L&T Finance Holdings – Investors Presentation + Research Reports Of PL & Sharekhan

LTFH saw beat in earnings on back of better fee income and tax write back from goodwill amortisation from merger but these gains were used to further strengthen weaker part of balance sheet by voluntary provisions on potential shocks and move towards regulatory requirement. Operational levers have started to play out on fees/opex/topline, while these tax efficiencies will continue for some time ahead, LTFH will use these gains to further take voluntary provisions. We believe ROEs are on improving trajectory with medium risk to asset quality especially in the infra business. Improving ROEs with growth and run down in defocused businesses are going to be key for LTFH valuation going forward. We believe that the company is strongly on the recovery path and we expect the stock to get rerate upwards with an expansion in P/ABV as they keep improving their capital return ratios and strong growth. We maintain BUY with revised PT of Rs210 (revised from Rs140) based on 2.9x Mar‐20E ABV.

– Operating performance strong: LTFH saw better operating performance with NII growth of 21% YoY, as LTFH continued to generate very strong fee income (1.5% of assets) on strong sell down activity, while non‐wholesale biz growth was strong with steady margins. Company used goodwill amortisation gains on tax to create voluntary provisions leading credit cost to ~400‐420bps of loans but drew up PCR to 42% from 37% in Q3FY17. LTFH also derived good lever from strong cost rationalisation bringing down C/I down to 28% from 31% in Q3FY17.

– Loan book continues to be strong in focus biz: Loan book growth in focussed business was strong at 20% YoY mainly from wholesale biz & housing biz, while rural business growth was slightly soft on conservativeness in MFI loans. LTFH continued to focus on sell downs to generate fees, hence, saw strong disbursements in few of its strong business footprints like renewable/transmission & structured finance. It will continue to focus on origination and sell down as strategy.

– Strong strategy layout till FY2020 & beyond: LTFH aspires to become dominant player in businesses like Infra & tractor by FY20 and be meaningful in other businesses as well. Also improvement in ROEs will be led by cost control & rationalisation with big thrust on digital investment, focus on fee income (1.2‐ 1.3% of assets) and strengthening balance sheet by higher provisions from exceptional gains, which we believe can lead to achieve ROE of 18% by FY19 & 20% by FY20.