L&T Finance Ltd. share price target

22 January 2019 L&T; Finance Holdings (LTFH) 3QFY19 PAT grew 81% YoY to INR5.8b, in line with our estimate, driven by strong AUM growth (+23% YoY), retailization of the balance sheet, and improving asset quality. LTHF prioritized its rural lending business in the quarter. The reduction in the GNPL ratio has come on the back of an improvement in asset quality in the rural lending book, while the housing finance and wholesale finance books witnessed stable asset quality. Over the past two years, LTFH has delivered a turnaround in business, with a strong improvement in RoE from 10% to 18%. It is now well on its journey of retailization of the balance sheet. Notwithstanding the tight liquidity in the past quarter, management has been able to grow its focused products impressively and yet maintain sufficient liquidity. We remain confident that LTFH would continue to generate strong return ratios over the medium term.

INR240b of debt capital since 21 September 2018, the company is well placed on the liquidity front, in our view. In addition, LTFH is comfortable with its builder and IL&FS; exposures. We note that IL&FS; exposures are to SPVs formed by the subsidiaries of IL&FS;, where LTFH has the first right to cash flow. Nevertheless, there has not been any instance of defaults over the past two months. The business transformation story remains on track, with retailization of the balance sheet and sustenance of RoE at 18-19% levels. A lender to SPVs managed by IL&FS; subsidiaries; protected from NCLT proceedings Management explained that there is no exposure to IL&FS; at the holdco level. The...

In Q1FY19, Rural finance business grew robust 76.2% YoY on improved momentum in MFI (133.4% YoY) and two wheeler (68.0% YoY) loans, while farm equipment business grew relatively lower at 32.5% YoY. Share of rural book increased ~237 bps QoQ at 22.0% of loans.

Company's FY18 performance shows its strategy to move away from loss - making segments and increase focus on more lucrative verticals including rural, housing and select wholesale financing is paying off. In FY18, exposure to Defocused Book was reduced to ` 1540 crore compared with `2671 crore in FY17 . During the period,...

L&T; Finance Holdings (LTFH), holding company for all finance-related activities of the L&T; Group, is one of the largest NBFCs in India with loan book standing at nearly Rs800 bn. It is promoted by infrastructure conglomerate Larsen & Toubro Ltd (64.01% stake as of Mar'18). Having ~1,100 point of presence (including 219 branches) across 23 states, the company operates in retail/wholesale lending as well as across 2W finance, tractor finance, infra finances, microfinance, home loans/LAP, builder finance and structured finance among other product lines. LTFH is now on a path of sustainable growth and profitability after successfully...

Disbursements remain on a robust trajectory, driven by all segments, especially microfinance. The microfinance book now stands atINR75b, making LTFH among the largest MFI entities in India. The tractor finance book has also witnessed a clear turnaround over the past few quarters,with growth coming in at 28% YoY in 4QFY18. RoE in this segment remained stable at 30% even post capital infusion, as credit costs which were running high post demon have normalized.

L&T Finance Holdings Ltd (LTFH), promoted by L&T Ltd (64.2%) is a leading NBFC with a diversified lending portfolio. Over the last two year the management has restructured its business model and is focusing on selective segments where it has competitive advantage, simultaneously downsizing some products which were making losses. O..

L&T Finance (LTFH) recently raised equity capital amounting to INR30b, of whichINR20b came from the parent (L&T). As a result, leverage has declined from previous elevated levels of ~8.5x to ~6.1x now. We believe LTFH is now well capitalized for growth, and will not need to raise equity capital at least in the next 3-4 years. Over the past two years, there has been a modest increase in the share of retail loans from 26% to 30%. On the wholesale lending front, there has been a mix shift toward real estate finance (its share has increased from 6% to 12% over the same period), while the contribution of other wholesale finance segments (infra, structured finance, etc.) has declined. However, the increased share of real estate finance is likely to translate into strong growth in the retail home loan segment in the coming years, in our view.

L&T; Finance Holdings (LTFH) reported a strong PAT of Rs 3.6 bn, up ~45.2% YoY, primarily on a lower tax outgo (~6% tax rate; carry forward benefits). Loan book growth was healthy at 19% YoY (~Rs 723 bn; 23.2% YoY on focused business).

Over the past month, LTFH's stock price has corrected by 23% and we believe the CMP provides an attractive entry point due to: i) Improving RoE trends - profitability over the last 6 quarters has improved with reported ROE improving from 9.7% in to 15.2% despite the company providing for voluntary provisioning of INR 8.9bn and accelerated provisioning of INR 5.3bn; ii) While PSU banks' recap would increase competitive intensity in infrastructure/LAP, LTFH would benefit from the increase in down-selling opportunities; and iii) The company has hired senior staff from Bajaj Finance and Piramal Finance for its credit analytics and housing team. We believe LTFH is on track to achieve top quartile (18%+) ROE...