N Sivaraman, president & whole-time director, L&T Finance Holding in an interview to CNBC-TV18 spoke about the March quarter performance and the outlook going forward.He expects to see an improvement in ratio of non-performing assets (NPA) to total assets and sees a stable to improving asset quality for the coming fiscal.If the RBI cuts rate in the June policy then the borrowing costs are likely to taper down, says Sivaraman and expects the bank borrowing ratio to come down to 40 percent of overall borrowingOn the inorganic acquisition front, he said there is nothing on the table yet.It was a good fourth quarter for the company with net interest income up 21.3 percent to Rs 705.6 crore versus 581.7 crore for the corresponding quarter last year. Profits too were up 10.2 percent to Rs 205.6 crore versus Rs 186.54 crore Year-on-Year (YoY)Moreover, brokerage house JP Morgan is owerweight on the stock with a target price of Rs 77 per share for March 2016. According to them the stock has surprised positively on earnings over the last two quarters driven by retail busines. The house believes that improvement in loan growth and margin profile are the key drivers but credit quality in wholesale finance book remained a source of concern. However, hereon they expect it to stabilise.
Below is the transcript of N Sivaraman's interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18. Sonia: This quarter the standout improvement has come in your asset quality where your gross non-performing assets (NPAs) have reduced to 2.2 percent. Tell us among the segments that you lend to whether it is tractors, two-wheelers or even road projects where are you seeing lesser number of bad assets this quarter? A: The retail book typically performs in a very seasonal way, which mean that June and December quarter as the gross non-performnig assets (GNPAs) do pick up because of the general way, the economic activity of this segment happens. The September and March quarter we do see a reduction and March especially with the carry crop getting harvested, the level of cash inflows with our client segments are also very strong. So they typically come down. The retail segment, we have seen reduction in the farm book. We have seen a reduction in the commercial vehicles & construction equipments (CVCE) book but a lot of it is driven by our own exposure to the segment being dramatically lower compared to the past years. We have also seen some of the SME accounts, which were in NPA have got upgraded and that is because of consistent payment performance over the last 18-24 months. In the wholesale segment our stress levels are more around the construction companies and some of the vendors to public sector companies. That situation has not dramatically changed over the last 2-3 years. They continue to remain stressed and they have not seen significant improvement because the economic activity in the country has also been low for the last three years, and in the next two quarters we do not see this picking up unless the order flows for the government sector basically National Highway Authorities of India (NHAI) and the Tamil Power whatever is left out in terms of completion, picks up. Without this, we don’t see this sector dramatically changing. Our project sector assets which are restructured -- there is likely technical restructuring because of delay in commercial operations. We don’t see a stress increasing on this segment.
Our general overdue levels have been stable to coming down. We are not seeing any big new slippages or new stress emerging on our balance sheet. So as I look at the current year, while there could be seasonal variation of gross non-performing assets on the retail segment over the year, but overall we would tend to see an improvement in terms of the ratio of GNPA to overall assets.
As far as the wholesale segment is concerned, the movement could be within the stressed segment of restructured assets and NPAs rather than any new slippages into restructuring. However, one cannot say with the level of confident that it may not happen but as we look at the portfolio today, we feel far more confident and we perhaps have seen the worst of the crisis so far.
From here onwards there should be improvement, the wholesale segment improvement can happen more gradually because these are stickier in terms of reservation abilities whereas the retail will be subject to the seasonal fluctuations, we should see an improvement in ratios.
Reema: For the combined GNPAs which currently stand at 2.25 percent, do you think it will improve? What would you target by the end of FY16, how much could it come down to?A: The ratio improvement can come from three sources, one is the absolute improvement in the GNPA levels but with the increase in book, this may or may not be possible. The ratio will also be a function of the denominator - asset growth how strong it is. That will also drive us. We do see a decent growth in the assets for the current year. So that itself will also bring down the NPA ratios.The third is in terms of our provisioning write-offs that happen on a consistent basis will also help us.Overall, we can see a stable to improving asset quality but I may not want to put a number to it.Sonia: Can you throw some more colour on this point you made about the reduction in the farm book and the CV book delinquencies because for the farm sector, we still don’t have access to how much the damage could be because of the unseasonal rains and in the commercial vehicle sector as well it has been just four-five months of a rebound. Do you think that the stress in these sectors could alleviate in the quarters to come?A: From the overall level if you look at it, it depends on the exposure to the various geographies that you have and whether harvest was largely done or not done and what kind of crop it is. You will realise that as compared to the fear about the damage to the wheat crop, there has been far less than what it was feared to be. The wheat prices remain stable to improving. So this definitely helps the farmer.As far as the current quarter is concerned, it is going to be a function of a few things. One is how much of the damaged crops have since been harvested in this quarter and then been able to realise value for it. Second will be the effect of monsoon and how people will prepare or the outlook to this monsoon. I would guess that sectors, areas which are well irrigated are lower stressed whereas those rain dependent will have increased risk.Our exposure largely has been around areas, which are irrigated. So hopefully other than the seasonal fluctuation, we should be at a level of comfort even though the level of stress could marginally increase.Reema: If there is a rate cut in the June policy of 25 bps and maybe we do not get even another one till the end of the calendar year, what is your expectations on the net interest margins (NIMs), do you see it improving? Walk us through how you are seeing a borrowing cost in FY16?A: Our outlook is that the borrowing cost should taper down but may not be very significant because if you look at the bond market, they have already come down quite dramatically over the last full year and today the government securities have shown some price volatility.However, given the gap between the bank lending rate and the bond market rates, I don’t see a very large opportunity for reduction in the borrowing cost. We have also brought down the proportion of bank borrowings to close to around 40 percent at the overall level. So to that extent, if the banks do go ahead and reduce rates, we will see some benefits.The bond prices itself, I am little uncertain because there is the issue of US rate reversals, rate increases which have resulted in a level of outflow in the foreign inflows or even the renewals of existing investors have not happened. On liquidity level you might not find an opportunity of the bond prices improving significantly from where they are today. So all in all I would say there would be some improvement but it will not be very significant like what we experienced in the last year.Sonia: You have repeatedly been saying that you are looking out for any kind of inorganic acquisitions, we have all been reading and hearing about talks of L&T Finance being interested in Yes Bank, is there any truth to that and can we hear anything about inorganic acquisitions in the months to come?A: One is an inclination or wanting to look at inorganic growth, the second is opportunity on the table. As of now, we have nothing on the table.
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