail portfolio should aid NIM positively in the future. With an optimistic view, we maintain our BUY rating on the stock with a rolled forward target price of Rs. 110 based on 1.1x FY25E BVPS

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