CRISIL Research has come out with its report on L&T Finance Holdings. The research firm has revised fair value of the company to Rs 73. However, maintain its fundamental grade of 4/5 to the company.
L&T Finance Holdings' (LTFH's) Q1FY15 results were in line with CRISIL Research's expectations. Net interest income grew 4.1% q-o-q and 18.6% y-o-y driven by strong growth in the loan book and a tilt in mix towards high yielding assets. Opex decreased 4.4% q-o-q primarily due to completion of integration related activity and technology orientation for retail operations. Provisions were up 10.1% q-o-q due to seasonal pressure on the retail book and few stress accounts in the infra book. Adjusted PAT decreased 10.5% q-o-q (up 15.1% y-o-y) to Rs 1.7 bn. The investment management business maintained break-even status with average assets under management (AAUM) of Rs 199 bn (up 9% q-o-q) and IDF-NBFC commenced operations in Q1FY15. We maintain our fundamental grade of 4/5.
Healthy loan book growth driven by B2C business, housing finance and infra lending Loan book grew 1.7% q-o-q to Rs 408 bn. Within the retail and mid-market segment, growth came from lending to B2C businesses – tractors (up 7% q-o-q) and microfinance (up 5.3% q-o-q) – to capitalise on growth opportunities in the rural economy. This was offset by a cautious lending approach towards the construction equipment (CE) and commercial vehicle (CV) sectors. Consequently, the mix of B2C products in the retail and mid-market finance loan book increased 1.6 pps q-o-q (8.4 pps y-o-y) to 41%. Housing finance loan book grew 12.1% q-o-q primarily due to good disbursement growth (up 71% y-o-y) in Q1FY15. In the infra lending segment, as expected, disbursements to operating projects drove growth; proportion in the loan book increased to 42% from 37% during Q4FY14.
Net interest margin marginally down q-o-q and y-o-y
LTFH's NIM declined 8 bps q-o-q and 6 bps y-o-y to 5.5%. Overall NIM was down as the improvement in the mix of higher yielding B2C products was offset by a fall in NIM in the infra lending segment because of non-accrual of interest on NPAs and restructured cases. Also, the lending approach to operational projects (ratings in the range of A to AAA) largely for refinancing impacted NIM in the infra lending segment.
Asset quality impacted due to seasonality and weak macro environment
LTFH's gross non-performing assets (GNPA) rose 39 bps sequentially to 3.6% in Q1FY15 as infra GNPA rose to 3.5% in Q1FY15, up 41 bps q-o-q. The restructured book increased 40 bps q-o-q to 6.8%. In the retail and mid-market financing segment, GNPA rose 37 bps q-o-q to 3.8%. Moreover, GNPA in the housing finance segment increased 78 bps q-o-q to 2% due to seasoning of the acquired portfolio and as few home loan cases are under litigation. Credit cost was stable at Rs 1.6 bn despite higher GNPA on infra and retail loan book due to some stability in the mid-market loan book. We foresee asset quality stress over another quarter and expect improvement in 2HFY15.
FY15 earnings estimate lowered; fair value revised to Rs 73
Our FY15 adjusted PAT estimate has been reduced by 4% on account of higher operating expenses. Following a change in our cost of equity methodology, we have lowered the cost of equity for LTFH. Accordingly, our sum-of-the-parts (SoTP)-based fair value is revised to Rs 73 per share. At the current market price of Rs 66, our valuation grade is 4/5.
Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.
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