Akash Jain
We like L&T Finance Holdings as it transformed itself and improved its return ratios by focusing on profitable verticals and shutting down low yielding verticals. The company currently operates in eight verticals from around 20+ earlier.
L&T Finance has successfully dealt with the volatility and liquidity conditions through prudent ALM and resilient business model. It continues to deliver top quartile RoE of 18 percent.
In Q3FY19, consolidated PAT witnessed YoY growth of 81 percent to Rs 580 crores led by strong AUM growth of 23 percent and improving asset quality.
It raised adequate liquidity to build sufficient liquidity buffer and support growth of its core businesses. Differentiated performance and strong pedigree were instrumental in raising ~Rs 29,800 crore in Q3FY19.
As of December 31, 2018, Rs 15,662 crore of liquidity is maintained through the following:
- Rs. 4,173 crore in the form of cash, FDs and other liquid instruments which is around 4 percent of balance sheet
- Undrawn bank lines of Rs 9,489 crore
- Back up line from L&T of Rs 2,000 crore
The company’s ability to pass increasing cost to customers and increase in retailisation of its portfolio has maintained NIMs at a steady level.
Although the company has exposure to six SPV subsidiaries of IL&FS, it is confident of zero credit losses. L&T Finance has exposure to four annuity
projects and two toll road projects. Cash flows for all the projects are secured though water tight escrow accounts with specific
charge/lien in favour of lenders. All the projects have Debt Service Reserve Account and other reserves amounting to ~ Rs 500 crore. All projects are self - sustaining without any further equity infusion required from the promoter.
The company’s asset quality also improved marginally in Q3FY19. GNPA stood at 6.7 percent and Net NPA ratio stood at 2.6 percent. Gross Stage 3 has reduced from 10.4 percent to 6.74 percent (7.1 percent in Q2FY19). Net Stage 3 has reduced from 4.74 percent to 2.64 percent (2.79 percent in Q2FY19). Provision coverage increased from 57 percent to 62 percent.
At CMP of Rs 145, the stock is valued at a P/BV of 2.3x. We recommend a buy with a target price of Rs 180 with a horizon of 12 months.
The author is Vice-President - Research at Ajcon Global Services
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