L&T Finance Holdings - Trends point towards guarded optimism - ICICI Securities

L&T Finance Holdings (LTFH) reported its Q1FY21 PAT at Rs1.47bn (I-Sec: Rs3.8bn) primarily led by: 1) accelerated Covid-19 and macro prudential buffer of Rs5.8bn, and 2) provisioning on one conglomerate in the defocused business of Rs2.25bn (utilising exceptional gain from sale of the wealth management business). With this, LTFH now carries a buffer of 3% on rural portfolio and 2.3% on LAP+RE financing. Given the prevailing macro uncertainty, prudent provisioning will continue for a couple of quarters more (we are building-in credit costs of 3.3% for FY21E). Emerging trends in rural (both on demand and collections) has brought in some guarded optimism, though we will watch the behaviour of its real estate financing and infrastructure business till clear visibility emerges. Rising credit reserves, adequate liquidity and stock underperformance (~47% in past six months) renders risk-reward favourable at 0.7x FY22E P/BV. We upgrade the stock to ADD with a target price of Rs70.

Accelerated prudent provisioning stance is creditable and will continue: The moratorium scene has improved across retail product segments supported by better collection efficiency, especially in the tractor segment. In the wholesale book, moratorium stood at ~40% with ~83% of the under-construction real-estate financing book seeking the benefit despite being adequately collateralised. On the back of improved collections in farm and retail housing, gross stage-3 assets declined to 5.24% (from 5.36% in Q4FY20) and 1+dpd (debtors book) was down by Rs13bn QoQ to Rs42.7bn. Anticipating continuation of accelerated provisions for vulnerable segments, we build-in credit costs of 330bps/250bps in FY21E/FY22E.

Enhanced guardrails and tightened credit filters to soften growth (to our liking): Amidst the prevailing uncertainty, LTFH has revised its operating models enhancing the guardrails, tightening credit filters and reducing LTVs where appropriate. Incremental growth will flow from: 1) revived sentiment in tractor and 2-W segments; 2) collection-led disbursement strategy in MFI and consumer loans, and 3) tranche-based disbursements in the wholesale segment. Sequential growth in AUM was led by loading up of funding interest portion of Rs6.0bn-6.5bn. We expect, with collections determining disbursements in the near term, AUM growth would be modest at 3% in FY21E.

NIM + fee income could remain under sustained pressure: In Q1FY21, LTFH reported a negative carry of Rs840mn (pre-tax) on additional liquidity buffer of Rs66bn. This coupled with lower fee income led to >100bps contraction in NII plus fee income to 5.78%. Limited high yielding opportunities and stringent guardrails will in the near term cap the upside in NIM + fee income, though it will be offset by benefit on funding costs and control on operating expenses.

Comfortably placed on liquidity: LTFH raised Rs35bn in long-term borrowings in Q1FY21 and is carrying adequate liquidity buffer (Rs91bn in form of liquid cash equivalents) - the most comforting factor in this environment. It will further try to improve leverage levels by raising confidence capital.

Shares of L&T FINANCE HOLDINGS LTD. was last trading in BSE at Rs.61.65 as compared to the previous close of Rs. 59.8. The total number of shares traded during the day was 1924687 in over 8587 trades.

The stock hit an intraday high of Rs. 61.8 and intraday low of 58.5. The net turnover during the day was Rs. 117276397.

Source : Equity Bulls

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