Buy L and T Finance Holdings Ltd For Target Rs.120 - ICICI Securities
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Treading a path to retailisation; marks down wholesale to facilitate accelerated sell-down
L&T Finance Holding (LTFH) has reported adjusted consolidated PAT of Rs4.54bn in Q3FY23 (compared to Rs4.1bn/ Rs2.62bn/ Rs3.42bn/ Rs3.26bn/ Rs2.23bn/ Rs1.77bn in Q2FY23/ Q1FY23/ Q4FY22/ Q3FY22/ Q2FY22/ Q1FY22, respectively). Aligning to Lakshya 2026 goals, retail portfolio scaled up 10% QoQ/34% YoY and it has commenced accelerated reduction in wholesale portfolio (down 18% QoQ/24% YoY). This, coupled with improvement in NIMs + fee (8.8%), led to better than estimated core operating performance
It reported capital gains of Rs26.1bn (pre-tax) from stake sale in L&T Investment Management. Nonetheless against this, LTFH created a one-time provision of Rs26.87bn (equivalent to 8% of wholesale book) to facilitate accelerated sell down of wholesale book. The management believes this provision adequately covers any downside risks of an accelerated sell down. It has also proposed the merger of its subsidiary lending entities - L&T Finance Ltd. and L&T Infra Credit Ltd. with itself, which is likely to result in a simple, unified structure
The overhang of mark-down of wholesale portfolio was addressed with incremental provisioning. With focus on accelerated sell-down of wholesale portfolio, company is looking at ~90% of retail mix by FY24-end. Also it will accelerate Lakshya 2026 strategic initiatives of targeted RoA of 2.8-3.0%, gross stage-3 at 25% retail asset growth. We believe consistent delivery and execution of Lakshya 2026 strategic plan, coupled with retail asset growth, could help it command a multiple of 1.25x on FY24E book value. Maintain BUY with a revised target price of Rs120. (earlier: Rs95 at 1.1x FY24E book value). Key risks: 1) Slower-than-anticipated execution of Lakshya 2026 plan; 2) any incremental cost attached with the downselling of real estate and wholesale portfolio
* Mutual fund stake sale gains used to further strengthen the balance sheet: LTFH’s divestment of mutual fund business to HSBC Asset Management (India) was completed in Q3FY23. It received total consideration of Rs42.49bn in the form of sales proceeds of Rs34.85bn and surplus cash of Rs7.64 from L&T Investment Management Limited. This deal values its asset management business at 5.7% of closing AUM. Capital gains realised from the stake sale in L&T Investment Management amounted to Rs21.6bn (post tax). Nonetheless against this, LTFH created one-time provision of Rs26.87bn to facilitate accelerated sell down of wholesale book (this is equivalent to 8% of wholesale book).
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