27 November 2019
Update | Sector: Financials - NBFC
TP: INR130 (+21%)
Focus on raising the retail lending share
Valuations attractive at 1x BVPS
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
205.9 / 2.9
159 / 79
Financials Snapshot (INR b)
Div. Yield (%)
Shareholding pattern (%)
FII Includes depository receipts
Stock Performance (1-year)
Sensex - Rebased
A key focus area of management over the past few years has been retailization
of balance sheet. LTFH revamped its strategy in home loans by increasing the
share of in-house sourcing to 70%+.
In tractor and 2W finance, it has a strategy
of targeting only the top dealers and OEMs based on feedback from its
As a result, the company has grown the rural finance book by 2.5x in
2.5 years. A key driver of this has been microloans, wherein the company has
expanded into 17 states – the book now accounts for 48% of the total rural
lending book compared to 35% in FY17.
Including home loans and LAP, the
share of retail lending has increased from 27% in FY17 to 38% in 1HFY20.
run-down of the de-focused wholesale lending book (structured finance and
debt capital markets) and stronger growth in 2W finance and microloans, the
share of retail lending (rural + retail housing finance) is expected to reach 43%
L&T Finance Holdings (LTFH) has grown its rural finance book ~2.5x over the past 2.5
years to INR270b. A key driver of growth has been microloans, which now
comprises nearly half of rural loans. Consequently, the share of this business in the
total segment is up from 15% to 27% over the same time period.
CRISIL rated the company ‘AAA’ in October 2019 on the back of a diversified loan
and borrowing book and support from the parent. Cost of funds increased only
30bp YoY to 8.6%. LTFH runs a positive ALM across tenors in the sub-1 year bucket.
Profitability of the business has been largely intact over the past four quarters – the
company has delivered stable ~16% RoE.
The AMC business has witnessed 44% AAAUM CAGR over the past three years, with
the share of equity increasing from 41% to 55%. With improving profitability, we
believe this business is on track to deliver INR2b+ PAT in FY22 (post INR500m
amortization of goodwill).
Current valuation of 1.0x Sep’21E BVPS is undemanding. The company is poised to
deliver steady retail loan growth, increasing share of AMC profits and healthy RoE
(16-17%). Buy rating with a target price of INR130 (1.3x Sep’21E BVPS).
Share of retail lending steadily increasing
54% PCR higher than most peers; INR3.5b floating provision buffer
In the tough operating environment over past one year LTFH witnessed asset
quality improvement with the GNPL ratio declining 110bp to 6.0% which is
commendable. The improvement has been driven largely by wholesale and rural
finance, while asset quality in housing finance has been largely stable. The GNPL
ratio in the wholesale finance book is at 9% largely due to legacy stressed loans
in the thermal power finance book. These loans comprise half of the total GNPLs
in this book.
The company maintains 54% PCR on its GNPLs – higher than that
of most peers (refer Exhibit 10).
In addition, it has INR2.35b of floating
provisions in rural finance and INR1.15b of provisions in housing finance.
Research Analyst: Piran Engineer
(Piran.Engineer@MotilalOswal.com); +91 22 6129 1539 |
(Alpesh.Mehta@MotilalOswal.com);+91 22 6129 1526
(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542 |
(Divya.Maheshwari@motilaloswal.com); +91 22 6129 1540
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.