IGI Logo

Investment Rationale

L&TFH is on track to accomplish its LAKSHYA 2026 goals of retailisation (80% contribution) with retail growth of ~25% CAGR. Asset Quality is improving steadily and GS3 target of less than 3% can be achieved before envisioned. Standard asset coverage will safeguard the balance sheet and we may witness lower credit cost because of provision write-back. With strong operating metrics we estimate a ROA of 1.8% for FY24E. Inexpensive valuation of 1x PBVPS makes L&TFH attractive and we recommend BUY.

Retailisation to drive future growth: The Company has a long term focus on retail book, which the management has reiterated several times. The retail book grew at CAGR of 20% over FY16-22, while rural portfolio grew at a CAGR of 26% over previous six years. At the end of FY22, the retail book share to the total AUM stood at 51% against 26% in FY16. The wholesale book has been witnessing consistent drag down with 47% share at the end of FY22 against 57% in FY16. The defocused business (Infra bond + CRE) contributes insignificant portion of 1.7% of the book. The company is establishing strong market position across businesses with a granular customer base of more than 20 million. L&TFH has nation wide presence in 21 states and 1 UT with 13000+ touch points. The company witnessed highest ever quarterly and yearly disbursement in 4QFY22 which led to growth of 42% YoY in FY22 to ₹249bn of disbursements and a growth of 22% YoY in 4QFY22 to ₹81bn. Owing to enhanced on-ground collection efforts and analytics based resource allocation, the company remained one of the leading retail financiers, as the retail book increased by 6% sequentially. As part of “LAKSHYA 26” goals, L&TFH plans on growing its retail business to 80% of loan book.

Strong liability franchise and healthy ALM: In FY22, the company’s long term bonds upgraded from AA+ rating to AAA. A rating upgrade has resulted in lowest ever weighted average cost of funds in FY22 at 7.3%. The company is diversifying its borrowings from banks to ECBs and raised granular liabilities through retail NCDs. L&TFH is consistently maintaining an ALM surplus of less than 1-month surplus of ₹321bn and liquidity surplus for the period of 6-12 is at ₹258bn.

Consistent improvement in asset quality: L&TFH’s asset quality improved despite pandemic. The increase in Gross Stage 3 (%) during FY17 and FY18 was primarily due to change in norms. At the start of pandemic, the GS3 was 5.9% which ran down to 3.8% at the end of FY22. At the end of FY22 the GS3 of rural finance, housing finance, and Infrastructure finance stood at 3.97%, 7.83% and 0.75% respectively with PCR of 75%, 29%, and 34%. Moreover, the company is carrying additional provision (outside of PCR) of ₹23.5bn (2.85% of total standard assets). We believe the additional provisions may counter impact any future stress and may be gradually released (write-back) in coming quarters. We estimate the GNPA of 3.3% for FY24E with NNPA of 1.5%. The management goal of GS3 and NS3 of <3% and <1% for FY26 can be achieved before than envisaged.

LAKSHYA 26; ROA target of 2.8%: Factoring strong growth in high yielding retail book (80% contribution target by FY26.), normalization of NPA ratio (GS3: <3%, NS3: <1%) and gradually improving operating metrics; we believe the FY26 ROA target of 2.8% is likely to be achieved. We estimate the overall loan book to grow at 11% CAGR for FY22-24. With consistent NIMs of 6.4% and C/I ratio of 34%, we expect the PPOP to grow at 12% during FY22-24. Thus estimating a PAT growth of 54% YoY in FY23E and 24% YoY for FY24E to translate in ROA of 1.6% in FY24.

Outlook and Valuation

Factoring lower weighted average cost and improved collections along with strong business momentum backed by accelerated retail growth, we see immense potential in the stock for long term. We recommend BUY on L&TFH with a target price of ₹110; based on 1.15x FY24E BVPS of 96.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at www.lkpsec.com/#foo
SEBI Registration number is INM000002483

Above views are of the author and not of the website kindly read disclaimer