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Optimism on OMCs contingent on crude sustaining below ~USD 80/bbl

In 3QFY23, L&T Finance Holdings (LTFH) reported PAT of INR 4.5bn (+39% YoY/ +12% QoQ), aided by robust NII (at INR16.9bn, +24% YoY/ +8% QoQ). Credit costs (provisions as % of avg. loans) marginally inched-up QoQ to 2.3% (vs 2.2% QoQ). Operating performance continued healthy trajectory (PPOP at INR 12.4bn +8% YoY/ +5% QoQ). Other key highlights for the quarter: i) disbursements were strong (up, 36% YoY and 19% QoQ), propelled by a solid momentum in Retail disbursements, ii) Focussed AUM declined 2% QoQ (up 6% YoY) as the lender commenced accelerated reduction of Wholesale book (-24% YoY/ -18% QoQ) through various means like: repayments, prepayments, sell down; retail finance continued healthy traction (up, 34% YoY/ 10%QoQ), iii) reported NIM+Fees stood at 8.8% (up, 70bps YoY/ 6bps QoQ) attributing to higher yields in farm equipment, 2W and consumer loans, and shift in product mix towards Retail (64% vs. 50% in 3QFY22), iv) GS3 ratio slightly deteriorated QoQ to 4.2% (+20bps QoQ), v) coverage ratio improved to 60% (vs. 50% YoY/ 55% QoQ) while total additional provisions stood at 1.9% of standard book. In 3QFY23, leverage ratio enhanced to 4.1x (vs. 4.2x, as of 3QFY22). In 3QFY23, the financier completed the sale of its MF business (proceeds incl. surplus cash: ~INR 42.5bn; post-tax capital gains of INR 21.6bn) and utilized the proceeds for one-time provisions of ~INR 26.9bn to enable accelerated sell-down of the wholesale book. The provisions are due to change in valuation methodology of wholesale book from amortised cost to FVTPL, factoring-in illiquidity discount. In light of healthy momentum in retail products along with prepayments/ repayments (INR 42bn in 3QFY23) and sell-down (INR 29bn in 3QFY23), management reckons Retail products will form around 90% of the total loans through FY24 (vs. >80% as per Lakshya 2026). We forecast loan book CAGR of 11% and earnings CAGR of 49% over FY22-FY25E, with RoA/ RoE of 2.7%/ ~14% in FY25E. Maintain BUY with a TP of INR 115 valuing the company at 1.2x FY24E BVPS.

Strong disbursements continued in Retail; accelerated reduction of Wholesale book dragged loan growth: 

In 3QFY23, disbursements were strong at INR 132bn (up, 36% YoY and 19% QoQ), propelled by a solid momentum in Retail disbursements, which constituted 88% of total disbursements. Within Retail, LAP, 2W and Farm Equipment were robust. Retail assets contributed to 64% of the portfolio mix in 3QFY23 (vs. 50% YoY/ 58% QoQ). Loan book stood at INR 884bn whereas Focussed book at INR 880bn, with a decline of 2% QoQ (up 6% YoY), dragged by accelerated reduction of Wholesale book (-24% YoY/ -18% QoQ) through various means like: repayments, prepayments, sell down. However, this was largely offset by continued healthy traction in retail finance (up, 34% YoY/ 10%QoQ), mainly driven by Consumer Loans (2.8x YoY/ 19% QoQ), (2.8x YoY/ 19% QoQ), Rural Business Loans (46% YoY/ 10% QoQ) and Home Loans (32% YoY/ 8% QoQ). In light of healthy momentum in retail products along with prepayments/ repayments (INR 42bn in 3QFY23) and sell-down (INR 29bn in 3QFY23), management reckons Retail products will form around 90% of the total loans through FY24 (vs. >80% as per Lakshya 2026). Despite sharp reduction of Wholesale book, we believe pick-up in existing products, scaling-up of new products (e.g. SME loans), cross-selling, geographic expansion, increased traction on Planet app and introduction of new products, will help generating loan CAGR of 11% over FY22-FY25E.

Asset quality marginally deteriorated QoQ:

In 3QFY23, collection efficiency across the Retail businesses was healthy. GS3 ratio slightly increased QoQ to 4.2% (+20bps QoQ) whereas NS3 reduced to 1.7% (-10bps QoQ) on account of expansion in coverage ratio to 60% (+500bps QoQ). Retail asset quality sequentially improved (GS3 ratio at ~3.5% vs. ~3.9% QoQ), while there was a sequential deterioration in wholesale asset quality, driven by a truncation of the wholesale book. The financier carries total additional provisions of INR 10.4bn (1.9% of standard book). LTFH created one-time exceptional provisions of ~INR 26.9bn to enable accelerated sell-down of the wholesale book in anticipation of illiquidity discount. These provisions were made from the consideration of the MF business (proceeds incl. surplus cash: ~INR 42.5bn).

Maintain Buy; expect RoA/ RoE at 2.7%/ 14% levels by FY25E:

The lender has meaningful market share and position across retail products viz. Tractor (15%, #1), 2W (11%, #4) and Micro loans (5.7%, # 4), as of Dec’22. Furthermore, it has also successfully scaled-up new products (e.g. SME loans). We believe the management is on course to transform the loan book from Wholesale focussed to Retail and will materially improve the return metrics. We forecast loan book CAGR of 11% and earnings CAGR of 49% over FY22- FY25E, with RoA/ RoE of 2.7%/ ~14% by FY25E. The growth will be driven by increasing higher margin business owing to retailisation and credit costs normalization, thus enhancing the returns. We value LTFH at 1.2x FY24E BV to arrive at our TP of INR 115.

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