Weak quarter LTFH :: Religare Research

Weak quarter
LTFH reported weak results for both infrastructure and retail & corporate
finance businesses. While NIMs remained stable in the retail & corporate
business, advances growth was subdued and asset quality remained under
pressure (GNPLs/NNPLs up 89bps/72bps QoQ). PAT for the infrastructure
finance business grew 3% YoY as NIMs declined QoQ and provisions were
high. A sharp increase in wholesale rates and a change in the loan mix
could put further pressure on NIMs. Maintain HOLD.

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 Retail & Corporate Finance – NIMs healthy but asset quality under pressure:
Advances grew by 2.5% QoQ and were primarily driven by rural products (up 8.6%
QoQ) and capital markets (up 20% QoQ). However, transport equipment, CEs and
the supply chain finance book declined QoQ. NIMs were largely stable QoQ at 6.2%
(5.5% in Q1FY13).However, GNPLs/NNPLs increased to Rs 6.2bn/Rs 3.7bn from
Rs 4.5bn/Rs 2.4bn in Q4FY13. PAT declined 27% QoQ due to higher opex and credit
costs. ROEs dropped from 14.5% in Q4FY13 to 10.3% in Q1FY14 and could remain
subdued given asset quality pressures and a likely increase in wholesale rates.
 Infrastructure Finance – profitability under pressure: Reported NIMs declined
15bps QoQ and fee income from Rs 201mn in Q4FY13 to Rs 28mn inQ1FY14.
GNPLs/NNPLs increased from Rs 2.1bn/Rs 1.7bn in Q4FY13 to Rs 2.2bn/Rs 1.8bn in
Q1FY14 and credit costs from Rs 394mn to Rs 519mn. Advances growth also
moderated to 2.6% QoQ (36% YoY off a low base). ROEs declined from 18.7% in
Q4FY13 to 13.1% in Q1FY14.
 Valuations rich; maintainHOLD: As per management, asset quality pressures are
likely to persist in Q2FY14. Moreover, the recent tightening of liquidity and increase
in cost of funds could put pressure on NIMs, especially as pricing power remains
weak. Valuations too are expensive vis-à-vis peers (lending businesses trading at
~2.2x FY14 BV). While lossesin the AMC businesses have come down,these would
continue to impact consolidated ROEs. Maintain HOLD with a TP of Rs 85/share