L&T Finance Holdings Research Report By Motilal Oswal

Well capitalized for growth

~15% accretion to BVPS on account of recent capital infusion

 L&T Finance (LTFH) recently raised equity capital amounting to INR30b, of which INR20b came from the parent (L&T). As a result, leverage has declined from previous elevated levels of ~8.5x to ~6.1x now.

We believe LTFH is now well capitalized for growth, and will not need to raise equity capital at least in the next 3-4 years.

 Over the past two years, there has been a modest increase in the share of retail loans from 26% to 30%.

On the wholesale lending front, there has been a mix shift toward real estate finance (its share has increased from 6% to 12% over the same period), while the contribution of other wholesale finance segments (infra, structured finance, etc.) has declined.

However, the increased share of real estate finance is likely to translate into strong growth in the retail home loan segment in the coming years, in our view.

 The non-fund-based businesses are on a strong growth trajectory. Over the past two years, AAUM in the investment management business has grown at 60%+ CAGR, with equity AAUM growing at 80%+ CAGR.

Profitability, too, has improved significantly, with PAT growing from INR190m in FY16 to INR850m in FY18E.

As a result, the contribution of the investment management business to consolidated PAT has increased from 3% in FY16 to 6% in FY18E.

 Post capital infusion, our BVPS estimates for FY19/20E have been revised upward by 17%/13%. While RoE will appear optically lower due to low leverage (FY20E RoE of 16%), we expect LTFH to achieve its targeted RoE of 18% by FY21.

The correction in the stock price over the past six months provides an attractive entry point, in our view. The stock trades at 2.1x FY20E BVPS – a discount to our NBFC coverage universe (ex-GRUH) average of 2.4x. We keep our target price unchanged at INR240 (3.0x FY20E BVPS). Maintain Buy.

13-17% upward revision in BVPS estimates post capital raise

The company recently raised INR30b in equity capital, of which INR20b came from the parent (108m shares @INR186/share) and INR10b from institutional investors (63m shares @INR159/share).

The capital infusion came in at a timely moment, as leverage (assets/equity) was elevated (~8.5x) and growth was robust. Post the capital raise, LTFH now has average leverage levels relative to its NBFC peers (refer Exhibit 1).

With an expected AUM CAGR of 16% over FY18-20, LTFH will not need to raise equity capital in the next 3-4 years, in our view. Additionally, our BVPS estimates have been revised upward by 17%/13% for FY19/20.