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Improved CE; lower provisioning

* L&T Finance Holdings (LTFH) reported 4QFY21 PAT of INR2.7b (a 31% miss). Excluding a one-off taxation provision, PAT would be INR4.3b (v/s our estimate of INR3.8b). While PPOP missed our estimate by 9%, lower credit costs led to the PBT beat.

* In FY21, the loan book declined 4% YoY and PAT more than halved to INR9.5b on the back of accelerated credit costs (up 58% YoY). Operating profit was largely flattish.

* We believe LTFH has accounted for most of the asset quality related pain, and going forward, we expect topline growth to pick up. Hence, we upgrade our FY22 EPS estimate by 3%. Maintain Buy, with TP of INR115 (1.2x FY23E BVPS).

Rural drives recovery in disbursements

* Disbursements are almost back at pre-COVID levels, led by Vehicle Finance / Micro Finance. With disbursements of INR12b in 4QFY21, LTFH is the largest tractor financier in India. 2W disbursements stood at INR11b (YoY level), and MFI disbursements reached new highs of INR32b.

* Disbursements in Housing / Real Estate Finance remained muted, while those in Infrastructure Finance were at their lowest ever at INR12b.

* Due to elevated sell-downs in the Infrastructure Lending segment, the total loan book declined 4% QoQ to INR940b.

Collections at pre-COVID levels; building up provision buffer

* With improved collection efficiency, credit costs declined to INR6.5b in 4QFY21 from an average of ~INR10b over the previous three quarters. The total additional provision buffer now stands at INR10b (1.2% of loans).

* While the GNPL ratio was largely unchanged at 5%, the NNPL ratio declined to 1.6% (down 30bp QoQ). During the quarter, LTFH undertook INR7b write-offs (100% provided, NPLs, largely rural).

Spreads improve; AMC AUM posts growth

* Spreads (calculated) improved 30bp QoQ to 6.2% as CoF fell by a similar quantum to 7.1%.

* Average AUM in the AMC segment increased 5% QoQ to INR728b, led by an 8% increase in equity AUM to INR405b.

Key highlights from management commentary

* Sustainable NIMs + fees would be in the range of 6.5–7.0%. Management expects retail AUM to be near 60% of the mix over the next 3–5 years.

Valuation and view

LTFH has been consolidating its loan book over the past few quarters; however, with an improving environment, loan growth should pick up. Margins should benefit from a higher share of retail loans and lower liquidity on the balance sheet. Credit costs should normalize as provisioning has been upfronted. We upgrade our FY22 EPS estimate by 3%. Maintain Buy, with TP of INR115 (1.2x FY23E BVPS).

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