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05-04-2023 02:54 PM | Source: JM Financial Institutional Securities
Buy L and T Finance Holdings Ltd For Target Rs.125 - JM Financial Institutional Securities
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LTFH reported consolidated profit of INR5bn (+47% YoY) led by lower credit costs. NII at INR16.8bn (+18% YoY) and PPOP at INR12.4bn (+9% YoY) were largely in line with our estimates. While overall loan assets declined sharply (-8% YoY, -8.5% QoQ) led by decline in wholesale assets (-53% YoY), retail assets scale up continued at a brisk pace at 35% YoY (as per management’s indicated strategy). Retail assets now form ~75% of the lending assets mix for LTFH. At the analyst meet, mgmt. reiterated its focus on scaling up the retail portfolio to ~90% of the overall lending book by FY26 led by continued traction in its identified segments of rual micro/group loans (+41% YoY), consumer loans (+138% YoY on a low base) and home loans (+36% YoY). Mgmt. believes focus on analytics, cross sell to existing customer base and continued investments in its tech prowess should aid LTFH in delivering its targeted RoA of 2.8-3% on an overall level (with GS3<3%, NS3<1%). In our view, the scale up of LTFH’s retail portfolio is encouraging and should translate into better medium-term RoEs as the drag from wholesale portfolio reduces. We maintain BUY with a revised TP of INR 125.

* Retail loans scaling up at a brisk pace: While overall loan assets declined sharply (-8% YoY, -8.5% QoQ) led by decline in wholesale assets (-53% YoY), retail assets continued to scale up at a brisk pace at 35% YoY. Retail assets presently stand at ~75% of the loan book as against 51% in FY22 with it being led by rural micro/group loans (+41% YoY, 7% QoQ), home loans (+36% YoY, 8%) and consumer loans (+138% YoY, 16% QoQ). Whereas exposure to wholesale business has been brought down with sharp decline in disbursements (-84% YoY, -34% QoQ). LTFH plans to increase its retail share to 90:10 (Retail: Wholesale) by FY26 on the back granular customer franchise and cross selling to its existing customers. We have built an AUM growth of 20% CAGR by FY23-25E.

* Headline asset quality stable; large on-book provisions offer cushion: LTFH’s GS3 assets stood at 4.74% (vs 4.21% QoQ) primarily led by sequential decline in lending assets, though coverage on GS3 assets stood at 69%. Retail finance asset quality will be a monitorable given the strong growth underway and will be a critical driver for achieving the 2026 goals laid out by the mgmt. In FY23, LTFH has created provisions towards/revalued some of its wholesale exposures (~INR27bn impact) form the one-time gains recognized through sale of its mutual fund business. These, along with existing provisions towards stage-2 and stage-3 assets offer cushion with respect to stress.

* Return metrics on the mend; maintain BUY: LTFH is targeting sustained improvement in its key return metrics by driving granular retail business. We believe given the benign credit environment, underpenetrated customer base and renewed focus on risk should drive healthy asset quality in the near-to-medium term which, in turn, should aid return ratios’ improvement. Barring any incremental unforeseen event in the wholesale portfolio, we expect LTFH’s RoEs to improve to 12.3%/13.6% by FY24/FY25. Maintain buy with a revised target price of INR125 (1.14x FY25e P/BV).

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