L&T Finance Holdings

Revenues broadly in line; asset quality impairment seasonal July 23, 2015 Nitin Kumar nitinkumar@plindia.com +91 22 66322236 Pritesh Bumb priteshbumb@plindia.com +91 22 66322232 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) 123.0 Shares o/s (m) 1,718.4 3M Avg. Daily value (Rs m) 642.2 Major shareholders Promoters 72.93% Foreign 3.59% Domestic Inst. 1.54% Public & Other 21.94% Stock Performance (%) 1M 6M 12M Absolute 13.1 1.1 (1.3) Relative 11.1 4.2 (9.8) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2016 5.0 5.6 10.1 2017 6.5 6.8 4.7 Price Performance (RIC: LTFH.BO, BB: LTFH IN) (Rs) 90 80 70 60 50 40 30 20 10 0 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) 2014 2015 2016E 2017E Net interest income (Rs m) 19,137 25,311 30,241 37,369 Growth (%) 22.7 32.3 19.5 23.6 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) 3.0 3.7 5.0 6.5 Growth (%) 16.3 21.4 36.3 29.7 Net DPS (Rs) 0.7 0.8 0.9 1.2 Profitability & valuation 2014 2015 2016E 2017E Spreads / Margins (%) 5.0 5.4 5.3 5.2 RoAE (%) 9.2 10.6 13.3 15.4 RoAA (%) 1.3 1.4 1.5 1.6 P/E (x) 23.6 19.4 14.3 11.0 P/BV (x) 2.1 2.0 1.8 1.6 P/ABV (x) 2.5 2.2 2.0 1.8 Net dividend yield (%) 1.0 1.1 1.3 1.7 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

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% 361 13% Total Income 7,739 7,517 3% 7,417 4% Staff expenses 1,148 782 47% 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 831 952 13% 573 45% PAT 1,921 2,856 33% 2,032 5% Tax rate (%) 30 25 22 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 (%) 2.6 3.6 (93) 2.3 39 NNPA (%) 1.6 2.7 (107) 1.3 34 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 (%) 3.1 4.6 (158) 3.1 (3) NNPA (%) 2.0 3.7 (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 441,370 362,760 22% 420,910 5% Loans & Advances 492,190 407,640 21% 472,320 4% Disbursements 88,450 65,560 35% 89,400 1% July 23, 2015 2

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, 2015 3

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 220 150 47% 160 38% 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 1,450 980 48% 1,020 42% Profit before Tax 1,330 1,140 17% 1,360 2% Tax 450 320 41% 440 2% Profit after tax 880 820 7% 920 4% Tax rate (%) 34 28 32 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% 2,880 101% Gross NPA (%) 4.8 3.8 96 3.0 176 Net NPA (%) 2.7 2.7 267 1.4 140 Credit Cost (%) 2.7 1.9 82 2.0 76 Yield on loans (%) 15.7 15.1 62 15.2 54 Cost of funds (%) 9.1 9.8 69 9.1 1 Spreads (%) 6.6 5.3 131 6.1 53 NIM (%) 7.9 6.6 131 7.5 44 Tier I (%) 14.9 14.2 69 14.3 55 CAR (%) 17.4 16.7 68 16.8 56 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) 258,670 228,450 13% 249,930 3% Retail loans 168,470 138,660 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 22,760 112% 42,580 13% Micro Finance 12,120 4,360 178% 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, 2015 4

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 2Q13 12.00% 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, 2015 5

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 120 100 20% 180 33% Total income 2,340 1,970 19% 2,530 8% Operating cost 270 230 17% 270 0% Operating Profit 2,070 1,740 19% 2,260 8% Credit cost 930 530 75% 1,410 34% Profit before Tax 1,140 1,210 6% 850 34% Tax 260 330 21% 180 44% Profit after tax 880 880 0% 670 31% Tax rate (%) 23 27 21 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 (%) 1.9 3.5 166 1.8 7 Net NPA (%) 1.3 2.8 150 1.3 5 Credit Cost 1.6 1.2 44 2.6 92 Restructured loans % 5.4 6.2 72 5.5 8 Net O/s SRs 0.9 0.6 26 0.9 5 Yield on loans 12.3 12.2 3 12.4 15 Cost of funds 9.3 9.3 1 9.2 7 Spreads 3.0 2.9 4 3.2 22 NIM 3.9 4.2 30 4.3 38 Tier I (%) 12.2 16.1 387 13.1 85 CAR (%) 18.4 18.0 41 17.5 91 Borrowings 214,720 160,420 34% 202,470 6% Disbursements 25,100 19,530 29% 26,430 5% Loans Portfolio (Rs m) 233,520 180,860 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, 2015 6

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, 2015 7

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, 2015 8

Income Statement (Rs m) Y/e March 2014 2015 2016E 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 (%) 22.7 32.3 19.5 23.6 Non interest income 2,496 2,995 3,744 4,493 Growth (%) 133.8 20.0 25.0 20.0 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 801 882 970 1,067 Total expenditure 9,123 11,674 14,136 16,909 PPP 12,510 16,632 19,849 24,954 Growth (%) 19.9 33.0 19.3 25.7 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 (%) 27.9 27.9 29.0 29.0 PAT 5,209 7,514 8,622 11,182 Growth (%) (21.7) 44.3 14.8 29.7 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 45.1 39.3 21.3 27.0 Non interest income 348 395 361 408 Net operating income 7,036 7,165 7,417 7,739 Growth 28.3 38.3 20.9 2.9 Operating expenditure 2,791 2,713 2,826 3,108 PPP 4,245 4,452 4,591 4,631 Growth 31.6 65.6 25.0 (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 868 848 573 831 Prov. for deferred tax liability Effective tax rate (%) 32.4 31.9 22.0 30.2 PAT 1,816 1,816 2,056 1,925 Growth 16.6 65.6 10.2 (32.7) Balance Sheet (Rs m) Y/e March 2014 2015 2016E 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 (%) 6.5 5.5 11.1 12.8 Loan funds 358,536 434,952 546,414 692,764 Growth (%) 26.9 21.3 25.6 26.8 Others Minority Interest Deferred Tax Liability (2,174) (2,522) (2,774) (3,163) Total 424,618 507,512 631,527 792,249 Application of funds Net fixed assets 13,672 14,678 15,522 16,358 Advances 386,972 461,950 575,128 724,661 Growth (%) 20.2 19.4 24.5 26.0 Net current assets (2,998) (1,435) (1,142) 845 Investments 27,303 32,763 42,592 51,111 Growth (%) 48.2 20.0 30.0 20.0 Other Assets 3,459 3,805 4,185 4,604 Total 424,618 507,512 631,527 792,249. Key Ratios Y/e March 2014 2015 2016E 2017E CMP (Rs) 72 72 72 72 Eq. Shrs. O/s. (m) 1,718 1,718 1,718 1,718 Market Cap (Rs m) 122,955 122,955 122,955 122,955 Market Cap to AUM (%) 29.0 24.2 19.5 15.5 EPS (Rs) 3.0 3.7 5.0 6.5 Book Value (Rs) 33.9 35.8 39.7 44.8 Adjusted Book Value (Rs) 28.7 32.4 35.6 40.7 P/E (x) 23.6 19.4 14.3 11.0 P/BV (x) 2.1 2.0 1.8 1.6 P/ABV (x) 2.5 2.2 2.0 1.8 DPS (Rs) 0.7 0.8 0.9 1.2 Dividend Yield (%) 1.0 1.1 1.3 1.7 Asset Quality Y/e March 2014 2015 2016E 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. (%) 3.2 2.3 2.0 1.6 Net NPAs to Net Adv. (%) 2.3 1.3 1.4 1.1 NPA Coverage (%) 28.4 44.5 39.7 40.3 Profitability (%) Y/e March 2014 2015 2016E 2017E NIM 5.0 5.4 5.3 5.2 RoAA 1.3 1.4 1.5 1.6 RoAE 9.2 10.6 13.3 15.4. July 23, 2015 9

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