L & T Finance - Religare

Strong growth prospects to support premium valuations
We initiate coverage on LTFH with a HOLD rating and a Sep’14 TP of Rs 85/sh.
We like LTFH for its diversified product profile, strong parentage (subsidiary
of L&T) and skilled management. This coupled with a low base will ensure
industry-leading growth in the medium term. LTFH is also a leading contender
for a new banking licence which will further accelerate growth. Valuations
(lending businesses trading at 2.2x FY14E BV) are expensive given subdued
ROEs, but we are long-term positive and advise buying on declines.

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 Building a comprehensive product portfolio: LTFH, through its two key subsidiaries
LTF and LTIF, has developed a strong and comprehensive lending portfolio which
caters to the infrastructure, industrial, consumer and rural segments. This coupled
with a low base resulted in a 39% CAGR in advances over FY08-FY13 to Rs 333bn.
While total advances are in line with other NBFCs, LTFH’s market share in different
products is still low, implying ample opportunities for growth. We factor in 25%
CAGR growth in advances over FY13-FY15. A banking licence, if granted, will further
boost long-term growth. The acquisition of Fidelity MF has also positioned LTFH as a
strong asset management company.
 Robust earnings trajectory; ROEs to improve: Lower wholesale rates are likely to
boost NIMs in the lending business. This together with lower credit costs in LTF
(FY12/FY13 costs were higher due to microfinance losses and provisions on some
corporate assets) and reduced losses in the MF business should boost consolidated
profitability. We expect consolidated earnings to grow at a 31% CAGR over FY12-
FY15 and ROE to improve by 320bps to 15% over this period.
 Valuations expensive but banking licence key catalyst: Valuations (lending business
trading at 2.2x FY14E BV) appear expensive given relatively lower ROEs. However,
strong business growth potential and the likely award of a banking licence will support
premium valuations, in our view. Our FY14/FY15 SOTP stand at Rs 77/Rs 91 (assuming
~2.2x Sep’14 P/BV for the lending business and 5% of AUM fortheAMC).