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Retailization momentum healthy; marginal beat on PAT

* LTFH reported a 3QFY22 PAT of INR3.1b (including minority interest), 5% above estimate. PPOP stood at INR11.8b (7% beat), driven by healthy improvement in fees and other income, while provisions/credit costs of INR7.4b (8% above our estimate) dipped 5% QoQ and 28% YoY.

* Loan book continued to consolidate and stood at INR856b (down ~15% YoY and 2% QoQ), driven primarily by Infrastructure loans (down 7% QoQ), LAP (down 4%), and the defocussed business. The Rural Finance business (particularly Micro Loans, 2Ws, and Consumer loans) exhibited strength, with a normalized monthly disbursement run-rate in Micro loans.

* Additional provisions (including OTR provisions) stood at INR21.8b (2.8% of standard loans), including utilization of INR450m for its remaining exposure in a specific Real Estate account. The aggregate restructured book stood at INR31b (3.6% of loan book).

* While its Wholesale Real Estate and Infrastructure segments would continue to consolidate, we expect LTFH to start demonstrating healthy loan growth in the retail businesses from FY23 onwards. The remaining exposure in the specific large Real Estate account that slipped into NPA in 2QFY22 has been recognized as non-performing in 3Q and provided for. We are now factoring in an 8%/14% loan growth in FY23E/FY24E; however, we have cut our FY23-24E EPS by 3-4% to factor in higher credit costs. We maintain our BUY rating on the stock with a TP of INR100 (premised on 1.1x Dec’23E consolidated BVPS), implying 37% potential upside.

Healthy disbursements in Rural; while LAP, Wholesale RE, and Infra muted

* Disbursements rose 35% QoQ (down 8% YoY on a higher base) to INR99.1b, driven by Rural Finance, which constituted 70% of total disbursements. Despite muted growth in the Tractor and 2W industries and a tepid festive season, LTFH maintained its market share and delivered largely stable disbursements YoY in 3QFY22. The MFI segment saw a sharp recovery in disbursements, driven by normalized collections, with a balanced mix of 44% new and 56% repeat customers.

* Disbursements in LAP remained muted, with LTFH continuing to focus on the salaried home loan segment. The company reported that it has reinitiated disbursements in the SENP segment, with revamped market offerings through DSA sourcing. In RE Finance, LTFH continued to disburse to existing projects, with a focus on project completion and monitoring.

* In Infrastructure segment, LTFH moderated its disbursements in line with its retailization strategy and unattractive risk-based pricing in the segment.

Slippage of remaining exposure in a RE account and resolutions in few others

* Consolidated GNPA was up ~20bp QoQ to 5.9%. While GS3 improved in Rural, it was offset by the deterioration in asset quality in Infrastructure and RE Finance. The remaining exposure of ~INR3.5b in a specific RE account slipped in 3QFY22. GS3 in this segment was up ~7.9% (+200bp QoQ), while PCR was stable at 22%.

* Resolutions were achieved in a few watch list accounts (but standard accounts) in the Wholesale RE book.

* Consolidated PCR fell 200bp QoQ to 50% (down from 52% in 2QFY22). As a result, NS3 rose ~20bp QoQ to 3%. Write-offs stood ~INR6.25b.

Spreads and NIM were higher sequentially; AMC AUM increased

* Spreads (calculated) rose 20bp sequentially to 6.6%, led by ~10bp decline in CoF. Yields improved 10bp QoQ, driven by further retailization of the loan book. NIM + fee income grew 50bp QoQ, led by a 10bp improvement in NIM and sequentially higher disbursements in 3QFY22.

* Average AUM in AMC was up 1.6% QoQ to INR796b, led by a similar increase in average Equity AUM. LTFH witnessed inflows in the pure Equity and Fixed Income categories, but net outflows in the Hybrid category.

Retailization would gain further momentum under the new strategy

* LTFH has introduced a new product segment known as small and medium Business Loans. Consumer Loans, another relatively newer product segment is shaping up well. Existing products complemented by newer products (some of which are in the pipeline) and newer customer segments can lead to healthy retail book growth. We model retail loan CAGR of ~20% over FY22-FY24E.

* LTFH expects the proportion of retail to improve to ~80% of the loan mix within the next 3-4 years. It also anticipates to deliver a 25% CAGR in retail loans and consolidated RoA of 2.5% by the end of five years.

Key highlights from the management commentary

* In 3QFY22, infrastructure disbursements were well below expectations. Market was not pricing the risk appropriately and LTFH stayed away from this segment. It will continue with its capital-light model. As disbursements pick up, its selldowns will also pick up. Pre-payments were also higher than expectations.

* During the quarter, RBI issued a circular for daily stamping of NPAs and classification of NPAs. GNPA would have been higher by INR8.5b (~65% of this was in tractors) under the new circular but there is no financial impact since the ECL provisions are higher than the IRACP provisions. The company expects both the GNPA and GS3 to converge over the next 3-4 quarters.

Valuation and view: Retail segment to drive growth ahead; Maintain BUY

Rural segments continued to witness an improving trend in operational metrics, with sequential improvement in asset quality. Even with continuing consolidation in the Wholesale Real Estate and Infrastructure loan book, we expect LTFH to start delivering strong growth in the retail segments from FY23 onwards. We remain watchful of potential slippages in RE Finance as this segment could remain vulnerable despite all the buoyancy which is being seen in the sector. LTFH carries adequate additional provisions (including OTR provisions) of 2.8% of standard loans. These are over and above ECL provisions and should provide the necessary buffer to protect against contingencies in Micro loans and the RE segment. We have cut our FY23-24E EPS by 3-4% to factor in higher credit costs. We maintain our BUY rating on the stock with a TP of INR100 (premised on 1.1x Dec’23E consolidated BVPS), implying 37% potential upside.

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