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Our Take:

L&T Finance Holdings (LTFH) has shown commendable growth on all fronts post implementation of its strategy in FY17. It is on path to become a dominant player in infrastructure and tractor businesses. Focus on branch rationalization, cost efficiency and use of digital and data analytics platform to source loans and collections could lead to further improvement in return ratios.

The company had been focusing on reducing its product lines which were low margin and substandard ROE businesses. Improving capital allocation by exiting/partial selldown of its non-core assets/unprofitable businesses and redeploying it to RoE accretive businesses (Rural and Housing Finance) with higher focus on fee income through sell-down and DCM (Debt and Capital Markets) operations would also support RoE expansion. Disbursement growth has turned positive in Q3FY21 after 9 quarters of de-growth as LTFH rationalized its operations.

Collection volumes have picked up and asset quality has been gradually improving. The company has made accelerated provisioning towards Covid, cushioning the balance sheet from future uncertainities. Reduction in cost of funding aided by easing liquidity, strong capability to earn fee income and pickup in rural disbursements should aid in margin expansion.

Valuations & Recommendation:

LTFH, over the years has been constantly reducing its dependence on the wholesale lending business by aggressively expanding its well diversified rural financing business which has grown at CAGR of 40% over FY17-20. The company’s rural financing segment share of revenues expanded by 1100 bps over last 4 years from 17% to 28% as on FY20.

It has established itself as one of the prominent players in the tractor financing business. LTFH has witnessed improving trends across its business in the past few months and with pick up in disbursements, return ratios are likely to improve.

The stock is available at cheap valuations for a reason of possible asset quality hiccups in wholesale lending though the focus on this business has been falling. We feel investors can buy the stock at CMP (1.04xFY23E ABV) and add further on dips to Rs 73-76 band (0.90x FY23E ABV) for sequential targets of Rs 99.5 (1.2x FY23E ABV) and Rs 107.5 (1.3x FY23E ABV) in 2 quarters.

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