L&T Finance Holding Ltd | Q1FY20 Result Update | Disbursements slowdown

Disbursements slowdown; Credit Costs higher due to markdown on defaulted HFC

Deep Dive Analysis (Q1FY20)­­

• Net interest income for the quarter grew by 30% YoY to INR 1,369cr on back of an 127 bps increase in yield to 13.22% coupled with an 16% YoY growth in total AUM. The focused book increased 24% YoY to INR 90,501cr while the defocused book (now inclusive of the Structured Corp Finance and DCM books) de-grew by  28% YoY. The company also recognized INR 84 Cr of interest income related to IL&FS exposure which was deferred in Q3 and Q4 FY19 which has resulted in slightly higher NII for the quarter
• NIM increased by 61 bps YoY and 43 bps sequentially to 5.51%
• Net revenue grew 25% YoY to 1,765cr (higher than market estimation of INR 1,619cr) as non-interest income registered an growth of only 10.3%
• Operating expenditure grew by 28% YoY to INR 422cr, as against 25% YoY growth in net revenue, leading to PPoP growth of 24% YoY to INR 1,343cr, against market estimation of INR 1,096cr. Consequently, Cost-to-income ratio increased by 52bps YoY to 23.9%.
• Provisioning for the quarter stood at INR 595cr including an 50% markdown of INR 284 cr on an exposure of INR 567cr to an HFC which was downgraded to D rating in the quarter. Hence, credit cost for the quarter came in 2.39% as against 1.91% seen in Q4FY19 and 1.66% seen in Q1FY19
• Consequently, PBT and PAT for the bank grew by 3%/2% YoY to INR 748cr/INR 549cr respectively, almost in-line with consensus of ~INR 557cr.

Disbursements witness de-growth across segments; Focused Book continues to grow at robust pace

• Disbursements registered a de-growth 36% YoY to INR 9,608 cr while also declining 28% on a sequential basis
• Within the focused book, the company witnessed robust growth in both the rural/housing books which grew by 35%/28% YoY respectively while infrastructure finance book grew by 14% YoY. Overall the Focused book showed an growth of 24% YoY to INR 90,501 cr
• The de-focused book now also constitutes DCM and Structured Corporate Finance book which on an adjusted basis showed a de-growth of 28%. Defocused book now constituted ~10% of the overall book as of Q1FY20

    Asset Quality remained stable

• GNPA/NNPA stood at 5.7%/2.5% in Q1FY20 as against 5.9%/2.4% in Q4FY19 which is an minor improvement on GNPA
• PCR stood at 58.1% vs 62.0% in Q1FY19 and 61.0% in Q4FY19

     Other Highlights

• CAR- 18.38%; Tier I – 15.05%; Tier II – 3.33%
• Term sheets for 3 Amber entities (INR 1492 Cr out of INR 1612 Cr total exposure) have been signed by IL&FS to convert to “Green” and the execution of the binding documents is in progress

Our View:

Positive:

• Focused book growth continued to be robust with high growth rates continuing in Rural and Housing books
• Majority (93%) of its IL&FS exposure will now be “Green”

Negative:

• Markdown of 50% taken on defaulted HFC exposure of INR 567 cr

Valuation

At the CMP of INR 110, stock is trading at 1.2x FY21 ABV

INR crs	Q1FY20	Q1FY19	%change	Q4FY19	%change
Interest income	3287	2564	28.2	3046	7.9
Interest expenses	1918	1512	26.9	1832	4.7
Net interest income	1369	1052	30.1	1215	12.7
Non-interest income	396	359	10.3	403	-1.7
Net Revenue	1765	1411	25.1	1618	9.1
Operating expenses	422	330	27.9	405	4.2
Operating Profit	1343	1081	24.2	1213	10.7
Provisions & Contingencies	595	356	67.1	457	30.2
PBT	748	725	3.2	756	-1.1
Tax	199	187	6.4	208	-4.3
PAT	549	538	2.0	548	0.2
Paid-up Capital	2000	1999	0.0	1999	0.0
Adj. EPS (INR)	2.75	2.69	2.0	2.74	0.1
Ratio (%)
C/I Ratio	23.9	23.4	52 bps	25.0	-112 bps
Yield	13.22	11.95	127 bps	12.75	47 bps
Cost of funds	8.59	8.29	30 bps	8.53	6 bps
Spread	4.63	3.66	97 bps	4.22	41 bps
NIM	5.51	4.90	61 bps	5.08	43 bps
Balance Sheet (INR Crs)
Loan & Advances	99,904	86,321	15.7	99,121	0.8
Disbursement	9,608	15,033	-36.1	12,774	-24.8
Asset Quality (%)
GNPA	5.7	7.9	-221 bps	5.9	-18 bps
NNPA	2.5	3.2	-69 bps	2.4	8 bps
Provision Coverage Ratio	58.1	62.0	-389 bps	61.0	-289 bps