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Investment Rationale
Business growth to slow down due to economic factors
Disbursements have grown at 59% during FY11, despite of the tint of macro economic slowdown
which has impacted growth of many financial companies. The growth was mainly on account of
Corporate segment lending which grew by 76.9% Y-o-Y vs 35.8% for Infra segment and 44.3% for
retail segment in FY11. However there has been slowdown in corporate activities as reflected
by IIP of 1.8% during Dec’11 mainly due to higher input cost, delay in projects and macro
economic slowdown. After factoring the impact of demand slowdown, we expect advances to
grow by 45.6% CAGR over FY11-FY13E on back of disbursement growth of 34.3% CAGR over
FY11-FY13E.
Margin under pressure, to improve in FY13E
The company had NIM of 6.8% in FY11 lower than 7.5% in FY10 as high borrowing cost impacted
margins. Though borrowing rates have peaked out, still slow-down in growth will limit passing
on of cost to customers.
• Going forward, we expect NIM to correct in FY12E as borrowing cost is at its peak and
slow-down in demand has curtailed pricing power.
• We expect, NIMs to improve in FY13E on back of the funding source of retail bonds that the
company is likely to tap for containing cost of funds which would help it to support
margins. We expect NIM to be at 5.3% in FY12E and 5.4% in FY13E.
Profitability will get impacted by low margins and higher credit cost
PAT has grown at CAGR of 58.8% over FY07-FY11 for L&T Fin. Growth in PAT was mainly
supported by consistent growth in NII, growth in other income as business from Asset
management (AMC) and third party product distribution contribution improved over FY07-FY11.
Going forward, we expect PAT to grow at CAGR of 30.2% over FY11-FY13E on back of:
• Other income to grow at 6% Y-o-Y as AMC business picks up and higher growth in business
from third party product distribution would lead to higher commission.
• Cost to Income Ratio (CI ratio) to remain elevated close to 40% in FY13E on back of low
growth in NII.
• Credit cost to move up to 0.3% in FY13E on the back of higher delinquencies due to the
company’s exposure to sensitive sectors like power where repayment concerns are
lingering and further slow-down in business could impact repayment capacity of borrowers.
Asset quality intact, but further slippage possible
L&T Fin has improved upon its asset quality significantly as is evident from the GNPA level of
1.1% in FY11 vs 2.4% in FY10 and 1.9% in FY09. Out of total GNPA of `1.4 bn, `100 mn came
from Micro Fin AP exposure in FY11 for L&T retail segment. Going forward, we expect to see
some pressure on asset quality as the company has exposure to power and port sector which
are facing headwinds in current economic weak condition mainly on account of coal supply
concerns. On the other hand even corporate and some of the retail segment products are
facing slowdown in growth. We expect, GNPA to remain at 1.5% in FY13E.
Valuation
The company has growth plans in place but economic condition has led to things going against
expectations. We feel L&T Fin is in growth phase and if it can overcome the above discussed
issues while maintaining decent growth, the stock should command higher multiple. Risk to our
valuation is issuance of banking license to LTFH, which would led the stock to trade at higher
valuations. At CMP, the stock is trading at 2.0x and 1.7x ABV FY12E and FY13E respectively. We
initiate coverage on the stock with Neutral rating and TP of `45 (1.7x ABV FY13E).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Rationale
Business growth to slow down due to economic factors
Disbursements have grown at 59% during FY11, despite of the tint of macro economic slowdown
which has impacted growth of many financial companies. The growth was mainly on account of
Corporate segment lending which grew by 76.9% Y-o-Y vs 35.8% for Infra segment and 44.3% for
retail segment in FY11. However there has been slowdown in corporate activities as reflected
by IIP of 1.8% during Dec’11 mainly due to higher input cost, delay in projects and macro
economic slowdown. After factoring the impact of demand slowdown, we expect advances to
grow by 45.6% CAGR over FY11-FY13E on back of disbursement growth of 34.3% CAGR over
FY11-FY13E.
Margin under pressure, to improve in FY13E
The company had NIM of 6.8% in FY11 lower than 7.5% in FY10 as high borrowing cost impacted
margins. Though borrowing rates have peaked out, still slow-down in growth will limit passing
on of cost to customers.
• Going forward, we expect NIM to correct in FY12E as borrowing cost is at its peak and
slow-down in demand has curtailed pricing power.
• We expect, NIMs to improve in FY13E on back of the funding source of retail bonds that the
company is likely to tap for containing cost of funds which would help it to support
margins. We expect NIM to be at 5.3% in FY12E and 5.4% in FY13E.
Profitability will get impacted by low margins and higher credit cost
PAT has grown at CAGR of 58.8% over FY07-FY11 for L&T Fin. Growth in PAT was mainly
supported by consistent growth in NII, growth in other income as business from Asset
management (AMC) and third party product distribution contribution improved over FY07-FY11.
Going forward, we expect PAT to grow at CAGR of 30.2% over FY11-FY13E on back of:
• Other income to grow at 6% Y-o-Y as AMC business picks up and higher growth in business
from third party product distribution would lead to higher commission.
• Cost to Income Ratio (CI ratio) to remain elevated close to 40% in FY13E on back of low
growth in NII.
• Credit cost to move up to 0.3% in FY13E on the back of higher delinquencies due to the
company’s exposure to sensitive sectors like power where repayment concerns are
lingering and further slow-down in business could impact repayment capacity of borrowers.
Asset quality intact, but further slippage possible
L&T Fin has improved upon its asset quality significantly as is evident from the GNPA level of
1.1% in FY11 vs 2.4% in FY10 and 1.9% in FY09. Out of total GNPA of `1.4 bn, `100 mn came
from Micro Fin AP exposure in FY11 for L&T retail segment. Going forward, we expect to see
some pressure on asset quality as the company has exposure to power and port sector which
are facing headwinds in current economic weak condition mainly on account of coal supply
concerns. On the other hand even corporate and some of the retail segment products are
facing slowdown in growth. We expect, GNPA to remain at 1.5% in FY13E.
Valuation
The company has growth plans in place but economic condition has led to things going against
expectations. We feel L&T Fin is in growth phase and if it can overcome the above discussed
issues while maintaining decent growth, the stock should command higher multiple. Risk to our
valuation is issuance of banking license to LTFH, which would led the stock to trade at higher
valuations. At CMP, the stock is trading at 2.0x and 1.7x ABV FY12E and FY13E respectively. We
initiate coverage on the stock with Neutral rating and TP of `45 (1.7x ABV FY13E).
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