Buy L&T Finance Holdings Ltd For Target Rs.2,770 - Motilal Oswal Financial Services Ltd
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In-line earnings aided by NIM expansion and lower tax rate
Consol. RoA expands further to ~2.5%; asset quality largely stable
* L&T Finance Holdings (LTFH) reported PAT of INR6.4b (in line) in 3QFY24. PPOP grew ~7% YoY to INR13.4b (in line), while credit costs of ~INR5.1b translated into annualized credit costs of 2.5% (vs. 2.6% in 2QFY24 and 2.7% in 3QFY23). The effective tax rate stood at 22.4% (vs. 25.5% in 2Q).
* Total loan book grew 4% QoQ and declined ~8% YoY to INR818b, mainly due to continued run-down in the wholesale portfolio, which fell 24% QoQ/77% YoY to ~INR70b (2Q: ~INR93b). Wholesale Real Estate book dipped ~66% YoY to ~INR25b.
* Retail assets contributed 91% to the loan mix (2Q: 88%). Retail book grew ~8% QoQ/31% YoY, propelled by healthy growth in MFI, Home Loans, SME, and Consumer Finance.
Healthy disbursements in Retail; continued running down of wholesale segments
* Disbursements grew 13% YoY to ~INR149b, driven by 25% YoY growth in retail to ~INR145b in 2QFY24.
* Wholesale disbursements grew ~69% QoQ, led by infrastructure finance but declined 78% YoY to INR3.3b.
Asset quality improved sequentially
* Consol. GS3 declined ~5bp QoQ to ~3.2%, while NS3 stood stable at ~0.8%. PCR declined ~40bp QoQ to ~75%.
* Retail GNPA declined 10bp QoQ to 2.95% and NS3 stood stable at ~0.65%.
Margin expansion driven by improving retail mix
* NII grew 7% YoY to INR19.5b. Consolidated NIMs and Fees improved ~10bp QoQ to 10.9% in 3QFY24, led by changing portfolio mix toward retail.
* Spreads (calculated) expanded 25bp QoQ to ~9.4%, led by a 35bp sequential increase in yields (calculated) to ~16.5%.
Valuation and view
Within Retail, MFI, Home Loans and 2W segments continued to post strong growth, with Retail now contributing 91% to the loan mix. The company continues to focus on digital initiatives to sustain its retail growth momentum. Credit costs would continue to moderate in the near term, driven by further reductions in the wholesale book and improvements in retail asset quality, which can translate into sustainable consolidated RoA of ~2.7%. Mr. Sudipta Roy (exICICI) has succeeded Mr. Dinanath Dubhashi as MD and CEO, effective 23rd Jan’24, and will look to leverage his vast experience to further strengthen the franchise. We might revise our estimates after the earnings call on 24 th Jan’24.
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SEBI Registration number is INH000000412
