L&T Finance holding (LTFH)… Reiterate BUY with target price of Rs 80… :IndiaNivesh

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We reiterate buy on LTFH as it remains the key beneficiary of uptick in economy
specifically in infrastructure segment which constitute 46% of consolidated loan
book. Our interaction with L&TFH’s management gives confidence of maintaining
the asset quality with limited incremental impairments for FY15. Recent correction
in stock price makes valuation attractive at 1.5x for FY16E ABV with limited
downside. Reiterate BUY with target price of Rs 80, valuing it at 2x FY16E ABV.
Risks – 1) Lower growth than anticipated and 2) significant deterioration in asset
quality. We had an interaction with L&T Finance Holding’ (LTFH’s) management
for getting more insight on business and outlook on future growth. Following are
the key takeaways –
Consolidated Loan book likely to grow by 15-20%:
LTFH’s consolidated loan book to grow by 15-20% yoy in FY15 with more focus on B
to C business (which is more of retail like micro finance, rural products and Vehicle
financing where the yields are higher) and operational projects in infrastructure
financing business. Further management specified that there is pick up in
disbursements in Q3FY15, however expect growth to pick up materially only in FY16.
In Q2FY15, Consolidated Loan book of LTFH was at 21% yoy (5% qoq) to Rs 428 bn
largely led by strong growth in L&T Infra of 24% yoy (disbursement to operational
projects). L&T Finance (retail financing subsidiary) grew by 10% yoy led by de growth
in Commercial vehicle, Construction equipment and Corporate segment. However
this was partially offset by growth in B to C segment ie rural products (largely include
tractors) grew by 45%, Micro Finance grew by 75% yoy and Vehicle finance (two
wheeler) grew by 14% yoy.
Consolidated margins to 5.9-6.1%:
Consolidated NIMs of LTFH is likely to remain in the range of 5.9-6.1%. Margins in
retail business of L&T Finance are expected to remain at ~7% mainly as against
6.5% in FY14 due to higher disbursement in high yielding B to C products. NIMs in
L&T Infra are likely to be at 4-4.1% for FY15. In Q2FY15, NIMs (rep) of L&T Finance
improved by 115 bps qoq to 7.7% driven by 1) increase in proportion of high yielding
segment and 2) one off income from higher prepayments and recoveries from NPA
accounts. The impact on NIMs due to this one off was 60-70 bps.
Asset quality pain not extended further:
Asset quality of LTFH on consolidated level has deteriorated in Q2FY15 with 39 / 38
bps increase in Gross / Net NPA to 3.6% / 2.7% respectively. Increase in NPA was in
both in L&T Finance by 37/45 bps qoq and L&T Infra by 41/27 bps qoq. Asset quality
pressure in L&T Finance (retail business) might get affected negatively in Q3FY15
due to seasonality however in L&T Infra, it is likely to remain stable. Hence on
consolidated level, asset quality in Q3FY15 will be either flat or will be affected
marginally. As far as recent guidelines on NBFC is concerned, L&TFH will comply
with regulatory requirement gradually as stated by RBI which is 5 bps increase on
standard provisioning to 0.4% by FY18 and 90 days recognition of NPAs. As of now
LTFH recognize NPA based on 180 days overdue in both financing subsidiaries. In
L&T Finance, it does standard asset provisioning of 0.25% while in L&T Infra it does
standard asset provisioning in the range of 0.25-0.4% as a prudent measure. Further
the company is having excess provisioning of Rs 910 mn in L&T Finance and Rs 690
mn in L&T Infra. LTFH will start increasing the provisioning expense gradually from
hereon in both the financing subsidiaries.
Valuation
LTFH has underperformed the market mainly due to stress in both infrastructure
segment and retail business resulting in asset quality deterioration. We believe LTFH
will be biggest beneficially of both revival in economy and decline in interest rates.
We are not increasing our earnings estimates and keep it unchanged with growth
of 18% CAGR for FY14-16E after factoring in provisioning expense of 1.4% (as a % of
advances). Recent correct in stock price gives a good opportunity to enter atvaluations of 1.5x FY16E ABV and hence recommend BUY with target price of Rs 80,
valuing it at 2x FY16E ABV. We assign lower multiple to L&TFH (vs other NBFCs
valuation of 2.5-3.5x for FY16) mainly due to comparatively lower return profile 12-
13% ROEs and 1.5-1.6% ROAs