 "L&T Finance")
L&T Finance Holdings' September quarter results were well within analyst estimates. Total income at Rs 1,793 crore and net interest income (NII) at Rs 734 were up 16 per cent, compared to the year-ago quarter. This indicates the shift in focus from institutional customers (B2B) to retail customers (B2C) helped the company hedge against the overall economic slowdown.
However, credit cost for the quarter was up 33 per cent and, thus slowed growth in profit after tax (PAT), which grew 11 per cent to Rs 206 crore. Asset quality decline was on account of isolated instances such as delayed recovery in farm loan and one restructured loan account in the infrastructure segment becoming a non-performing asset (NPA).
While farm loans might remain under stress in the near term, the overall asset quality remains sound. Growth in gross non-performing assets was largely flat, up three basis points (bps) sequentially at 3.08 per cent (based on 150 days past due). The good part is that share of the B2C segment is rising fast and now accounts for 61 per cent of total loans. The growth is led by non-farm segments like housing loans (now 21 per cent of loans, from the nine per cent in FY14), which augurs well from a long-term perspective.
Loans and advances went up 19 per cent, with the retail segment registering 31 per cent growth and wholesale business by 26 per cent. Growth in the retail business was largely guided by housing and micro finance. The roads and renewable power segments grew 21 per cent and 27 per cent, respectively, driving the wholesale business. Loan disbursements were up 18 per cent y-o-y, due to 31 per cent increase in disbursals in the retail finance business (with supply chain, housing and microfinance segments contributing to the additions). Offtake was lower than the first quarter of FY15 in rural products (mainly tractors) and mid-market products such as loan against shares, while it was rather negligible in personal vehicles finance (mainly two-wheelers) and commercial vehicles and equipment finance. Loan disbursements in these segments are expected to remain soft due to below-than-expected monsoon and vehicles sales, including two-wheelers are yet to show a meaningful recovery.
As for wholesale finance, lower disbursements to thermal power, real estate and special economic zone projects curtailed net disbursements in the second quarter of FY16. That said shift in focus from these sectors where the investments cycle is yet to recover, to those as renewable power and road projects which have relatively shorter gestation period will positively impact the asset quality and NIM of wholesale finance operations.
On the whole, the strategy to switch focus to the B2C segment has yielded positive results and a sustained improvement here should help NII and NIM expand. Reducing dependence from term loans (from 36 per cent in the September quarter of FY15 to 21 per cent in the September quarter of FY16) and increasing the proportion of market borrowing will also keep costs under check.
Despite the slippage from restructured assets and challenging outlook in the agriculture portfolio seen in the September quarter, analysts at Prabhudas Lilladher believe credit costs will moderate gradually. Analysts also estimate earnings to grow at 20 per cent plus annually over FY15-17, versus the 15-16 per cent witnessed in past two years. Analysts at Prabhudas Lilladher, thus, have retained their 'buy' on the stock, with a target price of Rs 80.
The stock, which has fallen five per cent versus the Sensex's 6.3 per cent decline after the results, currently trades near its two-year closing low of Rs 58. At Rs 65, the valuations are also reasonable, at 13 times its 12-month trailing earnings.
