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Wholesale running down fast; Retail on a strong footing

? LTFH reported a 3QFY23 consolidated PAT of ~INR4.5b (up 47% YoY, 8% beat), driven by a ~40bp QoQ expansion in NIMs (and fee income) which were aided by an improving retail mix. ? LTFH concluded the sale of its MF business with a pre-tax gain of ~INR26.1b. The proceeds were utilized for one-time exceptional provisions of ~INR26.9b to enable accelerated sell-down of the wholesale book. Management has guided that this would adequately cover any downside risks of an accelerated sell-down without any impact on retail profitability. ? We expect the proportion of the retail mix to improve to 85%/93% by FY24/FY25E. We have increased our FY23/FY24 EPS estimates by ~9% each to incorporate higher margins and a moderation in credit costs. Including the sharp run-down in the wholesale book, we model loan growth of 7%/18% in FY24/FY25E. We estimate a PAT CAGR of 33% over FY22-FY25E for a consolidated RoA/RoE of 2%/10.2% in FY25. ? A strong liability franchise, a well-capitalized balance sheet and a keen intent to accelerate the sell-down of the wholesale book position LTFH well to achieve its Lakshya 2026 goals. LTFH is at a cusp where it can turn over a new leaf from FY24. Maintain our Buy rating with a TP of INR120 (premised on 1.2x Sep’24E consolidated BVPS).

Healthy disbursements drive strong retail growth

* Total disbursements grew 33% YoY to ~INR131.6b, driven by 53% YoY growth in retail disbursements to ~INR116b. Retail assets now make up ~64% of the loan mix (PQ: 58%).

* The loan book grew 3% YoY but declined 2% QoQ to INR880b, largely driven by an accelerated reduction in the wholesale portfolio, which declined 24% YoY to INR310b as of Dec’22 (PY: ~INR408b). Retail grew 34% YoY, led by MFI, 2W, tractor and consumer finance.

Asset quality largely stable; provisioning on wholesale now complete

* Consolidated GS3 increased ~20bp QoQ to 4.2%, while consolidated NS3 declined ~10bp QoQ to 1.7%, driven by a ~5pp increase in PCR to 60%. Retail GS3 improved ~10bp QoQ, while there was a sequential deterioration in wholesale GS3 due to a decline in the wholesale book.

* Management stated that the provisions, which were required to account for the illiquidity discount and to accelerate the rundown of the wholesale book, have now been completed. It is carrying additional provisions (including OTR) of ~INR10.4b (~1.9% of standard assets) over and above the ECL provisions.

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