L&T Finance Holdings

Transcription

1 Revenues broadly in line; asset quality impairment seasonal July 23, 2015 Nitin Kumar Pritesh Bumb Rating BUY Price Rs72 Target Price Rs80 Implied Upside 11.1% Sensex 28,371 Nifty 8,590 (Prices as on July 23, 2015) Trading data Market Cap. (Rs bn) Shares o/s (m) 1, M Avg. Daily value (Rs m) Major shareholders Promoters 72.93% Foreign 3.59% Domestic Inst. 1.54% Public & Other 21.94% Stock Performance (%) 1M 6M 12M Absolute (1.3) Relative (9.8) How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: LTFH.BO, BB: LTFH IN) (Rs) Jul 14 Sep 14 Source: Bloomberg Nov 14 Jan 15 Mar 15 May 15 Jul 15 L&T Finance Holdings (LTFH) reported modest 15% YoY growth in adjusted net profits, dragged by interest reversal on slipped accounts in the farm lending business and higher opex. NII growth, thus, stood at 27% YoY (2.5% below our estimate), while other income reported 13% QoQ growth. Loan growth came in at 21% YoY led by continued traction in infra lending business (renewable), while retail business also reported pick up in loan growth. GNPLs increased 22% YoY on 180dpd basis. However, management expressed confidence on maintaining healthy trends, going ahead. We maintain our earnings and PT of Rs80 and retain BUY. Loan book grows 21% YoY; focused segments driving growth: LTFH reported 21% YoY growth in loan portfolio led by strong 29% YoY growth in infra lending business (particularly renewable: 87% YoY growth) and pick up in retail loan growth at 13% YoY aided by robust growth in Housing (112% YoY), MFI (178% YoY) and Supply chain business. Management affirmed loan growth guidance of 25% YoY for FY16E led by continued traction in these select segments. Asset quality deterioration largely seasonal; credit costs under control: GNPLs on 180dpd basis increased by 22% QoQ led by seasonal rise in slippages in the rural lending business even as GNPLs on 150dpd basis remained broadly stable. Overall credit cost declined by 18bps QoQ aided by benign trends in infra lending business though coverage ratio also moderated by ~450bps to 40%. Management expressed confidence on maintaining sound asset quality and report healthy recoveries in the rural portfolio in the coming quarters. Balance sheet de risking continues; return ratios to improve: In retail business, composition of CE/CV business declined further to 6%, while share of housing increased to 19%. On the infra front, share of operational projects further increased to 51%, while the share of under construction projects reduced to 25%. We expect credit cost to improve gradually, while improvement in operating leverage and gearing will help boost RoE in the medium term. Key Financials (Y/e March) E 2017E Net interest income (Rs m) 19,137 25,311 30,241 37,369 Growth (%) Non interest income (Rs m) 2,496 2,995 3,744 4,493 Operating Profit (Rs m) 12,510 16,632 19,849 24,954 PAT (Rs m) 5,209 7,514 8,622 11,182 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & valuation E 2017E Spreads / Margins (%) RoAE (%) RoAA (%) P/E (x) P/BV (x) P/ABV (x) Net dividend yield (%) Source: Company Data; PL Research Q1FY16 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 NII growth at 27% YoY was 2.5% below our estimates affected by interest reversal of Rs170m on slipped accounts Provisions showed a slight moderation aided by benign NPL trends in infra lending business as LTFH consciously de risks the loan portfolio. Coverage ratio also eased by 450bps to 40% Exhibit 1: LTFH Q1FY16 Higher opex and interest reversal impacted net profits Consolidated (Figures in Rs m) 1QFY16 1QFY15 YoY 4QFY15 QoQ Income Statement Interest income 17,176 14,378 19% 16,346 5% Interest expense 9,845 8,607 14% 9,291 6% NII 7,331 5,771 27% 7,056 4% Other Income 408 1,747 77% % Total Income 7,739 7,517 3% 7,417 4% Staff expenses 1, % 1,077 7% Other expenses 1,961 1,659 18% 1,749 12% Total Operating Expenses 3,108 2,441 27% 2,826 10% Operating profit 4,631 5,077 9% 4,591 1% Provisions 1,878 1,268 48% 1,986 5% PBT 2,752 3,808 28% 2,605 6% Tax % % PAT 1,921 2,856 33% 2,032 5% Tax rate (%) GNPLs on 150dpd basis remained stable pointed to some steadiness in asset quality and it was primarily rural lending business which drove increase in GNPLs on 180dpd basis Asset Quality at 180 days recognition GNPA (Rs m) 12,775 14,205 10% 10,448 22% NNPA (Rs m) 7,659 10,524 27% 5,798 82% GNPA (%) (93) NNPA (%) (107) Coverage ratio (%) 39.4% 25.2% 14% 44.0% 5% at 150 days recognition GNPA (Rs m) 14,736 18,433 20% 14,281 3% NNPA (Rs m) 9,575 14,645 35% 9,630 52% GNPA (%) (158) 3.1 (3) NNPA (%) (172) 2.1 (10) Coverage ratio (%) 34.4% 19.7% 15% 31.8% 3% Overall loan growth at 21% YoY was led by continued traction in infra lending business, while retail business also reported recovery in loan growth Balance Sheet Networth (excl. Preference Cap) 65,660 61,050 8% 63,770 3% Preference Capital 19,630 13,630 44% 12,630 55% Borrowings 441, ,760 22% 420,910 5% Loans & Advances 492, ,640 21% 472,320 4% Disbursements 88,450 65,560 35% 89,400 1% July 23,

3 Exhibit 2: LTFH Margins remain stable for the consolidated business 6.20% NIM % 6.00% 5.80% 5.60% 5.40% 5.20% 5.00% 4.80% 1Q13 2Q13 Exhibit 3: LTFH Asset quality deteriorates mainly from Retail business on 180dpd but was stable on 150dpd basis GNPA % NNPA % PCR % 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 50% 40% 30% 20% 10% 0% Note Q1FY16 asset quality on 150dpd Exhibit 4: LTFH Consolidated lending business witnesses marginal dip in credit cost 1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Credit Cost % 1Q13 2Q13 July 23,

4 NII grew at 24% YoY led by robust growth in high yielding business and moderation in borrowing cost Credit cost remained elevated due to higher delinquencies in rural lending portfolio (~80bps impact) Exhibit 5: LTF: NII declined on interest reversals in rural lending business L&T Finance (P&L m) 1QFY16 1QFY15 YoY 4QFY15 QoQ Interest Income 8,360 7,770 8% 7,920 6% Interest Expenses 4,160 4,380 5% 4,030 3% Net interest income 4,200 3,390 24% 3,890 8% Fee income % % Total income 4,420 3,540 25% 4,050 9% Operating cost 1,640 1,420 15% 1,670 2% Operating Profit 2,780 2,120 31% 2,380 17% Credit cost 1, % 1,020 42% Profit before Tax 1,330 1,140 17% 1,360 2% Tax % 440 2% Profit after tax % 920 4% Tax rate (%) NIMs expanded to 7.9%; however, are likely to moderate a little, going ahead, as share of housing grows further in the total loan mix, while rural lending mix moderates Gross NPA 10,040 7,700 30% 6,250 61% Net NPA 5,777 5,380 7% 2, % Gross NPA (%) Net NPA (%) Credit Cost (%) Yield on loans (%) Cost of funds (%) Spreads (%) NIM (%) Tier I (%) CAR (%) Disbursements in chosen B2C segments viz. Housing, MFI continues to remain strong, while the company continued to gain market share in rural lending business as well Disbursement 63,350 46,030 38% 62,970 1% Loans portfolio (Rs m) 258, ,450 13% 249,930 3% Retail loans 168, ,660 21% 163,110 3% CV / CE 16,750 31,260 46% 20,040 16% Rural Products Finance 62,780 54,430 15% 62,860 0% Housing Finance 48,250 22, % 42,580 13% Micro Finance 12,120 4, % 9,160 32% Personal vehicle 28,570 25,850 11% 28,470 0% Corporate loans 90,200 89,790 0% 86,820 4% Supply chain finance 15,920 9,950 60% 17,540 9% Mid market finance 74,280 79,840 7% 69,280 7% July 23,

5 Exhibit 6: LTF has been focusing on retail consumer segments Exhibit 7: Share of non housing loans decreasing in HF business B2C B2B Housing Loans % LAP % Const Finance % 8% 6% 9% 9% 67% 65% 62% 55% 53% 57% 46% 43% 41% 44% 43% 35% 31% 33% 35% 38% 45% 47% 43% 54% 57% 59% 48% 51% 56% 59% Exhibit 8: Margins increase on healthy growth in high yielding loans 4QFY14 1QFY15 4QFY15 1QFY16 Exhibit 9: Retail finance business remains adequately capitalized 9.00% NIM % 20.00% Tier I CAR 8.00% 7.00% 6.00% 5.00% 18.00% 16.00% 14.00% 4.00% 3.00% 2.00% 1Q13 2Q % 10.00% 1Q13 2Q13 Note Excludes housing finance biz Exhibit 10: Asset quality deteriorates from farm book Note Excludes housing finance biz Exhibit 11: Credit cost increase on back of higher slippages 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% GNPA % NNPA % PCR % 60% 50% 40% 30% 20% 10% 0% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Credit Cost % Note Q1FY16 asset quality on 150dpd July 23,

6 Exhibit 12: LTIF Stable performance; margins likely to improve, going ahead L&T Infra (P&L m) 1QFY16 1QFY15 YoY 4QFY15 QoQ NII declined on sequential basis led by moderation in lending yields as LTIF shifts its loan mix in favour of low yielding operational projects PAT growth stood flat on YoY basis; however, we expect trends to improve as credit cost improves led by conscious derisking strategy Interest Income 6,980 5,450 28% 6,810 2% Interest Expenses 4,760 3,580 33% 4,460 7% Net interest income 2,220 1,870 19% 2,350 6% Fee income % % Total income 2,340 1,970 19% 2,530 8% Operating cost % 270 0% Operating Profit 2,070 1,740 19% 2,260 8% Credit cost % 1,410 34% Profit before Tax 1,140 1,210 6% % Tax % % Profit after tax % % Tax rate (%) Gross NPA 4,200 6,090 31% 3,840 9% Net NPA 2,940 4,820 39% 2,690 9% Asset quality remained broadly stable though management highlighted that there are couple of corporate loans (already restructured) which may potentially slip into the NPLs. However, adequate provision has already been made in respect of such loans Loan growth remains strong at 29% YoY led by robust trends in renewable energy business. Management remains optimistic on maintaining this growth momentum Gross NPA (%) Net NPA (%) Credit Cost Restructured loans % Net O/s SRs Yield on loans Cost of funds Spreads NIM Tier I (%) CAR (%) Borrowings 214, ,420 34% 202,470 6% Disbursements 25,100 19,530 29% 26,430 5% Loans Portfolio (Rs m) 233, ,860 29% 222,370 5% Thermal power 31,380 26,250 20% 29,600 6% Renewable power 64,160 34,240 87% 59,310 8% Power Corp 25,890 21,740 19% 21,610 20% Roads 46,950 40,350 16% 47,360 1% Telecom 14,230 22,850 38% 14,270 0% Others 50,910 35,430 44% 50,220 1% July 23,

7 Exhibit 13: Share of operational projects increase Corporate Operating proj Under cons proj Equity Invts 4% 4% 4% 4% 5% 3% 3% 31% 27% 27% 26% 26% 28% 25% Exhibit 14: Focus remains on renewable segment Others 22 Thermal power 13 32% 37% 42% 43% 46% 47% 51% Telecom 6 Renewable power 27 33% 32% 28% 27% 23% 22% 21% Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Roads 20 Power Corp 11 Exhibit 15: Margins see slight decline on mix change Exhibit 16: Capital infusion likely as Tier I has reached threshold 5.50% NIM % 20.00% CAR Tier I 5.00% 4.50% 4.00% 18.00% 16.00% 3.50% 3.00% 2.50% 14.00% 12.00% 2.00% 10.00% 1Q13 2Q13 Exhibit 17: Asset quality for infra book remained stable Exhibit 18: Credit cost has come off sequentially on lower slippages 4.0% 3.0% 2.0% 1.0% 0.0% GNPA % NNPA % PCR % 35% 30% 25% 20% 15% 10% 5% 0% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Credit Cost % Note Q1FY16 asset quality on 150dpd July 23,

8 Exhibit 19: We value LTFH on SOTP basis of Rs80 per share based on Mar 17 book PT calculation and upside Fair value of LTF 38 Fair value of LTIF 32 Fair value of LTIM 8 Fair value of PE/wealth management 2 Total Fair value of LTFH 80 Target P/ABV lending business 1.7 Target P/E 10.9 Current price, Rs 71.6 Upside (%) 11% Dividend yield (%) 1% Total return (%) 12% July 23,

9 Income Statement (Rs m) Y/e March E 2017E Int. Inc. / Opt. Inc. 49,876 61,811 73,421 91,274 Interest Expenses 30,739 36,500 43,180 53,904 Net interest income 19,137 25,311 30,241 37,369 Growth (%) Non interest income 2,496 2,995 3,744 4,493 Growth (%) Net operating income 21,633 28,306 33,985 41,862 Expenditure Employees 2,736 3,475 4,240 5,130 Other expenses 5,585 7,317 8,926 10,712 Depreciation ,067 Total expenditure 9,123 11,674 14,136 16,909 PPP 12,510 16,632 19,849 24,954 Growth (%) Provision 4,261 6,367 5,445 6,174 Other income Exchange Gain / (Loss) Profit before tax 8,249 10,266 14,404 18,780 Tax 2,300 2,864 4,177 5,446 Effective tax rate (%) PAT 5,209 7,514 8,622 11,182 Growth (%) (21.7) Quarterly Financials (Rs m) Y/e March Q2FY15 Q3FY15 Q4FY15 Q1FY16 Int. Inc. / Operating Inc. 15,518 15,720 16,346 17,176 Income from securitization Interest Expenses 8,830 8,950 9,291 9,845 Net Interest Income 6,688 6,770 7,056 7,331 Growth Non interest income Net operating income 7,036 7,165 7,417 7,739 Growth Operating expenditure 2,791 2,713 2,826 3,108 PPP 4,245 4,452 4,591 4,631 Growth (8.8) Provision 1,568 1,794 1,986 1,878 Exchange Gain / (Loss) Profit before tax 2,677 2,658 2,605 2,752 Tax Prov. for deferred tax liability Effective tax rate (%) PAT 1,816 1,816 2,056 1,925 Growth (32.7) Balance Sheet (Rs m) Y/e March E 2017E Sources of funds Equity 17,184 17,184 17,184 17,184 Reserves & Surplus 41,072 44,268 51,073 59,833 Networth 58,257 61,453 68,258 77,017 Growth (%) Loan funds 358, , , ,764 Growth (%) Others Minority Interest Deferred Tax Liability (2,174) (2,522) (2,774) (3,163) Total 424, , , ,249 Application of funds Net fixed assets 13,672 14,678 15,522 16,358 Advances 386, , , ,661 Growth (%) Net current assets (2,998) (1,435) (1,142) 845 Investments 27,303 32,763 42,592 51,111 Growth (%) Other Assets 3,459 3,805 4,185 4,604 Total 424, , , ,249. Key Ratios Y/e March E 2017E CMP (Rs) Eq. Shrs. O/s. (m) 1,718 1,718 1,718 1,718 Market Cap (Rs m) 122, , , ,955 Market Cap to AUM (%) EPS (Rs) Book Value (Rs) Adjusted Book Value (Rs) P/E (x) P/BV (x) P/ABV (x) DPS (Rs) Dividend Yield (%) Asset Quality Y/e March E 2017E Gross NPAs (Rs m) 12,430 10,450 11,733 11,897 Net NPAs (Rs m) 8,900 5,800 7,072 7,107 Gross NPAs to Gross Adv. (%) Net NPAs to Net Adv. (%) NPA Coverage (%) Profitability (%) Y/e March E 2017E NIM RoAA RoAE July 23,

10 Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai , India Tel: (91 22) Fax: (91 22) Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 42.9% 39.8% 17.3% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Nitin Kumar (B.E, PGDM, CFA), Mr. Pritesh Bumb (MBA, M.com), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Nitin Kumar (B.E, PGDM, CFA), Mr. Pritesh Bumb (MBA, M.com), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. July 23,