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Mixed quarter; Retail book to underpin growth

L&T Finance Holdings Limited is a financial holding company offering financial products and services in the corporate, retail and infrastructure finance areas, along with fund products and investment services.

* In Q3FY22, NIM + Fee expanded by 71bps YoY to 8.1% and cost of borrowing declined 35bp YoY to 7.5%.

* Business momentum was maintained as farm equipment and twowheeler loans displayed growth, whereas micro loans business volumes normalized over Rs. 1,000cr a month. Consumer loans and home loans continued to gain further traction.

* GNPA and NNPA rose to 5.91% and 3.03%, respectively in Q3FY22, while PCR stood at 50% (vs. 52% in Q2FY22).

* An increase in disbursements, collections and adoption of prudent liquidity practices are factors that are likely to protect the company from uncertainties in the long run. This along with improved capital ratios will underpin growth. We therefore upgrade our rating to BUY with a rolled forward target price of Rs. 89 based on 0.9x FY24E BVPS.

Improvement in margins will lead to long-term growth

In Q3FY22, company’s net interest income was Rs. 1,468cr; NIM + Fee margin increased by 71bps YoY, to reach 8.1% in Q3FY22, an increase from 7.6% in previous quarter, mainly through increased retail momentum. The company is well protected from an expected liquidity tightening and an increase in interest rates; it registered the lowest weighted average cost of borrowing (WAC) in the quarter at 7.47%. This represents a reduction of 35bps/6bps YoY/QoQ. In addition, it raised Rs. 2,090cr of long-term borrowing in the quarter at a WAC of sub 6%. The GNPA/NNPA (for Stage-3) reported at 5.91%/3.03% in Q3FY22 as compared to 5.74%/2.81% in Q2FY22.

Strong business momentum in retail supports growth

LTFH witnessed strong sequential improvement in disbursements in Q3FY22 (+35.0% QoQ to Rs. 9,911cr). The company remained as one of the leading retail financiers, as the retail book increased by 4% QoQ. Retail portfolio mix is now at 50%, an increase from 40% in Q3FY21. This can be attributed to highest disbursements in Q3 led mainly by significant growth in two-wheeler finance, micro loans, and consumer loan business. The total disbursements in Q3 for focused retail business was at Rs. 7,606 cr a 29% YoY increase. Collection efficiencies that returned to pre-COVID levels in the previous quarter, further stabilized in Q3FY22. Robust collections were registered in real estate due to increase in resolutions. Principal repayment/ pre-payment amounted to Rs. 3,148cr in the previous 12 months.

Key highlights

* The company entered into an agreement with HSBC Asset Management to sell 100% shares of L&T Investment Management Ltd., for an aggregate purchase consideration US$425 million.

* In Q3FY22, company strengthened its balance sheet; the capital adequacy improved to 24.10%, with Tier 1 at 20.35%.

Outlook & Valuation

LTFH’s business is supported by highest quarterly retail disbursements. Company’s prudent operational strategies should drive topline growth in the short term, while improved capital ratios and liquidity position to deal with contingencies are expected to keep the long-term growth prospects intact. We hence upgrade our rating to BUY on the stock with a rolled forward target price of Rs. 89 based on 0.9x FY24E BVPS.

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