L&T FINANCIAL HOLDINGS: Business performance stable

Increased provisioning for COVID-19 impacts earnings

–       LTFH reported 4QFY20 PAT of INR3.8b (-30% YoY), ~20% below our estimates. The miss was largely on account of lower-than-expected total income (8% miss) while opex and credit costs were in line. LTFH reported INR844m in net loss on fair value changes, which led to the topline miss.

–       LTFH created additional provisions of INR3.1b for the impact of COVID-19 during the quarter, of which INR2.1b was as per the RBI’s requirement of 5% provisioning against 1-89dpd loans under moratorium. The provision would be repeated in 1QFY21. While as of Mar’20, ~36% of AUM was under moratorium, a modest increase was seen in April.

Rural disbursements most impacted; NIM stable

–       Disbursements in Rural finance declined ~20% QoQ, compared with 6–9% decline witnessed in other segments. The plunge in Rural lending was largely attributed to the Auto segment (Tractors and 2Ws). Hence, loan growth in the segment declined to 8% YoY in 4QFY20 from 14% YoY in 3QFY20.

–       While NIM on a consolidated basis came in steady at 5.7%, lower disbursements led to ~50bp decline in the fee income margin to 1.2%.

–       CoF declined 10bp QoQ to 8.4%. The share of CPs was down 300bp QoQ / 1,000bp YoY to 6%.

Improvement in asset quality

–       The GNPL ratio improved 60bp QoQ to 5.4%, with PCR at 59% (+200bp QoQ).

–       More importantly, even without the moratorium on 1-89dpd loans, the GNPL ratio would have been only 25bp higher at 5.6%.

–       LTFH has INR6.6b worth of provisions over and above the standard asset and NPL provisions; this includes the existing INR3.5b macro-prudential provisions and INR3.1b worth of COVID-19-related provisions this quarter.

Highlights from management commentary

–       Rabi crop output is strong. Economic recovery would be led by rural India.

–       Credit norms have been tightened across products.

–       75% of the portfolio falls under the Orange and Green zones.

Valuation and view

–       Over the past year, LTFH has focused on consolidating its loan book and improving the liability franchise. The overall loan book has been largely flat and is expected to remain this way in the near term. On the liability side, the share of CPs is down to 6% YoY from 16% YoY. The proposed consolidation of lending subsidiaries would further simplify the business structure. We estimate a 4% loan book CAGR over the next three years (largely back-ended). Asset quality performance would be the key monitorable going ahead. We cut our FY21/FY22 EPS estimates by 17%/8% to factor in higher credit costs given the extended lockdown. Buy, with TP of INR75 (0.8x FY22E BVPS).