L&T Finance Holdings: Weak AUM, Provision Dents Earnings Sequentially

L&T Finance

L&T Finance Holdings (LTFH) fared poorly during the fiscal third quarter to December 2019.
The diversified non-banking financial company (NBFC) arm of engineering and construction giant Larsen & Toubro, reported a 2% rise in consolidated December quarter net profit at Rs 591 crore against Rs 580 crore reported for the same quarter a year ago.

It continued to maintain a steady net interest margin and fee income, growing it to 7.29% in Q3FY20 against 6.79% a year ago.

Pre-provisioning operating profit (PPOP) stood at Rs 1,334 crore for Q3FY20, up 12% on the year.
The NBFC delivered top quartile return on equity at 16.51% and its focused lending book expanded 14% year on year and it serviced over 1.19 crore customers through 223 branches and 1,450 meeting centers during the quarter.

It claims to have remained on the path of consistent financial performance with steady profit margins, stable asset quality, and growth in focused businesses.

However, analysts are worried due to weak assets under management (AUM) growth of 5% on the year.
Also, the disbursement continued its downward momentum.

Net interest margin (NIMs) – the difference between interest earned and paid – as well as fee income has dipped sequentially. Consequently, net profit declined sequentially on higher provisioning.

Meanwhile, asset quality remains flat sequentially with GNPLs at 5.94% and NNPLs at 2.67%.

The company raised more than Rs 10,000 crore in long-term borrowing during the quarter, which was its highest quarterly borrowing since FY17.
It also sold a public issue of secured NCDs, which was oversubscribed 3.01 times the base issue size of Rs 500 crore and the issue was closed on the second day.

The company also effectively tapped PSL funding of Rs 1,818 crore in Q3FY20.

The weighted average cost of funds remained steady at 8.54% in Q3FY20 against 8.50% in Q3FY19 and 8.61% in Q2FY20 despite diversification. The CP proportion fell from 16% to 9% on the year as long-term borrowing increased.

Over the past year, the company has exited several wholesale business segments. It sold its supply chain finance business to Centrum Finance.

It has also announced plans to run-down the structured finance book (SFG) and the debt capital markets (DCM) book (currently Rs 65b).

As a result, there will be two key areas of focus in this segment – renewable power finance and road finance.

In the recent past, the company has gone slower on disbursements in some segments such as builder finance in which disbursements were down 20%+ YoY in 1HFY20.

In other segments such as tractor finance, there is a cyclical slowdown for the industry on the whole.

In addition, the company classified its structured finance and debt capital markets books as de-focused, implying that it would run-off over time.

In tractor and 2W finance, it has a strategy of targeting only the top dealers and OEMs based on feedback from its analytics.

As a result, the company has grown the rural finance book by 2.5x in 2.5 years. A key driver of this has been microloans, wherein the company has expanded into 17 states – the book now accounts for 48% of the total rural lending book compared to 35% earlier

Net net we believe that the near term outlook looks challenging with overall macros looking weak and hence Q4FY20 is also likely to remain weak.

However long term the company should grow well as there is significant headroom to grow from here on with strong support expected from its L & T its parent ahead.

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