Expect RoE to be in high teens; infra debt fund a boost: L&T Fin

A strong monsoon will go a long way in alleviating stress in the farm sector, something that has led to NPAs soaring for L&T Finance, CMD YM Deosthalee told CNBC-TV18."If the monsoon is good throughout India, we can see improvements from third quarter of FY17, and definitely by the end of the year, India farmers will be in a better situation," says Deosthalee. He adds that the company's focus will be on the strategies to increase the return on earnings in FY17. For FY16, L&T's lending portfolio was around 11.5-12 percent, but he expects it to be in high teens in the 2-3 years' time. The growth for the company in FY16 was led by renewable energy and operational projects. L&T's active infrastructure debt fund, Deosthalee maintains, will be the growth engine going forward. With the steel sector coping with excess capacity problems, Deosthalee adds that he does not expect to undertake new projects except in roads, renewable energy and transmission projects in the power sector.Below is the verbatim transcript of YM Deosthalee's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: The key highlight this quarter has been the improvement in the gross non-performing loans (NPLs) that we have seen to 3.05 percent versus 3.3 percent. Can you tell us what led to this improvement and is this sustainable?A: It has been a very difficult year for the farm sector. Throughout the year, the farm non-performing assets (NPAs) have remained at elevated level. So December was the peak. We had reasonably good collections in the last year, which has resulted in improvement in overall NPA situation.So apart from farm, there has neither been any deterioration nor any significant improvement in other areas.Going forward, if the monsoon is good, we can see improvement coming in after Q3 because as soon as it starts raining, farmer doesn’t get money. So, he has to get money from his crops, which will take at least from six months from now.We expect definite improvement towards the end of the year in any case as compared to the current year, if there are good monsoons throughout the country. It is also important for us to know that the overall rainfall maybe okay but it is essential to have rainfall where tractor industry is focusing and also where for last two-three years we had drought. So depending on the spread of this rainfall, the situation will pan out.However, at the moment this looks reasonably clear that if the monsoon situation is generally good, we will see from Q3 onwards some improvement.Latha: The guidance outlined by the company is to focus on the return on equity, what is the current return n equity, what would you like it to improve to and by when and how?A: If you look at our products lending portfolio, our RoE is currently in the range of about 11.5-12 percent or so if you look at the lending portfolio.From here onwards, we expect to go at least to high teens in the next couple of years time. That is one important point.The second important point is we also have made investments in the investment management business. As the growth pans out, this business also will start generating reasonable RoE in couple of years' time. So overall we hope to achieve high teens RoE in next two-three years time.Sonia: Concentrating little more on the advances, that was very strong, so 22 percent growth this quarter with wholesale financing, leading the growth at almost 30 percent, so can you tell us within wholesale finance, which are the segments that you are lending to where you have seen an improvement this time?A: We are an infrastructure finance company. So we are present in almost all the sectors. However, there are limited opportunities in many sectors as we speak. In fact, in the last year, the entire growth is led by renewable energy and operational projects. As you are aware, we have an active infrastructure debt fund (IDF). We started operations last year but there has been substantial growth in asset book of infrastructure debt fund in the last year. So that is going to be the growth engine going forward as well.These are the two areas in which most of the growth has happened. One more point we need to know that the proportion of operational projects in our overall portfolio of wholesale book has gone up to 61 percent. Some years ago it was about 20 percent. This is an important thing because as we shift focus to operational projects, the risk profile considerably reduces because in infrastructure sector, if it is a road and if you have a history of toll collection then you can very easily map the trajectory going forward.So, the risk profile goes down and as the risk profile goes down, you can transfer these assets to IDF and IDF is definitely a different business, if you take out refinancing business. It is a AAA entity, it currently enjoys a tax free status and it only houses operational projects as a result of which the cost of funding of IDF is relatively low.Latha: What is the kind of movement you are seeing on the ground for projects for fresh capex? Therefore your loan growth outlook for FY17?A: The proportion of operational projects in our book is 61 percent today and going forward it should remain in that level, it may go up to about 65 percent.If you talk of capex, in the last year, the opportunities for lending for capex is very limited. Many sectors are still going through problems those who spend heavily on capital expenditure, industries like steel are still struggling with excess capacity, also lot of imports and therefore nobody is likely to put up new projects in the near future. So, we don’t expect capex happening in any other areas except for roads, renewable energy and transmission projects in the power sector.Sonia: What were the cost of funds hence the net interest margins (NIMs) this quarter and what kind of guidance can you leave us with?A: Cost of funds we should look at for a longer period of time and not look at for the quarter. So over the year, the cost of funds has come down by nearly 60 bps from the start of the year. We do believe that it is going to remain stable at the current level, which is around 9.03-9.04 percent or so. Over the next one year or the current year it remains stable at these levels. We don’t expect substantial reduction from this.