Stock Update

L&T Finance Holdings Ltd

Mixed performance in Q2
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3R MATRIX + = -
Reco/View: Hold  CMP: Rs. 81 Price Target: Rs. 88 á

Result Update
Right Sector (RS) ü á Upgrade  Maintain â Downgrade

Right Quality (RQ) ü Summary

Š L&T Finance Holdings Limited (L&T Finance) reported PAT at Rs. 406 crore (up 82%
Right Valuation (RV) ü y-o-y/55% q-o-q), led by lower credit cost reported at 2.56% annualised (calculated as a %
+ Positive = Neutral – Negative of AUM) vs. 3.63% q-o-q and 3.60% y-o-y as Rs. 422 crore of slippages from retail finance in
OTR book were directly written-off from additional contingent provisions.
What has changed in 3R MATRIX Š Overall disbursements grew by 51% y-o-y/6% q-o-q, mainly led by robust growth in retail
disbursements, up 84% y-o-y/15% q-o-q. Disbursements in the wholesale segment fell by
Old New 54% y-o-y/47% q-o-q, in line with its strategy to focus on retail. However, AUM grew by only
4% y-o-y/2% q-o-q. Share of retail assets rose to 58% in Q2FY2023 vs. 48% of total AUM
RS  in Q2FY2022.
Š Asset quality was stable with overall GS-3/NS-3 assets at 4.02%/1.85%. PCR on Stage-3
RQ  assets was stable at 55% q-o-q. However, write-offs continued to remain higher at 3.7% of
RV  AUM.
Š At the CMP, the stock trades at 0.9x and 0.9x its FY2023E and FY2024E BV, respectively.
We maintain our Hold rating with a revised PT of Rs. 88.

ESG Disclosure Score NEW L&T Finance Holdings Limited (L&T Finance) reported mixed performance in Q2FY2023. NII
grew by 13% y-o-y/7% q-o-q, led by margin improvement. NIM (calculated as a % of AUM) stood
ESG RISK RATING at 7.32%. Higher yields, due to increasing share of retail, led to a 35-bps q-o-q expansion in
Updated Oct 08, 2022
20.15
NIM even as funding cost was higher marginally. Total operating expenses were up by 16%
Medium Risk y-o-y and 4% q-o-q mainly led by investments in new businesses. Thus, operating profit grew
moderately by ~8% y-o-y/3% q-o-q. Credit costs declined by 28% q-o-q/26% y-o-y to 256 bps
NEGL LOW MED HIGH SEVERE (annualised) vs. 3.63% q-o-q and 3.6% y-o-y as Rs. 422 crore of slippages from retail finance
0-10 10-20 20-30 30-40 40+
in OTR book were directly written-off from additional contingent provisions. PAT reported at
Rs. 406 crore was up by 82% y-o-y/55% q-o-q mainly led by lower credit cost. PAT of the core
Source: Morningstar
lending business was up 110% y-o-y to Rs. 426 crore. Asset quality was stable with overall
GS-3/NS-3 assets at 4.02%/1.85%. PCR on Stage-3 assets was stable at 55% q-o-q. However,
Company details
write-offs continued to remain higher at 3.7% of AUM. It is carrying additional provisions
Market cap: Rs. 20,010 cr amounting to Rs. 1,096 crore (1.2% of AUM). The company guided that the impact of one-
time restructuring on P&L is largely over for all the segments except housing (Rs. 880 crore),
52-week high/low: Rs. 92 / 59 where repayments would start in FY2024.
NSE volume: Key positives
64.6 lakh
(No of shares) Š Strong retail disbursement growth leading to 27% y-o-y/9% q-o-q growth in retail assets.
BSE code: 533519 Š Margins improved sequentially.

NSE code: L&TFH Key negatives

Š Higher write-offs
Free float:
74.3 cr Š Higher opex growth
(No of shares)
Management Commentary
Shareholding (%) Š The company has guided for credit cost at ~3% by Q4FY2023. The company expects cost-to-
average assets ratio to remain high for the next four quarters.
Promoters 66.2 Š The company will earn capital gain of ~Rs. 2,300 crore from the sale of AMC business.
FII 6.8 Management has guided that this may be set aside and not reckoned as profits immediately.
It has also guided for a reduction in wholesale loans to 20% of the balance sheet.
DII 5.4
Our Call
Others 21.7 Valuation – We maintain our Hold rating with a revised PT of Rs. 88: The company has started
exhibiting strong growth in its retail book, even as its wholesale book (particularly Real Estate)
Price chart and defocused segments moderated, which is a key positive. However, asset quality in the
95 highly volatile microfinance business, ability to manage new segments of consumer, and SME
85
loans remain crucial as the company has made large write-offs in the one-time restructuring
(OTR) book, mostly in retail loans. Large gains on AMC sale would offset residual risks in the
75 wholesale book. Credit cost guidance still remains higher despite benign credit cycle, which
could keep return ratios subdued.
65
Key Risks
55
Lower stress formation and, in turn, reduced credit cost remain key risks to the upside.
Mar-22

Jul-22
Nov-21

Nov-22

Valuation Rs cr
Particulars FY21 FY22 FY23E FY24E
Price performance NII 5,892 5,950 6,406 6,798

(%) 1m 3m 6m 12m PAT 948 1,049 1,628 1,878

EPS (Rs.) 3.8 4.2 6.6 7.6
Absolute 5.2 9.5 1.3 -8.0 P/E (x) 21.1 19.1 12.3 10.7
Relative to P/BV (x) 1.1 1.0 0.9 0.9
0.8 5.5 -7.6 -8.9
Sensex ROA 0.9 1.0 1.5 1.5
Sharekhan Research, Bloomberg ROE (%) 5.7 5.4 7.9 8.5
Source: Company; Sharekhan estimates

November 10, 2022 1

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Key result highlights

Š NII growth healthy: NII grew by 13% y-o-y/7% q-o-q, led by margin improvement. NIM (calculated as a % of AUM)
stood at 7.32%. Higher yields, due to increasing share of retail, led to 35-bps q-o-q expansion in NIM even as funding
cost was higher marginally. The company guided that NIM would remain healthy on account of strong growth in
micro loans and SME/consumer loans are expected to start exhibiting growth, which are high-yielding products.
Š Elevated operating expenses: Total operating expenses rose by 16% y-o-y and 4% q-o-q mainly led by higher
investments in newer branches and digital platforms. Management guided that it expects cost-to-average assets
ratio to remain high for the next four quarters and should moderate thereafter.
Š Credit cost guidance: Credit costs declined by 28% q-o-q/26% y-o-y to 256 bps (annualised) vs. 3.63% q-o-q and
3.6% y-o-y as Rs. 422 crore of slippages from retail finance in OTR book were directly written-off from additional
contingent provisions. The company has guided for credit cost at ~3% by Q4FY2023.
Š Asset quality stable due to higher write-offs: Asset quality was stable with overall GS-3/NS-3 assets at 4.02%/1.85%.
PCR on Stage-3 assets was stable at 55% q-o-q. However, write-offs continue to remain higher at 3.7% of AUM.
It is carrying additional provisions amounting to Rs. 1,096 crore (1.2% of AUM). The company has guided that the
impact of one-time restructuring on P&L is largely over for all the segments except housing (Rs. 880 crore), where
repayments would start in FY2024.
Š Strong growth in retail assets: Total disbursements grew by 51% y-o-y. Retail disbursements grew by 15% q-o-q to
touch record-high quarterly disbursements. Retail assets now constitute ~58% to the loan mix. Loan book grew by
4% y-o-y and 2% q-o-q. Retail assets grew by 9% q-o-q and 27% y-o-y, led by strong sequential growth in micro
loans (+10%), 2W (+8%), home loans (+9%), and consumer loans (+31%).
Š AMC business: Average AUM witnessed muted growth of 1% q-o-q. Average Equity AUM grew by 6% q-o-q. The
company witnessed inflows in the liquid category, but net outflows in the fixed income and hybrid categories. It has
already received SEBI approval for the sale of the AMC business to HSBC AMC. The company will earn capital gain
of ~Rs. 2,300 crore from sale of the AMC business.

Results Rs cr
Particulars Q2FY23 Q1FY23 Q2FY22 YoY (%) QoQ (%)
Net Interest Income 1,648 1,533 1,461 13 7
Fee and Other in-come 228 279 232 -1 -18
Total Income 1,876 1,813 1,693 11 3
Operating Expenses 687 658 591 16 4
Operating Profits 1,189 1,155 1,102 8 3
Provisions 577 799 783 -26 -28
PBT 613 356 319 92 72
Tax 207 95 96 115 118
PAT 406 261 223 82 55

AUM 90,098 88,078 86,936 4 2

Retail book 52,040 47,794 40,934 27 9
Wholesale book 37,597 39,795 43,532 -14 -6
Total Focused Book 89,637 87,589 84,466 6 2
Defocused book 461 489 2,470 -81 -6
Disbursements 11,049 10,460 7,339 51 6
Retail 10,238 8,938 5,579 84 15
Wholesale 811 1,522 1,760 -54 -47
Asset Mix
Retail book 58% 55% 48%
Wholesale book 42% 45% 52%
Asset Quality
Gross Stage 3 assets 4.02% 4.08% 6.48%
Net Stage 3 assets 1.85% 1.87% 2.92%
PCR 55% 55% 57%
Source: Company, Sharekhan Research

November 10, 2022 2

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Outlook and Valuation

n Sector View – Economic recovery is encouraging

The Indian economy has been witnessing a sharp revival from pandemic crisis and credit growth continues
to remain robust. Demand across retail assets has accelerated and asset -quality trends are also improving.
NBFCs with diverse product offering strategy, strong asset liability management, robust liquidity buffers,
strong risk management framework, healthy liability franchise, and well-capitalised have ample growth
opportunities and are well placed.

n Company Outlook – Return ratios outlook subdued

Bolstered by a strong parentage, good liquidity, and higher credit ratings, L&T Finance enjoys access to funds
at competitive rates. However, asset quality in the highly volatile microfinance business, ability to manage new
segments of consumer, and SME loans remain crucial as the company has made large write-offs in the one-
time restructuring (OTR) book, mostly in retail loans. Large gains on AMC sales would offset residual risks in
the wholesale book. Credit cost guidance still remains higher despite benign credit cycle, which could keep the
return ratio subdued.

n Valuation – We maintain our Hold rating with a revised PT of Rs. 88

The company has started exhibiting strong growth in its retail book, even as its wholesale book (particularly
Real Estate) and defocused segments moderated, which is a key positive. However, asset quality in the highly
volatile microfinance business, ability to manage new segments of consumer, and SME loans remain crucial as
the company has made large write-offs in the one-time restructuring (OTR) book, mostly in retail loans. Large
gains on AMC sale would offset residual risks in the wholesale book. Credit cost guidance still remains higher
despite benign credit cycle, which could keep return ratios subdued.

Peer Comparison
CMP P/E (x) P/B (x) RoE (%) RoA (%)
MCAP
Companies (Rs/
(Rs Cr) FY23E FY24E FY23E FY24E FY23E FY24E FY23E FY24E
Share)
L&T Finance Holdings 81 20,010 12.3 10.7 0.9 0.9 7.9 8.5 1.5 1.5
M&M Finance 220 27,219 16.2 13.8 1.7 1.5 11.2 12.7 2.1 2.3
Source: Company; Sharekhan Research

November 10, 2022 3

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About company
L&T Finance is a diversified NBFC catering to rural, housing, auto, SME, and wholesale business funding. The
company’s parent is one of the leading infrastructure players in the country, which not only helps L&T Finance
with access to pertinent industry information but also with the ability to leverage the parent’s strength in
business as well as ratings. The company operates in retail/wholesale lending, as well as across two-wheeler
finance, tractor finance, microfinance, home loans/LAP, builder finance, infra finance, and structured finance
among other product lines. The company is rated AAA by CARE and CRISIL.

Investment theme
L&T Finance has been strategically re-aligning its business mix, focusing on businesses where it has a clear
competitive advantage and opportunity to scale. Benefitted from a strong parent and higher credit rating, the
company has access to funds at competitive rates. However, asset quality in the highly volatile microfinance
business, ability to manage new segments of consumers, and SME loans remain crucial as the company has
made large write-offs in the OTR book, mostly in retail loans. Large gains on AMC sale would offset residual
risks in the wholesale book. Credit cost guidance still remains higher despite benign credit cycle, which could
keep return ratios subdued.

Key Risks
Lower stress formation and, in turn, reduced credit cost remain key risks to the upside.

Additional Data
Key management personnel
Mr. Dinanath Dub-hashi Managing Director and Chief Execu-tive Officer
Mr. Sachinn Joshi Group - Chief Financial Officer
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 LARSEN & TOUBRO LTD. 66.20
2 CITIGROUP GLOBAL MARKETS MAURITIUS PVT. LTD. 3.86
3 BC ASIA GROWTH INVESTMENTS 2.68
4 ARYAMAN CAPITAL MARKETS LTD. 2.34
5 LIFE INSURANCE CORP OF INDIA 2.16
6 ICICI PRUDENTIAL LIFE INSURANCE CO. LTD. 2.06
7 BC INVESTMENTS LTD. 1.38
8 VANGUARD GROUP INC. 1.30
9 NORGES BANK 1.00
10 DIMENSIONAL FUND ADVISORS 0.50
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

November 10, 2022 4

Understanding the Sharekhan 3R Matrix
Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.
Source: Sharekhan Research
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