GEPL Capital neutral on L&T Finance

“L&T Finance, disbursements have grown at 59% during FY11, despite of the tint of macro economic slowdown which has impacted growth of many financial companies. The growth was mainly on account of Corporate segment lending which grew by 76.9% Y-o-Y vs 35.8% for Infra segment and 44.3% for retail segment in FY11. However there has been slowdown in corporate activities as reflected by IIP of 1.8% during Dec’11 mainly due to higher input cost, delay in projects and macro economic slowdown. After factoring the impact of demand slowdown, we expect advances to grow by 45.6% CAGR over FY11-FY13E on back of disbursement growth of 34.3% CAGR over FY11-FY13E.”

“L&T Fin has improved upon its asset quality significantly as is evident from the GNPA level of 1.1% in FY11 vs 2.4% in FY10 and 1.9% in FY09. Out of total GNPA of Rs1.4 bn, Rs100 mn came from Micro Fin AP exposure in FY11 for L&T retail segment. Going forward, we expect to see some pressure on asset quality as the company has exposure to power and port sector which are facing headwinds in current economic weak condition mainly on account of coal supply concerns. On the other hand even corporate and some of the retail segment products are facing slowdown in growth. We expect, GNPA to remain at 1.5% in FY13E.”

“PAT has grown at CAGR of 58.8% over FY07-FY11 for L&T Fin. Growth in PAT was mainly supported by consistent growth in NII, growth in other income as business from Asset management (AMC) and third party product distribution contribution improved over FY07-FY11. Going forward, we expect PAT to grow at CAGR of 30.2% over FY11-FY13E on back of: Other income to grow at 6% Y-o-Y as AMC business picks up and higher growth in business from third party product distribution would lead to higher commission. Cost to Income Ratio (CI ratio) to remain elevated close to 40% in FY13E on back of low growth in NII. Credit cost to move up to 0.3% in FY13E on the back of higher delinquencies due to the company’s exposure to sensitive sectors like power where repayment concerns are lingering and further slow-down in business could impact repayment capacity of borrowers.”

“The company has growth plans in place but economic condition has led to things going against expectations. We feel L&T Fin is in growth phase and if it can overcome the above discussed issues while maintaining decent growth, the stock should command higher multiple. Risk to our valuation is issuance of banking license to LTFH, which would led the stock to trade at higher valuations. At CMP, the stock is trading at 2.0x and 1.7x ABV FY12E and FY13E respectively. We initiate coverage on the stock with Neutral rating and TP of Rs45 (1.7x ABV FY13E),” says GEPL Capital research report.

FIIs holding more than 30% in Indian cos

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