L&T Finance Holdings: Focused approach

L&T Finance Holdings

BSE Sensex

31,955

S&P CNX

9,900

L&T Financials - NBFC

Initiating Coverage | Sector: Finance Holdings

CMP: INR150

TP: INR180 (+20%)

Buy

Focused approach

Strong execution toward stated goals to boost profitability

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

12M Avg Val (INR M)

Free float (%)

Financial Snapshot (INR b)

Y/E March

2017 2018E

NII

31.4

35.7

PPP

26.7

35.3

PAT

9.2

13.0

EPS (INR)

5.2

7.2

BV/Sh. INR

44.3

50.8

RoAA (%)

1.5

1.8

RoE (%)

12.4

15.3

Payout (%)

19.8

15.2

Valuation

P/E (x)

28.6

20.9

P/BV (x)

3.4

3.0

Div. Yld (%)

0.6



LTFH IN

1817.2

153/74

-1/38/85

272.6

4.1

644

33.4

L&T Finance Holdings (LTFH) is a quintessential turnaround story, in our view.

From a company with 20+ product lines and sub-standard return ratios, it is

gradually transforming itself to a focused financier with eight product lines across

three verticals, with a target to achieve 18-20% RoE by FY20 (~12% in FY17).



The company has identified three segments to focus on – wholesale, housing and

rural finance, which comprise 62%, 19% and 15% of the total loan book,

respectively. While the rural and housing segments have already achieved 20%+

RoE, going forward, wholesale financing (RoE- FY17: 11%, FY20E: 16%) will be the

key driver of profitability improvement.

2019E

40.5

17.4

9.6

59.0

2.0

17.5

14.9

15.6

2.5

0.8



Strong growth and a decline in expense ratio and credit costs should elevate

RoA/RoE from 1.5%/12.4% in FY17 to 2.3%/19.2% in FY20. While the stock has re-

rated well over the past year on account of strong execution by management,

we expect re-rating to continue. We thus initiate coverage on LTHF with a Buy

rating and a target price of INR180 (3.0x FY19E BVPS).

Primary focus on achieving top-quartile RoE

After the appointment of Mr Dubhashi as MD & CEO in July 2016, LTFH’s primary

goal has been to generate top-quartile RoE for its shareholders. In order to

achieve this, LTFH has identified three key segments (rural, housing and

wholesale finance) to focus on, and is running-down the de-focused businesses.

It has focused on cost-cutting measures, and is also investing in technology in a

big way. While credit costs on the wholesale finance business were elevated

over the past few years due to legacy asset quality issues, they are expected to

moderate going forward due to better underwriting post 2012. We believe LTFH

is on track to achieve 35% PAT CAGR over FY17-20, with RoE of 19% by FY20.

Shareholding pattern (%)

As On

Mar-17 Dec-16 Mar-16

66.6

66.7

Promoter

3.7

3.6

1.8

DII

11.3

10.1

8.8

FII

18.4

19.7

22.7

Others

FII Includes depository receipts

Wholesale finance – Significant RoE improvement ahead

Wholesale finance has traditionally been the key business for LTFH. The loan

book stands at INR414b, with the product suite comprising infrastructure

finance (thermal, renewables and operating roads), structured finance and

supply chain finance. LTFH is the second largest renewable energy financier in

the country, and has consolidated its position led by its quick and skillful project

appraisal skills. While this segment has legacy asset quality issues, the loan book

written post 2012 has nil NPLs. The key focus in this segment is to generate and

sell-down loans in order to generate strong fee income. Loan growth is expected

to be in the range of 10-15%. With improving fee income, coupled with lower

incremental credit costs, this segment is poised to generate 15-16% RoE FY19

onward, in our view.

L&T Finance Holdings

Focused approach

Piran Engineer

91 22 3980 4393

Piran.Engineer@motilaloswal.com

Please click here for Video Link

19 July 2017

L&T Finance Holdings

Stock Performance (1-year)

Housing finance – Diverse product suite; 20%+ CAGR ahead

LTFH has a housing finance book of INR125b with a diversified product suite,

comprising home loans, LAP, construction finance and LRD. Home loans and LAP

constitute 60% of the overall book, while corporate loans account for the remaining.

The company conducts business from its 24 branches in the top 6-7 cities. Over the

past few quarters, LTFH has shifted its focus toward the self-employed non-

professional (SENP) segment for home loans. It has also stopped disbursing DSA-

sourced salaried loans due to the lack of profitability. LTFH’s biggest competitive

advantage in this segment is the strong relationships that its peer group companies

– L&T Realty and L&T ECC – enjoy in the industry. We expect the segment to grow at

20%+ CAGR over the medium term, with 18-19% run-rate RoE.

Rural Finance – Well-diversified; Top 3 player in tractor finance

LTFH has a rural finance book of INR100b, comprising three key products –

microfinance, two-wheeler finance and tractor finance. The company has a

differentiated model in microfinance, wherein, unlike peers, there is no concept of a

group leader. Also, most of the loans are for a tenure of two years, which reduces

the EMI burden. LTFH does not disburse loans to borrowers not producing their

Aadhar Card. LTFH entered the 2W financing business via the acquisition of Family

Credit. The business has ramped up well over the years, and the company now

finances 350,000 two-wheelers per year (implying 7% market share). The company

is one of the top three players in tractor financing, with estimated market share of

8-9%. It has tie-ups with several leading OEMs like TAFE, Mahindra and Sonalika.

Overall, rural financing is the most profitable segment for LTFH, with RoE of ~22%.

Management intends to allocate maximum capital to this segment to grow the

business.

Improving return ratios, strong growth; Initiating with Buy

We believe LTFH is well poised to deliver 16% loan book CAGR over FY17-20E, driven

by 20%/25% growth in rural/housing finance. We believe that the company is well

capitalized to achieve this growth and would not require any dilution. RoA/RoE are

expected to improve to 2.3%/19.2% by FY20E. Asset management and wealth

management subsidiaries have recently turned around and gaining scale – we

expect them to be the key value contributors over the medium term. We value the

company at 3.0x FY19E BV, based on the residual income model. Our key

assumptions are Rf of 7.0%, CoE of 13% and a terminal growth rate of 5%. We thus

initiate coverage with a

Buy rating and a target price of INR180.

Exhibit 1: Peer comparison

Market Cap

(INR b)

274

180

220

203

848

153

AUM

(INR b)

FY17

660

342

788

468

602

231

FY17-20E

AUM

CAGR

RoA (%)

FY17 FY20E

1.7

2.3

2.6

2.5

1.8

3.3

3.6

2.7

3.9

RoE (%)

FY17 FY20E

12.4

19.2

18.1

20.3

11.7

16.3

6.4

14.2

21.7

27.7

11.8

18.1

P/B

FY18E FY19E

3.0

2.5

3.6

3.0

1.7

1.5

2.9

2.7

7.1

5.7

2.7

2.3

P/E

FY18E FY19E

20.9

15.6

20.9

17.3

12.4

9.9

26.3

21.8

32.0

23.9

17.5

13.6

Company

LTFH

CIFC

SHTF

MMFS

BAF

SCUF

Price

150

1,148

975

357

1,544

2,290

Source: Company, MOSL

19 July 2017

L&T Finance Holdings

Current business description

L&T Finance

Focused

(INR640b)

De focused (INR27b)

(Includes CV/CE, Cars and

other products)

Non-

Lending

Business

Rural

(INR100b)

Housing

(INR125b)

Wholesale

(INR414b)

Asset Management



Mutual Fund

acquired from

Fidelity in 2012

AUM of INR393b

Equity AUM of

INR134b

FY17 PAT –

INR770m

Wealth Management



AUM of INR136b

FY17 – INR80m

Farm

Equipment

(INR44b)



Among Top

3 in tractor

financing

Home loans &

LAP (INR76b)



Focus on

SENP

segment



25% share

of L&T

Realty sales

Infra Finance

(INR329b)



Thermal,

Renewables

and

Operating

Roads

Two Wheeler

(INR21b)



7% market



Acquired

from Family

Credit

Real estate

Finance

(INR49b)



Tapping the

knowledge

resource of

L&T ECC

Structured

Corporate Loans

(INR64b)



Promoter

funding,

LAS,

acquisition

funding

Supply Chain

Finance

(

INR21b

)



Catering to

the supply

chain of L&T

Microfinance

(INR36b)



Rural player

only



Differentiat

ed business

model

19 July 2017

L&T Finance Holdings

Building LTFH 2.0

Doubling RoE over FY16-20E



Post appointment of a new MD & CEO in 2016, the company has reworked on its

strategy with a sole target to achieve top-quartile RoE (18-20%) by FY20.

The new management is leading the transformation by restructuring the business,

weeding out loss-making/inefficient business segments and shifting capital to more

profitable/sustainable ones.

We like the management’s focus on RoE generation and execution demonstrated in

implementing the revised strategy, which reflects in its robust operating performance

across all parameters in FY17.

Shift in strategy with a sole

focus on RoE bodes well for

the future

Clear segment targeting to focus on high-RoE businesses

LTFH operated as a corporate lender from 2007-2010, and started project financing

in 2011. Between 2011 and 2014, the company worked toward obtaining a banking

license from the RBI, which led it to over-diversify in terms of product offering,

creating a complex corporate structure. With many products being sub-scale, RoE

declined to ~10%. Post non-qualification for a banking license, the company has re-

focused on improving profitability as an NBFC, and has taken numerous initiatives

with the sole objective of attaining 20% RoE by FY20. These initiatives have been

supported by Mr Dubhashi, who is now leading the transformation.

Key initiatives to drive profitable growth

Some of the key initiatives taken are:

1) separation

of healthy, high-RoE businesses

and problematic low-RoE businesses into

core

(focused)

and non-core (defocused)

segments,

2) ensuring robust growth in the focused book while continually

running

down the defocused book

by divesting/writing-off assets. The defocused book is

expected to run-down completely by FY19.

3) Consolidation at organization level

merging subsidiaries to achieve synergies (merged three subsidiaries in FY17,

creating goodwill and tax benefits).

4) Trimming workforce

to eliminate

unproductive employees (1,000 branch-level employees fired and 1,300 feet-on-

street staff hired in FY17) and

reducing branch count

(shut down 87 branches in

FY17).

Exhibit 2: Product portfolio has been expanded since 2007 and now been segregated into core and non-core

Rapid production expansion since 2007

CV Financing

Microfinance

Mutual Fund

(DCAM acquisition)

Housing Finance

(IPHF Acquisition

Wealth Management

(L&T Capital Markets)

2007

2008

Loan against

2010

2012

2-wheeler Finance

(Family Credit

Acquisition)

2013

Source: Company, MOSL

19 July 2017

L&T Finance Holdings

Strategy shift is

spearheaded by a strong

management team –

execution success is

reflected in its FY17 results

Strong management team has delivered results in FY17

LTFH’s transformation process is being spearheaded by industry veteran Mr

Dubhashi. He has spent 25 years in leadership positions across large organizations,

such as SBI Cap, CARE and BNP Paribas. He has also led the change to include a

leaner, simpler organization structure and hierarchy – with an 11-member Group

Executive Council reporting to him v/s a 25-member team reporting to the erstwhile

MD. The success of the various initiatives undertaken has reflected in the company’s

strong operating performance in FY17.

Key changes introduced to drive shareholder value

Exhibit 3: Steps taken to enhancing shareholder value

STEPS TAKEN TO CREATE

SHAREHOLDER VALUE

Segregation of

product

portfolio into

focused (high

RoE) and de-

focused (low

RoE) segments

Grow in focused

businesses and

divest non-core

businesses

Merger of

subsidiaries for

capital

efficiency

Replacement of

branch staff

with feet on

street to

enhance

productivity

and reduce

expenses

Linking

senior/middle

management

bonus with RoE

Attaining scale

and

productivity in

wealth and

asset

management

businesses

Source: MOSL, Company

Business restructuring and divestment of non-core businesses

LTFH has restructured its fund-based product portfolio to focus on high-RoE

businesses and to eliminate others. The company has focused on three key verticals:

rural finance

(comprising 2Ws, farm equipment and microfinance),

housing finance

(home loans, LAP and construction finance) and

wholesale finance

(infra finance,

structured corporate finance and supply chain finance). The company has clubbed

together other non-core products, such as CV, CE, loans & leases/LAS and five PE

assets, as “defocussed

businesses”

and is gradually divesting those in a phased

manner.

Exhibit 4: Product portfolio segregated into core and non-core

Source: MOSL, Company

19 July 2017

L&T Finance Holdings

Exhibit 5: Product portfolio post segregation into core and non-core businesses (FY17)

Rural Finance

4% 5%

10%

3% 3%

12%

49%

Housing Finance

Wholesale

Finance

Microfinance

Home Loans / LAP

Structured Corp Finance

2W Finance

Real Estate Finance

Supply Chain Finance

Farm Equipment

Infrastructure Finance

De-focused Products

Source: MOSL, Company

Merger of subsidiaries for capital efficiency

In FY17, LTFH merged three of its subsidiaries – L&T Finance, L&T FinCorp and

Family Credit – into one entity, i.e. L&T Finance Ltd. This has led to capital efficiency

from cost synergies, as well as creation of goodwill of INR30b and tax gains of

INR10b.

Segregation of businesses

into focused and defocused,

with an aim to grow

focused businesses and

divest defocused businesses

Workforce reduction for enhanced efficiency

The company asked ~1,000 employees (700 of them from head office and regional

offices) to leave, leading to a lean, productive workforce and enhanced cost

efficiencies and subsequently hired 1,300 feet-on-street staff to help with loan

generation and disbursement.

Leaner, simpler organization structure

Efficiency has improved with a leaner structure and less bureaucracy. In addition to

abolishing 12 senior management roles, the number of reportees to MD & CEO has

been reduced from 25 to 11. The company closed over 80 branches bringing the

branch count down to 188 branches over the past year. Cost benefits are visible,

with opex on an absolute basis steadily declining since 4QFY16, except for 2QFY17.

Exhibit 6: Operating expenses have steadily declined since 4QFY16, except for one quarter

Opex

Growth (%)

-2

-1

-11

3,108

Q1 2016

3,392

Q2 2016

3,200

Q3 2016

3,428

Q4 2016

3,222

Q1 2017

3,327

Q2 2017

3,154

Q3 2017

3,063

Q4 2017

Source: MOSL, Company

19 July 2017

L&T Finance Holdings

Other changes to boost productivity

In addition to the aforementioned initiatives, several others have been enacted to

boost productivity and incentivize employees to achieve organizational goals.

100%/60% of senior/middle management bonuses have been linked with RoE. Other

initiatives in digital/data analytics will bring in cost savings, helping maintain the C/I

ratio at ~25% until FY20 and bringing it down further thereafter.

Exhibit 7: Opex will stay in control with digital initiatives (Opex/avg loans ratio %)

2.6

2.2

2.1

1.9

1.8

FY16

FY17

FY18E

FY19E

FY20E

Source: MOSL, Company

Cutting flab in the system

by eliminating unproductive

branch level staff and hiring

feet on the street, along

with reduction in branch

count, has helped contain

costs, boosting profitability

Single-minded focus on RoE, levers already in place

Over FY12-16, LTFH delivered sub-optimal RoEs of 9-10%. New management is

focused on creating shareholder value, targeting to achieve top-quartile RoE of 18-

20% by FY20. Management plans to achieve this through multiple levers of stronger

income generation across verticals, cost control, and credit cost reduction. The

initial steps have been taken, with the company trimming its workforce by 1,000 and

shutting down 87 branches to operate in a leaner, more productive way. The results

are reflected in the C/I ratio, which declined by 477bp from 30.94% in FY16 to

26.18% in FY17 (registered 4QFY17 RoE of 14.7%, the highest in 16 quarters).

Additional levers will also come from the progress made in its other businesses

(such as wealth and asset management) along with continued sell-downs in the non-

core businesses.

Defocused book divestment will free up capital; gains will be used to create

additional provisions

LTFH’s defocused book comprises non-core assets in CV, CE, loans & leases, LAS, and

five PE assets. This book is being slowly divested, and the proceeds are used to

create additional provisions to buffer against future credit costs. The defocused

book is expected to decline 50% in FY18 and run-off completely by FY19. The five PE

assets amount to ~INR8b, and the company expects to sell-off two of them in FY18.

This would help free-up capital for use in the high-RoE core assets, and reach the

target RoE by FY20.

AMC, wealth management businesses to provide additional boost to RoE

LTFH has INR339b and INR136b in investment management AAuM and wealth

management AAuS, respectively. Given the shift in financial assets from traditional

asset classes to equities, net inflows are expected to continue in these businesses.

The wealth management business broke even in FY17 and is expected to deliver an

annual profit of INR200-250m in FY18. LTFH may also look to divest part of its stake

in the AMC business in the medium term.

19 July 2017

L&T Finance Holdings

Rural business at an inflection point

Most profitable segment for LTFH; Top focus area for management



LTFH’s rural business comprises three product segments: microfinance, two-wheeler

finance and farm equipment (tractor) finance. LTFH is among the Top 3 players in the

tractor finance market.

This is the most profitable segment for LTFH, generating RoA/RoE of 3%/20%+. At the

same time, given the small base and large opportunity, this segment should deliver

20% AUM CAGR over FY17-20E, in our view.

Given its strong expected growth with highest RoE among all segments, the segment

will be given priority in terms of capital infusion.

Differentiated microfinance business model

LTFH operates in rural areas

only and does not do

individual lending

LTFH entered the microfinance segment in 2008 and conducts the business in rural

areas only. Prior to entering a new territory, it conducts a thorough analysis of the

market, especially on the risk front. It only enters markets where there is no history

of high delinquency or political interference. Unlike its peers, there is no concept of

a group leader, which mitigates any risk of a leader arm-twisting his/her group

members. Also, most of its loans are two-year loans. While it disburses loans from

only its branches, collections are done at homes of the borrowers. The company has

stayed away from individual lending and does group lending only. Also, unlike peers,

the sales person also has the responsibility of collections – there is no separate

collections team. Another key feature of the business is that LTFH does not disburse

loans to borrowers who do not produce their Aadhar card. Sales and collection

processes are tablet-enabled. The company refers to Highmark reports before

sanctioning loans.

Exhibit 8: Microfinance – Snapshot

Particulars

AUM

Geographies

Number of branches/centers

Yield

Tenure

Average ticket size

Lending model

Collection frequency

Number of customers

Description

INR36b

Orissa (20%), WB (20%), TN (20%), Karnataka, Maharashtra

620

24%

24 months

INR25-27k

Group lending only

Monthly

1.8m

Source: MOSL, Company

~44% of their debtors have

started paying dues

Around 70% of its borrowers are first-cycle customers. Additionally, LTFH follows a

monthly collection model. While there has been an impact on collection efficiency

due to political interference in the aftermath of demonetization, ~44% of debtors

have started repaying dues. The company has also started making provisions of 15%

for overdues in the Vidharbha region and 10% of overdues in the rest of

Maharashtra. According to the company’s policy, state-wise concentration is capped

at 20% of the portfolio.

19 July 2017

L&T Finance Holdings

Given large unmet demand, coupled with deeper penetration in existing

geographies, we expect 27% loan book CAGR over FY17-20E.

Exhibit 9: Microfinance loan book trend (INR b)

Loan book

FY16

FY17

FY18E

FY19E

FY20E

Source: MOSL, Company

Growth (%)

LTFH operates in rural areas

only and does not do

individual lending

Entered 2W financing business with the acquisition of Family Credit

LTFH entered the 2W financing business with the acquisition of Family Credit from

Societe Generale in FY13. Over the past four years, LTFH has grown to become a

significant player in the 2W lending market, financing ~350,000 vehicles per year

(implying a market share of 7% of vehicles financed).

Exhibit 10: 2W financing – comparison of loan book v/s peers (INR b)

62.9

50.6

40.6

32.6

21.1

20.1

HDFCB

BAF

SCUF

IIB

LTFH

CAFL

Source: MOSL, Company

LTFH has a network of 2,500

2W dealers and has a

preferred financier tie-up

with Honda

LTFH operates in the outskirts of tier I/II cities. It has tied up with over 2,500 dealers

and has a preferred financier tie-up with Honda. While it targets both salaried and

self-employed customers, the share of the latter is higher. The company uses

predictive modeling scorecard to appraise loans, resulting in TAT of 10 minutes for

sanctioning. While the in-house team is responsible for collections in the 0-30dpd

bucket, all collections post that have been outsourced to agencies.

19 July 2017

L&T Finance Holdings

Exhibit 11: 2W financing – snapshot

Particulars

AUM

Geographies

Locations

Tie-ups

TAT

Dealer Network

Yield

Tenure

Average ticket size

LTV

Key competitors

Collections

Volumes

Number of customers

Description

INR21b

WB, Guj, Maharashtra, Karnataka, Orissa

Outskirts of Tier I and Tier II cities

Preferred financier tie-up with Honda

10 minutes

2,500

20-22%

24 months

INR45k

80-85%

SCUF, Capital First, HDFCB, IIB

Insourced 1-30dpd collections; 30dpd+ collections outsourced

350,000 vehicles financed per annum

0.8m

Source: MOSL, Company

While 2W financing

penetration in India has

increased over the past five

years, it is still significantly

below 2008 levels

Improving levels of 2W financing penetration in India

Finance penetration of 2Ws in India plunged sharply from ~60% before 2009 to

~23% in FY11. However, penetration has started increasing again and currently

stands at ~30%. We expect this trend to continue over the medium term as the

market is likely to see aggressive action by both existing and new players.

Expect loan book to double in three years

We believe the penetration into new geographies, as well as the deepening wallet

share of existing OEMs, should drive 22% growth in AUM over FY17-20E.

Exhibit 12: 2W loan book trend (INR b)

Loan book

Growth (%)

FY16

FY17

FY18E

FY19E

FY20E

Source: MOSL, Company

LTFH is among the top

players in tractor financing

with a market share of 8-9%

Among the top three players in tractor financing business

The farm equipment (tractor) financing segment is one of LTFH’s niche lines of

business. The company is one of the largest players in the segment. It enjoyed a

market share of 11% until 2015, but pulled back from the market due to early signs

of stress. As a result, its market share dipped to as low as 3% in FY16, but increased

again in FY17 as LTFH re-entered the market. Currently, its market share is at 8-9%.

19 July 2017

L&T Finance Holdings

LTFH finances both new and used vehicles (80:20 mix). It competes with the likes of

MMFS, HDFCB and KMB in this segment.

Exhibit 13: Farm equipment financing – snapshot

Particulars

AUM

Geographies

TAT

Number of dealers

Yield

Tenure

Average ticket size

LTV

Collection

Corporate tie-ups

Number of customers

Description

INR44b

MP, AP, Telangana, Karnataka, Rajasthan, UP

1 day

600

15.5-17% for new vehicles and 19-20% for used vehicles

3-5 years

INR350,000

65-70%

Cash collections only when cheque bounces (40% of cases)

TAFE, Sonalika, Mahindra, John Deere, Escorts

0.2m

Source: MOSL, Company

Exhibit 14: Tractor financing – comparison of loan book v/s peers (INR b)

73.6

43.8

35.4

31.7

21.3

MMFS

LTFH

SHTF

Magma

CIFC

Source: MOSL, Company

Plan to increase the share

of business from its

preferred OEMs from 50%

to 65%

Management has a clear intention to be the top player in this segment, as it believes

it has the ‘right to win’ in this segment. Management’s plan is to increase the share

of business from its preferred OEMs from 50% to 65% over the near-to-medium

term. The company also intends to focus more on the top 10% dealers, which helps

build better-quality portfolios. In addition, the company is working on an algorithmic

model for underwriting tractor loans (similar to the model in 2W underwriting). This

will help to significantly reduce its TAT from one day currently to only a few hours.

19 July 2017

L&T Finance Holdings

Exhibit 15: Farm equipment loan book trend (INR b)

Loan book

Growth (%)

FY16

(6)

FY18E

FY19E

FY20E

Source: MOSL, Company

FY17

Exhibit 16: Peer comparison

Company

LTFH

CIFC

SHTF

MMFS

BAF

SCUF

AUM

(INR b)

FY17

100

342

788

468

602

231

FY17-20E

AUM

CAGR

NIM

(%)

FY17

12.2

7.6

7.3

8.1

10.7

13.5

GNPL

RoA (%)

RoE (%)

Ratio (%)

FY17

FY20E

FY17

FY20E

7.7

3.0

2.9

22.9

20.7

4.7

2.6

3.0

18.1

20.3

8.2

2.0

2.5

11.7

16.3

9.3

1.0

1.8

6.4

14.2

1.3

3.3

3.6

21.7

27.7

6.8

2.7

3.9

11.8

18.1

Source: Company, MOSL; Only Rural Business Portfolio considered

We believe that LTFH has laid the foundation for strong growth in the rural business

along with stable profitability.

Exhibit 17: Rural finance – disbursement trend

Disbursements (INR b)

Growth (%)

Exhibit 18: Rural finance – loan book trend

Loan book (INR b)

Growth (%)

FY16

FY17

FY18E

110

FY19E

131

FY20E

FY16

100

FY17

123

FY18E

146

FY19E

174

FY20E

Source: MOSL, Company

Exhibit 19: Rural finance – PAT trend

PAT

2.1

FY16

2.9

FY17

3.6

FY18E

4.1

FY19E

Growth (%)

Exhibit 20: Rural finance – trend in RoA/RoE

RoA (%)

22.9

23.6

21.5

20.7

RoE (%)

4.8

FY20E

3.0

FY17

3.1

FY18E

2.9

FY19E

2.9

FY20E

Source: MOSL, Company

19 July 2017

L&T Finance Holdings

Diversified player in housing finance

Key growth driver over the longer term



In the housing finance segment, LTFH has a diversified product suite comprising home

loans, LAP, construction finance and LRD.

Over the past few quarters, the company has shifted its focus toward the self-

employed non-professional (SENP) segment for home loans. It has also stopped

disbursing DSA-sourced salaried loans due to the lack of profitability.

LTFH’s competitive advantage in this segment is its relationship with peer group

companies – L&T Realty and L&T ECC. LTFH has a share of 25% of L&T Realty’s end

home buyers.

LTFH’s relationship with

L&T Realty and L&T ECC

gives it an edge in terms of

retail and corporate loan

sourcing

Renewing focus in housing finance

Within the housing finance segment, the company operated in retail home loans,

LAP and corporate finance segments. Around 60% of its loan book comprises home

loans and LAP, while the rest is corporate loans (largely construction finance). The

company is able to leverage on its relationships with group companies – L&T Realty

and L&T ECC – in this segment. L&T Realty helps the company get access to end-

home buyers – in fact, 25% of L&T Realty’s home buyers avail loan from LTFH. Its

relationship with L&T ECC helps it to better understand the broader real estate

market, and also aids in developer referrals.

LTFH runs this business out of tier-I geographies, with a greater emphasis on metro

locations. Over the past few quarters, the company has increased its focus on the

self-employed non-professional (SENP) segment, where it believes it has an edge

over peers in terms of credit underwriting. It has also stopped disbursing DSA-

sourced salaried loans due to thin profitability in this segment. Hence, going

forward, the focus will be on own-sourced salaried and DSA-sourced self-employed

loans.

Exhibit 21: Home loans - Snapshot

Particulars

Loan book

Geographies

Number of branches

Sourcing

Yield

Tenure

Average ticket size

LTV

Description

INR38b

Mumbai, Bangalore, Chennai, Hyderabad, Pune, NCR

Salaried HL (DST); SENP HL (DSA + DST)

Salaried HL (~9% incremental); SENP HL (~9.5% incremental)

15 years

Salaried HL (INR4m); SENP HL (INR5m)

Salaried HL (70%); SENP HL (60%)

Source: MOSL, Company

19 July 2017

L&T Finance Holdings

Exhibit 22: LAP - Snapshot

Particulars

Loan book

Geographies

Number of branches

Sourcing

Yield

Tenure

Average ticket size

LTV

Description

INR38b

Mumbai, Bangalore, Chennai, Hyderabad, Pune, NCR

Largely DSA

~12% incremental

10 years

INR5m

45%

Source: MOSL, Company

Around 70% of the real

estate book is in residential

construction finance

Real estate financing segment

In the real estate financing segment, LTFH targets category A and B developers in

the top 6-8 cities. The company follows stringent practices, both pre- and post-

disbursement. Prior to disbursement, it does a thorough assessment of the project

based on a number of factors (such as location (micro-market), expected sales

velocity, adequacy of collateral and reputation of the developer). Post

disbursement, it continues to track progress on sales velocity as well as project

completion. Incremental disbursements are linked to the completion of certain

milestones in terms of construction of the project. The company also keeps an

escrow mechanism for project receivables.

Around 70% of the real estate financing book is toward residential construction

finance, while the rest comprises LRD and commercial construction finance.

Exhibit 23: Real estate financing - Snapshot

Particulars

Loan book

Geographies

Yield

Tenure

Average ticket size

Number of projects financed

Description

INR49

Mumbai, Bangalore, Chennai, Hyderabad, Pune, NCR

~14-15% incremental

4-5 years

INR1.5-2b

~55

Source: MOSL, Company

As LTFH operates primarily in metro locations, its main competitors are HDFC, PIEL

and IHFL, in our view.

19 July 2017

L&T Finance Holdings

Exhibit 24: Real estate lending book comparison v/s peers (FY17, INR b)

874

214

201

117

PNBHF

LICHF

LTFH

HDFC

PIEL

IHFL

DHFL

Source: MOSL, Company

Exhibit 25: Home loan/LAP – loan book trend

Loan book (INR b)

FY16

FY17

FY18E

111

FY19E

135

FY20E

Growth (%)

Exhibit 26: Real estate finance – loan book trend

Loan book (INR b)

Growth (%)

FY16

FY17

FY18E

111

FY19E

135

FY20E

Source: MOSL, Company

Exhibit 27: Housing finance – PAT trend

PAT

116

4.1

3.1

FY18E

3.7

FY19E

FY20E

Growth (%)

Exhibit 28: Housing finance – trend in RoA/RoE

23.3

RoA (%)

20.3

RoE (%)

19.7

18.4

1.3

FY16

2.7

FY17

2.3

FY17

2.0

FY18E

1.9

FY19E

1.7

FY20E

Source: MOSL, Company

19 July 2017

L&T Finance Holdings

Differentiated approach in wholesale business

Niche player in renewable energy finance



Within the infrastructure finance book, LTFH has strategically shifted its focus to

renewables and roads projects and operational projects which can be booked within

IDF. LTFH has emerged to become the second largest renewable energy financier after

IREDA.

Although yields are lower compared to rural and housing finance, the credit costs are

low, resulting in good profitability with contained risks in the book.

While LTFH will incur elevated credit costs in FY18 due to provisioning on loans

disbursed pre-2012, it is expected to decline sharply from FY19 onwards. As a result,

RoE in the wholesale financing segment should improve to 15-16%.

Focus on infrastructure

lending, with shift to

operational roads projects

and renewable energy

financing

Leveraging on core strength area for growth

Infrastructure financing (INR329b in FY17, 79% of the total wholesale book of

INR350b) is LTFH’s core competency, and the company has a decade-long proven

track record in corporate and project financing. While the wholesale business

comprises three segments (infrastructure finance, structured corporate finance and

supply chain finance), LTFH has focused on its bread and butter – infrastructure

finance – for growth in this segment. We expect 9% loan CAGR over FY17-FY20 –

however, this number is understated due to the high levels of sell-downs in the infra

finance book. Key drivers in this segment include growth in renewables/road finance

and traction from evolved project finance models such as Hybrid Annuity Model

(HAM).

Shift in focus on roads and renewables is commendable

LTFH has done a commendable task of risk management in the infrastructure

finance book by shifting the book steadily toward renewables (low-gestation periods

and quicker cash flow generation) and roads (sector activity picking up with more

projects going operational). Between FY11 and FY17, the share of renewables

(INR128.8b in FY17) and roads (INR80.1b in FY17) in LTFH’s loan book increased

from 35% (12% for renewables and 23% for roads) to 63% (39% in renewables and

24% in roads). Within renewables, the company has managed risk well by focusing

on small-ticket projects in wind, solar and hydro power projects. During the same

period, the company lowered exposure to T&D projects and other riskier longer-

tenure projects with cash flow difficulties. We believe both renewables and road

finance are poised for strong growth over the next few years, driven by pick-up in

the roads sector and increased focus of the Indian government on increasing

renewables capacity.

19 July 2017

L&T Finance Holdings

Exhibit 29: Steady shift to high-growth, low-risk segments – a master move

Renewable Power

Transport

FY13

Power- Thermal

FY14

FY15

Power - Corp + T&D

FY16

Others

FY17

FY11

FY12

Source: MOSL, Company

Share of operational

projects has gone up

significantly

Shift in focus toward operational projects underscores superior risk

management

With a view to contain risk in the infra book, LTFH has increasingly shifted its loan

mix to operational projects. The share of operational projects increased to 60% as of

FY17 from 21% in FY11. Besides containing book risk, this has led to lower RWAs, as

risk weight for operational/under construction projects is 50%/100%, translating

into 70% risk weight for the infra finance book.

IDF portfolio to continue providing strong traction

LTFH has achieved phenomenal growth in the infrastructure book, led by

operational projects becoming eligible for IDF financing, which were moved from

their infrastructure entity to IDF in FY16, boosting both growth and leverage as they

were using the AAA status of the IDF book.

Exhibit 30: IDF - Snapshot

Particulars

Cumulative Refinancing

Number of projects financed

Lending product structure

Asset Quality

Portfolio composition

Outlook

Leverage

Description

~INR50b

~45

65% of loans comprise long-tenure bonds, majority of which are listed; offer fixed-rate products too

Nil NPLs and Nil restructured assets

60% road projects (19 projects; all guaranteed by a govt-owned authority); 40% towards renewables

and power transmission projects

Expect to refinance 3-4 PPP projects in the port sector in FY18; Expect strong growth in the overall loan

book

D/E ratio at 6x currently; Net worth of INR8b including INR1b preference capital

Source: MOSL, Media Interview

Sell-down CoE helps

generate additional fee

income while managing risk

Focus on sell-downs for fee income traction – key to RoE improvement

LTFH has a dedicated sell-down desk to help sell-down excess loans, providing

additional fee income in the process. Sell-down has started in the wholesale book,

where the company keeps ~30% of originations on its book and sells down the

remaining 70%. Sell-downs have also happened from real estate to an extent. We

like management’s move to set up a dedicated desk, which can help with: a)

switching between earning excess fee income

and achieving

extra loan growth

backed by higher originations, b) having a lever to manage risk on the book by

selling down loans beyond the risk appetite of the company (we see this as a two-

19 July 2017

L&T Finance Holdings

pronged tool to strengthen RoA/RoE of the lending business), c) attaining strong fee

income generating capability on the renewables book, given that even without

selling down, LTFH earns 75-90bp of underwriting and processing fees, and an

additional loan syndication fee if it sells down the portfolio.

We expect modest on-book loan growth in infrastructure finance, given the focus on

sell-downs.

Exhibit 31: Infra finance – loan book trend

Loan book

Growth (%)

Exhibit 32: Wholesale finance – loan book trend

Loan book

Growth (%)

276

FY16

329

FY17

352

FY18E

373

FY19E

403

FY20E

349

FY16

414

FY17

454

FY18E

491

FY19E

542

FY20E

Source: MOSL, Company

Structured corporate finance to provide additional levers of growth

The other components of LTFH’s wholesale finance book, i.e. structured corporate

finance and supply chain finance, comprise ~21% of the book. Supply chain finance

entails financing to entities in L&T’s supply chain and also some working capital

financing for auto dealers. Structured finance includes loans against shares

(promoter funding), mezzanine financing and IPO funding. Structured corporate

finance is a key focus area for the company - we expect 21% loan CAGR in this book

over FY17-20E.

Nil NPLs on loans disbursed

post 2012

Asset quality in control; Provisioning to subside from FY19 onwards

The company has a robust risk monitoring framework for risk management, which

provides comfort on the infra book. In renewable energy financing, LTFH enters into

3-4 player consortium deals, where it underwrites construction risk. PPAs are signed

before the project, and usually construction takes 7-8 months, post which LTFH

takes a call whether to sell down the exposure or to retain it. In roads, the company

enters operational projects only which helps mitigate risk. While HAM projects are

only a handful at this stage, incremental loans are expected to be under HAM

model, thereby containing risks.

LTFH’s wholesale loan book has GNPA/NNPA of 4.28%/2.35% as of 4QFY17, with a

provision coverage ratio of 46%. In addition, it has stressed asset classified as

standard amounting to 5.5% of total loans. Hence, its gross impaired loans stand at

9.8% of total loans (~INR38b). Over the last few quarters, the company has used

excess fee income and one-off gains to make additional provisions on NPLs in its

wholesale loan book. ~65% of wholesale GNPA is accounted for by EPC exposures,

while thermal power projects comprise the remaining. Notably, there are no NPAs

from loans generated post 2012.

19 July 2017

L&T Finance Holdings

Credit costs are expected to

decline sharply from FY19

onwards

With the accelerating shift to low-risk operational projects, we expect slippages to

be contained. Management expects a maximum of ~INR13b slippages from

wholesale exposures in EPC and thermal power over the next year taking the total

gross impaired assets to ~INR50b. As per management’s estimate, a provisioning of

INR18-20b against these stressed assets would suffice. Having already provided

INR11b so far, the incremental provisioning of INR8-9b will be completed in FY18,

leading to a sharp decline in credit costs from FY19 onwards.

Exhibit 33: Credit costs in wholesale book are declining

Credit Cost (INR b)

1.9

1.8

1.0

% of avg loans

0.9

4.6

FY16

7.1

FY17

7.8

FY18E

4.7

FY19E

4.6

FY20E

Source: MOSL, Company

19 July 2017

L&T Finance Holdings

SWOT analysis

Unique, presence in high-yield, high-growth business

segments and superior sustainable returns



Strong parentage a big boon in the housing and infra

finance segments



Among the top three players in tractor finance and

renewable energy financing



Strength

Operates in some high-risk segments like MFI. Asset

quality in these segments is cyclical



Legacy infra finance book has asset quality problems



While the company has successfully moved to NCDs,

the dependence on bank funding remains high



Weaknesses

Operates in underpenetrated business segments

with huge growth potential



Has yet to completely leverage on the knowledge of

the L&T Group ecosystem



Opportunities

SFBs have become very competitive in secured rural

lending



Entry of private sector banks into the renewable or

operating roads space could pose a threat to growth

and margins



Threats

19 July 2017

L&T Finance Holdings

Bull & Bear case

Bull Case



In our bull case, we assume a strong loan CAGR of 24% (vs. base case of 16%).

We believe the rural financing segment could surprise on the upside.

We expect margins to remain largely stable at 4.8-4.9%

We expect significant cost control, with cost-to-income ratio declining to 24% by

FY20 (v/s 26% in base case)

Asset quality would show some improvement with GNPA of 3.4% by FY20 (v/s

4.2% in base case).

This results in a PAT CAGR of 45% (vs. 35% in base case) over FY17-20 with

RoA/RoE in FY20 equal to 2.5%/23%

Based on the above assumptions, our bull case target multiple is 3.5x FY19 BV,

implying an upside of 42%.

Bear Case



In our bear case, we assume an AUM CAGR of 13% (vs. base case of 16%).

Slowdown in the infra financing segment could lead to such a scenario.



We expect margins to remain decline to 4.4% by FY20 v/s 4.9% in FY17.



We expect moderate cost control, with cost-to-income ratio declining to 28% by

FY20 (v/s 26% in base case)



Asset quality would worsen with GNPA of 4.7% by FY20 (v/s 4.2% in base case).



This results in a PAT CAGR of 21% (vs. 35% in base case) over FY17-20 with

RoA/RoE in FY20 equal to 1.8%/15%



Based on the above assumptions, our bear case target multiple is 2.2x FY20 BV,

implying a downside of 18%.

Exhibit 34: Scenario Analysis – Bull Case

Bull Case

Total Income

Opex

Provisions

PBT

PAT

NIM (%)

RoA (%)

RoE (%)

EPS

Target multiple

Target price (INR)

Upside

FY18E

50,660

14,289

14,783

21,587

15,623

4.9

1.9

16.8

8.6

51.5

3.5

213

42%

FY19E

58,883

15,177

13,312

30,393

21,389

4.8

2.2

19.8

11.8

60.9

FY20E

72,514

17,372

14,598

40,543

29,355

4.8

2.5

22.9

16.2

74.2

Exhibit 35: Scenario Analysis – Bear Case

Bear Case

Total Income

Opex

Provisions

PBT

PAT

NIM (%)

RoA (%)

RoE (%)

EPS

Target multiple

Target price (INR)

Upside

FY18E

46,935

14,410

16,266

16,260

11,800

4.7

1.5

12.6

6.5

49.7

2.2

123

-18%

FY19E

50,270

14,508

15,003

20,759

14,478

4.5

1.6

13.9

8.0

55.9

FY20E

56,295

15,552

15,344

25,399

18,449

4.4

1.9

15.8

10.2

63.9

Source: Company, MOSL

19 July 2017

L&T Finance Holdings

Financials and valuation

Re-rating to continue with strong management execution



L&T Finance Holdings (LTFH) is a quintessential turnaround story, in our view. From a

company with 20+ product lines and sub-standard return ratios, it is gradually

transforming itself to a focused financier with eight product lines across three

verticals, with a target to achieve 18-20% RoE by FY20 (12% in FY17).

With focused management and strong execution skills, the company is set to deliver

16% loan CAGR over FY17-20, driven by growth in the rural and housing finance

segments. In addition, continued origination and down-selling in the infra finance

book will drive fee income traction and thus RoE elevated.

Strong growth and a decline in the expense ratio/credit costs should elevate RoA/RoE

from 1.5%/12.4% in FY17 to 2.3%/19.2% in FY20. While the stock has re-rated well

over the past year on account of strong execution by management, we expect re-

rating to continue. We thus initiate coverage on LTHF with a Buy rating and a target

price of INR180 (3.0x FY19E BVPS).

Share of rural and housing finance to increase

Management’s clear intention is to allocate capital to the segments offering the

highest returns. Its first priority is housing finance, followed by rural finance and

wholesale finance. We believe the company has set the foundation to deliver 15%+

AUM growth over the medium term, driven by both rural and wholesale finance. As

a result, we expect the share of wholesale lending to decline from 62% currently to

56% by FY20.

Exhibit 36: Consolidated loan book trend

Loan book (INR b)

561

FY16

617

FY17

740

FY18E

840

FY19E

960

FY20E

FY16

FY17

FY18E

FY19E

FY20E

Growth (%)

Exhibit 37: Loan book mix

Rural

Housing

Wholesale

Source: MOSL, Company

Cost-control measures to drive C/I ratio down to 26%

With a slew of measures, LTFH managed to reduce its cost-income ratio by almost

700bp YoY to 32% in FY17. With benefits of enhanced digitization expected to

accrue over the medium-to-long term, we expect this ratio to continue to decline. In

addition, human resources currently engaged in collections in the de-focused book

will be absorbed in other departments over the next few quarters.

19 July 2017

L&T Finance Holdings

Exhibit 38: Expected trend in expense ratio

39.2

32.4

Cost/Avg AUM (%)

C/I (%)

28.8

26.8

25.6

2.6

FY16

2.2

FY17

2.1

FY18E

1.9

FY19E

1.8

FY20E

Source: MOSL, Company

RoE to reach 18% by FY19

We expect RoE to improve from FY17 levels, given (i) increasing share of rural and

housing finance book, which command higher RoE than wholesale finance and (ii)

declining credit costs in the wholesale finance book. Once LTFH builds a provision

buffer of INR18-20b for stressed assets in infra finance by FY18, credit costs

incrementally should decline sharply, in our view, leading to improved RoE.

Exhibit 39: RoE to reach 19% by FY20

RoA (%)

RoE (%)

17.5

19.2

15.3

10.2

12.4

1.5

FY16

1.5

FY17

1.8

FY18E

2.0

FY19E

2.3

FY20E

Source: MOSL, Company

We value the company at 3.0x FY19E BV based on the residual-income model. Our

key assumptions are Rf of 7.0%, CoE of 13% and a terminal growth rate of 5%. We

thus initiate coverage with a

Buy rating and a target price of INR180.

Exhibit 40: LTFH P/B chart

2.8

2.3

1.8

1.3

0.8

1.6

P/B (x)

5 Yrs Avg(x)

2.6

Exhibit 41: BAF P/B chart

8.0

6.0

4.0

2.0

0.0

3.0x

P/B (x)

5 Yrs Avg(x)

6.7

Source: MOSL, Company

19 July 2017

L&T Finance Holdings

Exhibit 42: CIFC P/B chart

5.0

3.8

2.5

1.3

0.0

2.2

P/B (x)

5 Yrs Avg(x)

3.4

Exhibit 43: MMFS P/B chart

3.5

2.8

2.0

1.3

0.5

P/B (x)

5 Yrs Avg(x)

2.8

2.5

Source: MOSL, Company

Exhibit 44: SCUF P/B chart

3.5

2.7

1.9

1.1

0.3

P/B (x)

5 Yrs Avg(x)

2.7

2.2

Exhibit 45: STF P/B chart

4.0

3.0

2.0

1.0

0.0

1.8

1.9

P/B (x)

5 Yrs Avg(x)

Source: MOSL, Company

19 July 2017

L&T Finance Holdings

Key risks

Rural economy still significantly dependent on farm income

While the rural financing segment offers unparalleled growth opportunities, it is also

fraught with risks. Rural incomes in India are still largely dependent on agricultural

or other farm activities. A downturn in the rural economy could pose severe asset

quality problems for LTFH.

Competition from HFCs and banks in housing finance

Given strong growth opportunity and best-in-class asset quality in housing finance,

HFCs and banks have become aggressive in this segment. In the construction finance

segment, there has been huge inflow of money from other NBFCs and PE

companies. Growth and asset quality could be impacted due to the hyper

competitive environment.

Cancellation of PPAs in renewable energy

Over the past few years, the cost of power purchase in renewable energy PPAs has

declines significantly from Rs7-8/KWh to Rs3-4/kWh. If SEBs renege on PPAs signed

earlier, it could impact the financials of power producers and thus, LTFH.

Regulatory risk

Any changes in regulations by the RBI with respect to provisioning and capital

adequacy could impact the company. However, we do not see this as a key near-

term risk.

19 July 2017

L&T Finance Holdings

Company Background

L&T Finance Holdings (LTFH) in the holding company for all finance-related activities

of the L&T Group. LTFH is among the largest NBFCs in India with a loan book in

excess of INR650b and with 700+ points of presence across 24 states. It operates in

retail/wholesale lending, as well as across 2W finance, tractor finance, microfinance,

home loans/LAP, builder finance, infra finance and structured finance among other

product lines. LTFH is rated AA+ by CARE.

Key management personnel

Mr Dinanath Dubhashi serves as MD & CEO of the company. He was promoted to

the position of Managing Director in July 2016.

Exhibit 46: Management

Name

Designation

Description



Over 26 years of experience across multiple domains in financial services such as

Corporate Banking, Cash Management, Credit Rating, Retail Lending and Rural

Financing. He joined LTFH in 2007 and has been instrumental in scaling up the

MD & CEO

Retail business. Prior to this, he was associated with BNP Paribas, CARE Ratings and

SBI Caps in various capacities. He holds a B.E. (Mechanical) degree and a PGDM

from IIM Bangalore.



Over two decades of experience across functions including Accounts, MIS, Audit,

Tax, Treasury, Secretarial & Statutory Compliances and Admin functions. Prior to

joining LTFH, he worked at Aditya Birla Finance, Angel Group of Companies and

Group CFO

IL&FS Group. He is a qualified Chartered Accountant (FCA) and a Cost Accountant

(FCWA). He has also done his post-graduation in Law (LLB-Gen) and completed

Business Leadership Program (BLP) from IIM Calcutta.



Around 20 years of experience in global and regional leadership roles. Prior to

joining L&T Financial Services, he has been associated with ICICI Bank, GE and

CE – Rural & CHRO

Novartis in various capacities. He is a Gold Medalist in Business Management from

Xavier Institute of Management, Bhubaneswar, and holds a Bachelor’s degree in

Commerce from the Pune University.



Over two decades of experience in Project Finance, Corporate Finance, Structured

Lending and Stressed Asset Management. He has contributed significantly toward

CE – Wholesale

growth and reorientation of Project Finance Business. Prior to joining LTFH, he was

associated with State Bank of India for more than 15 years. He holds a post-

graduation in MBA (Finance) and a graduate degree in engineering.



Around two decades of experience in the financial services & banking industry

across functions like corporate credit risk, commercial loans/capital market

CE – Housing

products and SME. Prior to joining LTFH, he worked with BNP Paribas, Dubai. He

completed his MBA from IIM Lucknow and holds an engineering degree.



Over two decades of rich experience in Sales, Business Development and

Operations in the BFSI sector. Prior to joining L&T Mutual Fund, he was associated

CE – Investment

with Kotak Mahindra Asset Management, MetLife Insurance and ICICI Group, JM

Management

Financial, Eicher Motors Limited in different capacities. Mr. Kulkarni is on the board

of the Association of Mutual Funds of India (AMFI). He holds an MBA from Institute

of Management Development and Research, Pune.



Over two decades in the financial services industry across private banking,

CE – Wealth

investment banking, stock broking, estate and succession planning. Prior to joining

Management

LTFH, he worked in EFG Bank and Anand Rathi Financial Services. He is a Graduate

Engineer from the Bangalore University.

Source: MOSL, Company

Mr. Dinanath Dubhashi

Mr. Sachinn Joshi

Mr. Sunil Prabhune

Mr. Virender Pankaj

Mr. Srikanth JR

Mr. Kailash Kulkarni

Mr. Manoj Shenoy

19 July 2017

L&T Finance Holdings

Financials and valuations

Income statement

Y/E March

Interest Income

Interest Expended

Net Interest Income

Change (%)

Other Operating Income

Net Income

Change (%)

Operating Expenses

Operating Income

Change (%)

Provisions/write offs

PBT

Tax

Tax Rate (%)

PAT

Change (%)

Preference Dividend

Change (%)

PAT

Change (%)

2014

48,719

30,739

17,980

20.6

3,653

21,633

29.8

9,123

12,510

19.9

4,261

8,249

2,300

5,948

-18.4

760

4,965.3

5,189

-28.7

2015

59,025

35,678

23,347

29.9

4,349

27,697

28.0

10,771

16,926

35.3

6,617

10,309

3,014

8,734

46.8

1,102

45.0

7,632

47.1

2016

68,174

41,241

26,933

15.4

6,533

33,466

20.8

13,129

20,337

20.2

7,810

12,527

3,990

8,537

-2.3

1,671

51.7

6,866

-10.0

2017

77,710

46,270

31,439

16.7

8,013

39,453

17.9

12,765

26,688

31.2

15,899

10,789

364

10,425

22.1

1,244

-25.5

9,180

33.7

2018E

87,342

51,687

35,655

13.4

13,901

49,556

25.6

14,263

35,292

32.2

15,643

19,649

5,435

14,214

36.4

1,200

-3.6

13,014

41.8

2019E

98,135

57,629

40,506

13.6

14,855

55,362

11.7

14,831

40,530

14.8

13,910

26,620

7,977

18,643

31.2

1,200

0.0

17,443

34.0

(INR Million)

2020E

110,118

63,914

46,205

14.1

17,561

63,765

15.2

16,315

47,450

17.1

14,700

32,750

9,099

23,651

26.9

1,200

0.0

22,451

28.7

(INR Million)

2020E

29,691

18,172

108,148

137,840

928,980

14.2

47,852

1,114,672

959,687

14.2

80,013

10.0

7,164

1,115,853

Balance sheet

Y/E March

Capital

- of which equity share capital

Reserves & Surplus

Net Worth

Borrowings

Change (%)

Other liabilities

Total Liabilities

Loans

Change (%)

Investments

Change (%)

Net Fixed Assets

Total Assets

E: MOSL Estimates

2014

27,184

17,184

41,072

68,257

358,536

26.9

21,817

448,609

386,972

20.2

27,303

48.2

7,287

448,609

2015

30,837

17,203

46,562

77,399

420,906

17.4

29,117

527,422

457,631

18.3

26,492

-3.0

7,185

527,422

2016

29,668

17,534

53,237

82,905

516,157

22.6

37,221

636,283

560,654

22.5

35,633

34.5

6,962

637,463

2017

29,691

17,534

60,202

89,893

598,111

15.9

35,952

723,955

617,248

10.1

60,115

68.7

6,189

725,136

2018E

29,691

18,172

74,141

103,832

718,728

20.2

39,547

862,107

740,323

19.9

66,127

10.0

6,498

863,288

2019E

29,691

18,172

88,989

118,680

813,517

13.2

43,502

975,699

840,266

13.5

72,740

10.0

6,823

976,880

19 July 2017

L&T Finance Holdings

Financials and valuations

Ratios

Y/E March

Spreads Analysis (%)

Avg Yield on Loans

Avg. Yield on Earning Assets

Avg. Cost-Int. Bear. Liab.

Interest Spread

Net Interest Margin

Profitability Ratios (%)

RoE

RoA

Int. Expended/Int.Earned

Other Inc./Net Income

Efficiency Ratios (%)

Op. Exps./Net Income

Empl. Cost/Op. Exps.

Asset Quality (%)

Gross NPAs

Gross NPAs to Adv.

Net NPAs

Net NPAs to Adv.

VALUATION

Book Value (INR)

Price-BV (x)

EPS (INR)

EPS Growth YoY

Price-Earnings (x)

Dividend per share (INR)

Dividend yield (%)

E: MOSL Estimates

2014

13.2

12.9

9.6

3.3

4.8

2015

13.5

13.1

9.2

4.0

5.2

2016

13.0

12.6

8.8

3.8

5.0

2017

12.8

12.2

8.3

3.9

4.9

2018E

12.8

11.8

7.9

3.9

4.8

2019E

12.8

11.4

7.5

3.9

4.7

2020E

12.8

11.3

7.3

3.9

4.7

9.2

1.5

63.1

16.9

12.5

1.8

60.4

15.7

10.2

1.5

60.5

19.5

12.4

1.5

59.5

20.3

15.3

1.8

59.2

28.1

17.5

2.0

58.7

26.8

19.2

2.3

58.0

27.5

42.2

30.0

38.9

32.7

39.2

37.1

32.4

38.7

28.8

34.6

26.8

33.3

25.6

30.2

12,430

3.2

8,895

2.3

14,281

3.1

9,630

2.1

17,354

3.1

11,540

2.1

24,900

4.0

14,610

2.4

31,769

4.2

18,616

2.5

35,744

4.2

20,673

2.5

40,763

4.2

23,610

2.5

33.9

3.0

-28.8

0.7

37.1

4.4

46.9

0.8

40.4

3.9

-11.7

0.8

44.3

3.4

5.2

33.7

28.6

0.9

0.6

50.8

3.0

7.2

36.8

20.9

0.9

0.6

59.0

2.5

9.6

34.0

15.6

1.2

0.8

69.5

2.2

12.4

28.7

12.1

1.6

1.0

19 July 2017

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