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Strong PAT beat; healthy Retail loan growth and stable asset quality

Expect credit costs to moderate as a large part of the OTR pain is now over

LTFH reported a PAT of ~INR4.1b in 2QFY23 (up 82% YoY, 24% beat). Healthy NIM (and fee income) and lower credit costs (driven by utilization of INR4.2b of management overlay to create 100% provisions on OTR slippages) led to the strong earnings. While the company has demonstrated an improvement in NIM, we model in a margin compression in FY24 to factor in a gradual rise in borrowing costs and the competitive landscape. A better execution of the management’s Retail strategy and an improved product mix (Retail loans improving to 58%) should aid an improvement in asset quality. Given that a large part of the capital gains from the sale of the AMC business will be utilized for macro-prudential provisions (and to improve PCR on the Wholesale Real Estate business), it will be in a better position to monetize and/or further sell-down this Wholesale segment. LTFH is at a cusp where it can turn over a new leaf from FY24. We maintain our Buy rating with a TP of INR95 (premised on 1x FY24E consolidated BVPS).

Strong Retail growth driving the improvement in Retail mix

* Total disbursements grew 51% YoY to ~INR110b. Retail disbursements grew 15% QoQ to touch yet other record high quarterly disbursements of ~INR102b. Retail assets now constitute ~58% to the loan mix (PY: 47%).

* Loan book grew 4% YoY and 2% QoQ to INR901b. The Retail book grew 9% QoQ and 27% YoY, led by a strong sequential growth in Micro loans (+10%), 2W (+8%), Home loans (+9%), and Consumer loans (+31%).

Overall asset quality stable; improving trajectory in Retail asset quality

* GS3/NS3 was stable QoQ at 4%/1.85% and S3 PCR stood at 55%. There was a minor improvement in Retail asset quality, with Retail GS3 at ~3.6% (absolute quantum rose to INR18.5b). Within Wholesale, while there was a QoQ decline in the quantum of GS3, it exhibited minor deterioration to 4.72% (on a reduced base).

* On the OTR front, INR4.2b of Retail Finance loans, which slipped into Stage 3, was fully provided for. The management suggested that the impact of OTR in Unsecured loans was largely over. Except Housing, repayments have resumed in all other Unsecured products after the moratoriums.

* After the utilization of management overlay to provide for slippages from the OTR pool, LTFH has additional provisions (including OTR provisions) of ~INR11b (1.3% of standard assets) over and above the GS3 and standard provisions.

Spreads expanded, while AMC AUM showed signs of an improvement

* NII and fee income grew 9% YoY to INR17.5b (8% beat). Consolidated NIM and fee income grew 85bp YoY to 8.4%, led by higher retailization of the loan book and an improvement in core margin.

* Spreads (calculated) expanded by ~40bp QoQ to 7%, led by a 50bp rise in yields to 13.9%, despite a reducing proportion of the Wholesale book.

* Average AUM in the AMC witnessed a muted growth of 1% QoQ to INR724b. This was driven by a 6% QoQ growth in average Equity AUM. LTFH witnessed inflows in the Liquid category, but net outflows in the Fixed Income and Hybrid categories.

Key highlights from the management commentary

* Robust arrivals of agricultural produce at mandis have contributed to the strong cash flows in rural India. Rural cashflows are expected to further improve, led by: a) elevated crop prices and higher realization from the Rabi crop; b) overall water storage position across most reservoirs is good and c) an increase in NREGA wage rates.

* Early festive season trends have been good for both tractors and two-wheelers.

* NIM and fee income remains healthy. The management expects cost-to-average assets ratio to remain steady for the next four quarters and should start trending down from there on.

* It guided at a credit cost of ~3% by 4QFY23 and trend even lower in FY24.

* OTR pool outstanding stood ~INR8.8b in the Housing segment (o/w of INR6b will open up for repayments in FY24).

Valuation and view

MFI, Home loans, and Consumer businesses saw a strong sequential improvement in disbursements and loan growth. LTFH has started exhibiting strong growth in its Retail book, even as its Wholesale book (particularly Real Estate) and defocused segments moderated. Credit costs should moderate from here on as the impact of OTR is largely over and utilization of capital gains from the sale of the AMC will take care of the provisioning requirements in stressed pockets of the Wholesale book. We have increased our FY23/FY24 EPS estimate by 8%/3% to factor in higher loan growth. We expect a PAT CAGR of 35% over FY22-24 and an improvement in RoA/RoE to 1.6%/ 9% by FY24. We maintain our Buy rating on the stock with a TP of INR95 (premised on 1x FY24E consolidated BVPS).

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