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RESEARCH

CRISIL IER Independent Equity Research

L&T Finance
Holdings Ltd

Initiating Coverage

Enhancing investment decisions

CRISIL IER Independent Equity Research

Explanation of CRISIL Fundamental and Valuation (CFV) matrix


The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis
of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a
five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a fivepoint scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL
Fundamental Grade

Assessment

CRISIL
Valuation Grade

Assessment

5/5

Excellent fundamentals

5/5

Strong upside (>25% from CMP)

4/5

Superior fundamentals

4/5

Upside (10-25% from CMP)

3/5

Good fundamentals

3/5

Align (+-10% from CMP)

2/5

Moderate fundamentals

2/5

Downside (negative 10-25% from CMP)

1/5

Poor fundamentals

1/5

Strong downside (<-25% from CMP)

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Last updated: May, 2013

Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias
the grading recommendation of the company.

Disclaimer:
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(CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / report is subject to
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purpose.

L&T Finance Holdings Ltd

RESEARCH

A well diversified lending NBFC

Valuation Grade

2/5 (CMP has downside)

Industry

Diversified finance

February 26, 2014


Fair Value
CMP

L&T Finance Holdings Ltd (LTFH) is a well diversified NBFC with AUM of 378 bn across two
key segments retail & corporate lending and infrastructure lending. The company also
provides mutual fund and wealth management services. The infra lending segment is well
positioned against peers with a potential to build on other verticals. The segment faces shortterm challenges in growth due to pending issues in the infrastructure sector; we expect an
improvement in FY15. The retail & corporate lending segment has a diversified portfolio
which is expected to help it to grow even in the present subdued macro-environment. We
initiate coverage with a fundamental grade of 4/5 indicating superior fundamentals.

CFV MATRIX
Excellent
Fundamentals
5

Derives competitive advantage from L&T parentage


LTFH derives strong competitive advantage from its parentage, primarily in terms of a) strong
backing from parent; b) leveraging extensive domain experience of L&T to underwrite and
manage risks of loans in infrastructure and construction equipment (44% and 7% of AUM);
and c) a strong brand equity that helps to raise debt and equity from diverse investors.

Retail & corporate lending: Diversified portfolio to sustain growth; weak positioning
We expect the diversified nature of the retail & corporate lending portfolio (AUM of 196 bn)
to help growth despite the present subdued macro-environment. The key sectors in the
portfolio - Corporate (~40% of AUM), Rural (~24%), CE/CV (~22%) and Retail (~15%), are
relatively less correlated, which is an advantage. The company is also focussing on high yield
products with entry into two-wheeler financing. However, the return profile is weaker than that
of peers primarily because of other lower yield products and higher credit costs.

3
2
1

Poor
Fundamentals

Valuation Grade

KEY STOCK STATISTICS


NIFTY/SENSEX
NSE/BSE ticker
Face value ( per share)
Shares outstanding (mn)
Market cap ( bn)/(US$ bn)
52-week range ()/(H/L)
Beta
Free float (%)
Avg daily volumes (30-days)
Avg daily value (30-days) ( mn)

6,239/20,987
L&TFH / LNTFH
10
1717
134 / 2
87/53
0.9
17%
2,861,204
221

SHAREHOLDING PATTERN
100%
90%
80%

13.9%
0.9%
2.6%

13.8%
0.9%
2.8%

13.9%
0.8%
2.8%

14.6%
0.9%
3.0%

82.5%

82.5%

82.5%

81.5%

Mar-13

June-13

70%

Further levers - banking, IDF and private equity; delay in recovery of macro
environment is a key risk
We expect the bank possibility, IDF and nascent private equity operations to be further
levers. Longer than expected delay in improvement of investment climate is a key risk.

60%

Valuations: Fair value of 65 per share


We have valued LTFH by the sum-of-the-parts method. Our fair value is 65 per share. At the
current market price of 76, our valuation grade is 2/5.

10%

50%
40%
30%
20%
0%
Promoter

Sep-13

FII

Dec-13

DII

Others

PERFORMANCE VIS--VIS MARKET

KEY FORECAST
( mn)
Total operating income
Pre-provision profit
Adjusted net profit
Adj EPS ()
Adj. BV ( per share)
P/E (x)
P/ABV (x)
RoE (%)
RoA (%)
Net NPA (%)
CAR (calculated) (%)

Strong
Downside

Infra lending: Well positioned with potential upside; short-term challenges to growth
The infra lending subsidiary, L&T Infrastructure Finance (LTI) with IFC status, is well
positioned to tap opportunities in the infrastructure sector leveraging parent L&Ts expertise.
IFC status helps it to compete against banks. Also, compared to IDFC Ltd, its closest peer,
LTI is well positioned. Its focus on developing other verticals such as infra project advisory /
syndication etc is expected to narrow the gap with IDFC. The infrastructure sector continues
to face short term challenges due to delays in environmental and forest clearances, weak
profile of state distribution companies, high leverage of companies, etc which have sharply
increased the stress on the loan book. We expect the policy-related bottlenecks to get
resolved over the medium term which would give fillip to the sector; this is likely to boost LTIs
business. Being smaller than peers, we expect the companys infra book to grow faster than
the industry average.

65
76

Strong
Upside

4/5 (Superior fundamentals)

Fundamental Grade

Fundamental Grade

FY12
12,353
8,794
4,548
2.7
25.8
28.7
2.9
12.1
2.0
1.3
18.1

FY13
15,923
10,622
5,125
4.3
33.6
17.9
2.6
10.1
1.6
1.4
20.9

FY14E
22,126
15,001
6,207
3.6
35.0
21.0
2.5
10.9
1.6
1.9
18.1

FY15E
26,203
18,549
9,045
5.3
42.0
14.4
2.2
14.2
1.9
1.8
17.8

FY16E
32,940
23,761
12,503
7.3
51.0
10.4
1.9
17.1
2.1
1.6
17.2

Returns
1-m
8%

3-m
2%

6-m
34%

12-m
-7%

-0.4%

3%

15%

6%

LTFH
CNX 500

ANALYTICAL CONTACT
Mohit Modi (Director)

mohit.modi@crisil.com

Ankit Hakhu

ankit.hakhu@crisil.com

Vishal Rampuria

vishal.rampuria@crisil.com

Client servicing desk


+91 22 3342 3561

clientservicing@crisil.com

Source: Company, CRISIL Research

For detailed initiating coverage report please visit: www.ier.co.in


CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.

CRISIL IER Independent Equity Research

Table 1: L&T Finance Holdings - Business environment


Retail & Corporate lending
Retail

CE/CV

Corporate

Products

Rural product

Personal

Microfinan

Housing Finance

Constr. Eqpt.

Commercial

Supply

Corporate

Capital

offerings

finance (primarily

vehicles finance

ce

(including typical housing (CE) finance

vehicle (CV)

chain

loans

market

tractor finance)

(primarily cars

finance, LAP and Builder

finance

finance

and two-

finance)

products

wheelers)
AUM mix

12%

7%

1%

4%

7%

4%

3%

12%

6%

Year started

2004

2012

2008

2012

Pre-2006

2007

Pre-2006

Pre-2006

2008

Offering

L&T Finance

Family credit

LTF

L&T Housing Finance

LTF

LTF

LTF

LTF / L&T

LTF

Subsidiary

(LTF)

(FC)

AUM (FY11)

16

26

16

27

10

38

17

30

19

11

47

17

56

54

30

41

23

17

70

27

54%

NA

(15)%

NA

8%

11%

78%

31%

33%

14%

46%

48%

110%

11%

7%

15%

14%

17%

60%-90%

Cars: 70%-75%

NA

LAP: 60%

75%-90%

80%-95%

NA

NA

NA

12%-15%

12%-15%

13%-14%

12%-14%

11%-16%

SCBs, Various NBFCs

(as of 9MFY14)

(formerly Indo-Pacific

Fincorp

HFC)
( bn)
AUM (FY13)
( bn)
AUM (FY16E)
( bn)
AUM growth
CAGR FY11-13
AUM growth
CAGR FY13-16
Typical LTVs

Two Wheeler:

Home Loans: 50%

80%-100%
Typical yields

15%-20%

Cars: 12%-16%

Builder Loans: 25%


24%

Two Wheeler:

Home Loans: 11%-12%

20%-21%
Competitors

Builder Loans: 14%-16%

SCBs, Mahindra

SCBs, Mahindra

SKS,

SCBs, HDFC, LIC

SCBs,

SCBs, Chola,

Finance

Finance, Bajaj

Spandana,

Housing Finance, ICICI

Magma

Shriram Transport,

Auto Finance

Share

Home finance etc

Source: Company, CRISIL Research

LAP: 13%-14%

Fincorp,

Shriram City,

Microfin,

SREI Infra,

Sundaram, Tata

Bhandan

Shriram

Cap, Magma,

Transport

Mahindra Finance

L&T Finance Holdings Ltd


RESEARCH

Table 1: L&T Finance Holdings - Business environment (continued)


Infrastructure lending
Products

Thermal

Renewable

Power Corporate

offerings

power

power

loans + T&D

6%

8%

6%

AUM mix (as of


9MFY14)
Year started
Offering
subsidiary
AUM (FY11)
( bn)
AUM (FY13)
( bn)
AUM (FY16E)
( bn)
AUM growth
CAGR FY11-13
AUM growth
CAGR FY13-16

Investment Management

Transportation (Roads
/ Bridges / Highways/

Telecom

Others

5%

11%

Ports)
8%

Mutual Fund and nascent wealth management


portfolio

NA
2010 acq. Of DBS Chola AMC

2007

2012 acq. Of Fidelity Indias AMC


L&T Investment Management;

Primarily L&T Infra (LTI); Some corporate loans are offered through L&T Fincorp

Wealth management offered through L&T Capital


Markets

18

10

23

21

31

19

23

19

35

Mutual Fund -114


Wealth Management 20
Mutual Fund 256

296

76%

33

Wealth Management - 70
88%

46%

15%

33%

24%

Mutual Fund 85%


Mutual Fund 31%

26%

Wealth Management 10%

Typical LTVs

NA

Typical yields

13%-14%

Competitors

Banks, IDFC, PFC, REC, IIFCL etc

NA
13%-14%

13%-14%

13%-14%

12%-13%

13%-14%

NA
Fragmented with 44 players but top 5 players have
more than 50% of market share. Top 5 players are
- HDFC, Reliance, ICICI Pru, Birla Sunlife, UTI

Source: Company, CRISIL Research

CRISIL IER Independent Equity Research

Grading Rationale

Net worth split

A well diversified NBFC; derives strong support from parent

Others
14%

Promoted by L&T, L&T Finance Holdings Ltd (LTFH) is a well diversified lending company
with a total AUM of 378 bn (as of 9MFY14). The lending business is diversified across two

Retail &
corp.
finance
43%

Investment
mgmt.
9%

main segments - retail & corporate lending (52% of AUM, 55% of total income), and
infrastructure lending (44% of AUM, 38% of total income). The company also provides
investment management services such as mutual fund and wealth management, but these
services comprise a small portion of its overall business (1.7% of total income). The entire

Infra
finance
34%

business is operated through three main subsidiaries: L&T Finance (LTF) - retail & corporate
finance products, L&T Infrastructure Finance (LTI), and L&T Investment Management.

Source: CRISIL Research

Figure 1: Lending business of 378 bn (as of 9MFY14) is well diversified across ~14 asset classes
Housing
Finance
4%

Infrastructure
lending
44%

Others
24%

Therm al
Power
15%
Renewable
Power
18%

Telecom
11%

Transp.
19%

Power
Corp + T&D
13%

Retail &
Corporate
52%

Personal
vehicle
finance
13%
Capital
Market
Products
11%

Corporate
loans and
leases
24%

Source: Company, CRISIL Research

Derives strong advantage from L&T parentage


LTFH derives significant competitive advantage over peers because of its parentage. It not
only enjoys strong backing from parent but is also able to leverage L&Ts extensive domain
experience (for its loan underwriting business) and strong brand equity (that helps it to raise
funds). L&T, a professionally-run company with decades of experience, has a presence in
almost all infrastructure sectors. L&T holds a controlling stake of 81.5% (as on the date of
writing of the report) in LTFH.

Const. Equipt.
Finance
14%

Supply
Chain
Finance
5%
Microfinance
2%

Transp. Eqpt.
Finance
8%
Rural
Products
Finance
23%

L&T Finance Holdings Ltd


RESEARCH

Senior management team drawn from L&T


The companys senior management consisting of Mr. Y M Deosthalee and Mr. N Sivaraman
have been drawn from L&T (but on the payrolls of LTFH). The team has more than two
decades of experience in the financial services sector along with established track record in
starting, and growing new businesses. Mr. Y. M. Deosthalee, former CFO of L&T is the
chairman and managing director of LTFH and Mr. N. Sivaraman, former senior vice president,
Financial Services, L&T is the president and whole-time director of the company.

Leveraging the domain experience of L&T


The company derives synergies by leveraging L&Ts industry knowledge in sectors such as
infrastructure (which forms about 44% of LTFHs lending portfolio) and construction equipment
(~7.3% of the lending portfolio). This knowledge of the parent provides better understanding of

7.5 bn of preference equity was raised


from diverse investors

the risks in the infra lending segment which, in turn, helps in prudent underwriting and pricing

ICICI
Securities
Primary
Dealership
Limited
11%

Azim H.
Premji
12%

of loan products.

Strong brand equity of L&T helps to raise resources


L&T is a strong and a respected brand in the infrastructure space. The parents brand equity
Azim Premji
Trust
8%

thus helps LTFH to raise resources from diverse investors to meet the capital requirement of
its subsidiaries (and also to keep CAR under control). E.g. the company raised 7,500 mn of
preference capital, at 8.75% yield, in FY13 and 12,450 mn of equity capital through an IPO in

Others
69%

FY12 (which was subscribed 5.2x), pre-IPO placement and retail NCD issues as well as infra
bonds on the debt side. Moreover, the company has a strong credit rating of AA+ (from CARE
and ICRA) for its debt instruments, largely due to parent, as one of the factors. Its

Source: Company, CRISIL Research

subsidiaries, LTF and LTI, also enjoy a relatively strong credit rating of AA+. This helps the
subsidiaries to keep their borrowing costs competitive.

Relatively stronger growth due to aggressive launch of new products


The company, in line with its diversification strategy, has aggressively launched new products

Relatively stronger growth in AUM


AUM FY10-FY13 growth CAGR
IDFC

as well as acquired companies to enter new businesses. This has resulted in high growth in its

Bajaj Finance

lending AUM AUM CAGR of 43% over FY10-13 which is better than the growth in AUM of

Shriram Transport Finance

its peers.

30%

Shriram City Union

45%
56%
20%

Mahindra Finance

33%
34%

Cholamandalam Finance

Since 2006, the company has been aggressively launching new products. By 2006, the
company was primarily into vendor financing, construction equipment (CE) financing and
corporate loans. In 2007, it started infrastructure lending (leveraging parent L&Ts experience
in this field) and commercial vehicle (CV) financing. In 2008, it entered into microfinance and

27%

Magma Fincorp

43%

LTFH
0%

10% 20% 30% 40% 50% 60%

Source: CRISIL Research

capital market products businesses. In 2012, the company followed the inorganic route to
acquire Indo Pacific Housing Finance - to enter into housing finance, and Family Credit - to
enter into two-wheeler financing. Consequently, the infra and retail & corporate loan book of
the company have grown at 51% CAGR and 38% CAGR, respectively, resulting in faster
growth than peers.

CRISIL IER Independent Equity Research

Acquisition of CitiFinancials portfolio provides scale, reach and higher share


of high yield LAP portfolio to housing finance business
In Q3FY14, LTFH acquired CitiFinancials housing finance portfolio of ~7 bn to achieve scale
in housing finance. The AUMs as a result have increased from 3bn in FY13 to 15.7bn as of
Q3FY14. Also, the acquisition expanded the ability to service customers to 68 cities as of
Q3FY14 (from 16 cities pre acquisition). Moreover, the acquisition provided access to higher
yielding LAP portfolio (~76% of the acquired portfolio) which we expect to help improve the
yield of the housing finance business.
The distribution network has been gradually increased from around 60 branches in 2006 to
~150 as of 9MFY14. The company also has an extensive distribution reach in terms of having
700+ points of presence across India as of 9MFY14. It has diversified geographically by
increasing its presence in all states except J&K and with a limited presence in the North East.

Figure 2: Strong growth in lending AUM


( bn)
55.0%

400

56.6%

350

60%
45.1%

50%

Relatively stronger AUM growth at 43%

40%

CAGR over FY10-13 - better than peers -

300
250

29.8%

200

26.5%

150

because of aggressive launch of new


30%
20%

100
10%

50
8.5

73

113

177

257

333

378

FY06

FY09

FY10

FY11

FY12

FY13

9MFY14

0%
Consolidated AUM

yoy growth %

Source: Company, CRISIL Research


On the investment management side, the company entered the mutual fund business by
acquiring DBS Cholamandalam in 2010 and then acquired Fidelitys AMC business in 2012.
Consequently, mutual fund AUMs have increased from 26 bn in FY10 to 170 bn as of
9MFY14.

Infra lending short term challenges to growth and asset


quality; well positioned against peers with potential upside
Going forward, growth in disbursement in the infrastructure lending segment is largely hinged
on the timely resolution of bottlenecks that are holding back investments in this sector - such
as financial restructuring of state distribution companies, signing of FSAs for power producers,
delays in environmental and forest clearances, and land acquisition. We expect the policy
inertia issues to be ironed out in the medium to long term. If the political situation at the center
improves in FY15, we expect the economy to come back to the growth path and consequently
see an improvement in the investment cycle. Turnaround in the economy is critical for growth
and remains a monitorable.

products

L&T Finance Holdings Ltd


RESEARCH

Table 2: Status on key issues and challenges affecting investments


Sectors

Key issues

Power

Poor financial health of state distribution companies lowered power offtake:

Governments of eight states (including UP, TN, Bihar, Kerala, Himachal Pradesh and Rajasthan) have agreed to restructuring
of SEBs which would improve the SEBs financial health and as a result they would be able to increase power offtake.
However, there is uncertainty on the completion of such a restructuring

Over the past two years, most distribution companies have hiked tariffs, which is also expected to improve their financial
health

Delay in financial closures of projects due to limited fuel availability:

Coal India (CIL) has signed ~145 fuel supply agreement (FSAs), as of 1HFY14, against a target of ~170 FSAs. Signing of
FSAs would help the power producers to secure financial closures. However, even after signing FSAs, there is a challenge in
the production ramp up of CIL, which may lead to power producers running at sub-optimal levels

Roads

Stressed balance sheet, low traffic stretches

As of FY13, average gearing for large road developers was ~3.0x, rendering limited room to bid for new projects due to
stressed balance sheet

Delays in land acquisition and regulatory hurdles

More than 35% of the projects awarded in FY12 are stalled due to delays in environmental and forest clearance

Land acquisition hurdles also impacted timely execution. These regulatory hurdles impacted bidding for new projects in FY13

Project awards have slowed down

Ports

Projects offered in FY13 had low traffic density and limited potential to make good returns; hence low interest

Despite the decision to shift to EPC route, NHAI has not awarded any major projects

Guidelines for determination of tariff for projects at major ports

This was announced in July 2013 and the new guidelines would provide for tariffs to be indexed to inflation, they have also set
out performance standards for port projects to improve accountability and ensure improved quality of service

Expected to increase investment flows into the port sector

Delays in security clearances for port projects

In May 2013, the cabinet committee has directed security agencies to provide faster clearances within the decided time of 12
weeks the Adani project suffered because of such a delay

Airports

Expected to accelerate award of new projects

Public private participation in operation, management and transfer of six airports (Chennai, Lucknow, Kolkata, Guwahati, Jaipur
and Ahmedabad)
o

This is under process Request for quotations for Chennai and Lucknow airports were invited up to mid October, 2013 and
financial bids were likely to be received by mid December, 2013. The other four airports are likely to be taken on the same
pattern shortly.

Status of greenfield airports


o

In-principle approval given for 15 airports but pace remains slow

Source: CRISIL Research


Provided the short term challenges are weeded out, there is significant opportunity for

XII five year plan estimates a

investment in infrastructure in India as envisaged in the XII five year plan. The XII plan puts

significant investment

the infra investment opportunity at 56 trillion. Assuming only 70% of the target is met (as

opportunity in infrastructure

against ~90% met in the XI plan) and ~50% of this through debt, it implies a total opportunity
of 19 trillion. The adjusted total investment implies a ~10% CAGR over the XI plan.

CRISIL IER Independent Equity Research

Table 3: CRISIL Research expects infrastructure investments at 10%-12%


CAGR over FY13-16
Key Infra segment

CRISIL Research's investment growth expectation in sub-sectors

Power

Investments to grow at a CAGR of 5-6% over FY13-FY17 driven by:

16% CAGR in transmission investments primarily because of transmission line additions of around 98,000 circuit
Kilometers (ckm) over FY13-FY17

Roads

4% CAGR in generation investments driven by capacity addition expectation of ~68GW over FY13-17

-2% CAGR in distribution investments primarily because of poor health of state owned distribution utilities

Investments to grow at a CAGR of 10%-12% over FY13-FY17 driven by investments in national highways and state roads.
Private sector participation in national highways is expected to decline to 57% during this period in comparison with the
previous five-year period (67%), considering the anticipated growth in the share of contracts on EPC (Engineering
Procurement Construction) basis

Ports

In the XII five year plan, a total outlay of around 1.8 trillion has been earmarked for port investments (as against 0.2 trillion
investment in the XI plan). Around 86% of the investments are expected to be from the private sector in both major and nonmajor ports

Telecom

Investments to grow at 13% CAGR over FY13-16 driven by network expansion by operators in rural areas, which are
relatively under-penetrated (tele-density of less than 41%, as of September 2013). Additionally, extension of 3G services by
large operators will drive investment growth in the mobile services segment

Airports

Investments to grow at a CAGR of 20% over FY13-17. During 2012-13 to 2016-17, investments will mainly go towards
completion of work at the Mumbai and Bengaluru airports, and development of greenfield airports at Navi Mumbai, Goa,
Pune, Kannur and Nagpur. The modernisation of 35 airports controlled by the Airports Authority of India is also expected to
attract investments over the next five years. Private sector participation is expected at ~70%.

As the companys infra book is smaller compared to peers, we expect it to grow faster than the
industry average. We expect 19% CAGR in disbursement over FY13-16 and a repayment rate

Infra book expected to grow faster


than the industry average

at 20% of the loan book. Consequently, we expect 26% CAGR for AUM over FY13-16.

Figure 4: Expect 26% CAGR for infra lending AUM over


Figure 3: Smaller base vs. peers
( bn)

FY13-16
( bn)

FY13 AUM

1,400

350

1,200

300

75%

70%
60%

250

1,000

80%

45%

200

800

50%
35%

150

600

26%

24%

28%

30%

100

400

20%

50
200
1,274

566

148

PFC

IDFC

LTI

Source: Company, CRISIL Research

75

109

148

187

231

296

FY11

FY12

FY13

FY14E

FY15E

FY16E

Infra AUM growth

Source: CRISIL Research

The infra books asset quality has come under pressure over the past few quarters. While the
operational projects (that form 33% of the loan book) are doing fine, the corporate loan book
(that forms 35% of the infra loan book) has come under pressure given the downturn in
economic activity; this has resulted in delayed payments from companies as the latters

10%
0%

Asset quality has come under pressure

working capital requirements have elongated.

40%

yoy growth %

L&T Finance Holdings Ltd


RESEARCH

Figure 5: Infra loan book asset quality under pressure

Figure 6: Infra loan book mix

3.0%
2.4%

2.5%
2.0%

1.8%

1.7%
1.4%

1.5%

1.5%
1.5%
1.0%

1.2%
1.1%

0.5%

0.7%

1.5%

1.3%

1.6%
1.2%

0.9%

0.9%

1.1%

2.4%

1.9%

1.9%

1.4% 1.6%

1.6%

Others
24%

1.5%
Renewable
Power
18%

1.2%
Telecom
11%

NNPA

Q3FY14

Q2FY14

Q1 FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

0.0%

GNPA

Therm al
Power
15%

Transp.
19%

Power
Corp + T&D
13%

Credit Cost

Source: CRISIL Research

Source: CRISIL Research

Figure 7: Operational assets % of infra loan book has

Figure 8: Restructured assets % has increased

increased
34%

7.00%

33%
32%

6.00%

31%

5.00%

30%

Restructured assets as a % of infra loan book

4.00%

29%
3.00%

28%
27%
26%

2.00%
30%

28%

33%

32%

1.00%

FY13

Q1 FY14

Q2FY14

Q3FY14

0.00%

25%
Opertional projects

Source: CRISIL Research

3.05%

3.66%

3.90%

5.26%

6.01%

Q3FY13

Q4FY13

Q1 FY14

Q2FY14

Q3FY14

Source: CRISIL Research

Given the pressure on asset quality, the company is closely monitoring the stressed assets for
restructuring. As a result, the restructured loan book has increased from 3.05% of the infra
loan book as of Q3FY13 to 6.01% of the infra loan book as of Q3FY14. While the standard
asset provision is 0.4%, the company has 5% provision for the restructured assets. Moreover,
the companys provisioning is conservative vis-a-vis that prescribed by the RBI. The
cumulative provision over RBI norms stood at 1,218 mn in the infra loan book. We expect the
mix of restructured assets to standard assets to further increase in Q4FY14. Consequently,
we have built a higher provision coverage ratio in FY14 and FY15 over FY13.

... but expected to improve in FY15 because of improvement in macroenvironment and cautious approach to lending
We expect improvement in asset quality in FY15 on the back of a) improvement in
infrastructure investment environment; and b) a cautious approach to lending adopted by the

CRISIL IER Independent Equity Research

management - providing more weightage to the usual debt protection metrics while lending.
Consequently, we have built in an improvement in asset quality in FY15 and FY16.

Strategy to increase exposure to operational assets and larger ticket


sizes - NIMs to compress
With a cautious approach to lending, the company is gradually building up exposure to
operational assets as well as focussing on quality large-ticket clients which offer relatively low
yields. Consequently, the NIMs have compressed. Going forward, we expect a slight
compression in NIMs driven by the continued focus on building a good quality book and
improvement in opex because of increase in loans ticket size.

IFC and PFI status of infra subsidiary lowers borrowing cost


LTI - the infrastructure lending subsidiary of the company is a notified Public Financial
Institution (PFI) and has an Infrastructure Finance Company (IFC) status, which helps it to
access low cost funds as well as diversify its resource profile.

The IFC status allows LTI to raise more funds of longer tenors and at lower costs. E.g.
the IFC status enables LTI to raise long term debt through infrastructure bonds and have
a higher permissible bank borrowing (up to 20% of the bank's net worth compared to
15% for an NBFC that is not an IFC). It also provides access to low cost external
commercial borrowings (up to 50% of owned funds under the automatic route).

The PFI status allows the company access to cheaper sources of funds (such as from
insurance companies, public trusts and pension funds) with a larger exposure which is
not otherwise available to NBFCs without PFI status. E.g., the issued bonds and certain
other liabilities of PFIs are treated as eligible investments for insurance companies,
provident funds, mutual funds and residuary non-banking companies (RNBCs). Such
exposures on select PFIs also qualify for concessional risk weight of 20% for banks,
financial institutions (FIs), NBFCs and residual non banking companies (RNBCs) under
RBI guidelines.

Apart from lowering borrowing cost, the PFI status also provides powers of SARFAESI Act,
not available to non PFI NBFCs, for recoveries from delinquent customers.

Infra subsidiary is well positioned against banks and moderately


positioned against IDFC; potential upside in terms of other income
In the infra lending space, the peers of LTI include IDFC and banks. LTI is well positioned
against banks due to its better financial performance. However, compared to LTI, IDFC is a
bigger player with 4x more AUM. IDFC also has a higher total operating income to average
AUMs (net of interest cost) vis-a-vis LTI because of greater share of other income IDFCs
other income is 1.7% of its average AUM vis-a-vis LTIs 0.6%. As a result, opex cost per AUM
is also higher for IDFC. The credit costs are comparable. As a result, IDFC has better RoA
than LTI.

10

L&T Finance Holdings Ltd


RESEARCH

Table 4: LTIs financial performance better than banks


Spread

NIM

Opex

RoA

RoE

Figure 9: IDFC has a diversified other income stream


Other
Incom e
2%

GNPAs

LTI

3.0%

4.5%

0.6%

2.7%

16.6%

1.5%

Pvt banks

2.5%

3.0%

2.2%

1.3%

13.4%

2.7%

Principal
Gains
21%

Loan Book
Related fees
21%

Mutual
Fund
20%

Fixed
Income
13%
I-Banking &
Broking
9%

Source: CRISIL Research

Alternatives
14%

Source: CRISIL Research

Dupont analysis of LTI vs. infra financing NBFCs


Figure 10: Total income-to-average AUMs

Figure 11: Opex-to-average AUMs

FY13

FY13

LTI

5.1%

LTI

IDFC

6.6%

PFC

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

IDFC

PFC

4.3%

6.0%

7.0%

0.6%

0.9%

0.1%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

*Net of interest costs


Source: Companies, CRISIL Research

Source: Companies, CRISIL Research

Figure 12: Provision & write-offs to average AUM

Figure 13: Return on average AUM

FY13

FY13

LTI

IDFC

PFC

0.0%

LTI

0.6%

0.7%

IDFC

3.5%

PFC

0.1%

0.1%

2.7%

0.2%

0.3%

Source: Companies, CRISIL Research

0.4%

0.5%

0.6%

0.7%

0.0%

3.1%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Source: Companies, CRISIL Research

11

CRISIL IER Independent Equity Research

Figure 14: Leverage

Figure 15: Return on average networth


FY13

FY13

LTI

IDFC

2.0 x

3.0 x

4.0 x

5.0 x

6.0 x

15.1%

PFC

5.9 x

1.0 x

22.5%

IDFC*

4.0 x

PFC

0.0 x

LTI

5.4 x

7.0 x

0.0%

19.2%

5.0%

10.0%

15.0%

20.0%

25.0%

*adjusted for SSKI acquisition


Source: Companies, CRISIL Research

Source: Companies, CRISIL Research

Potential upside in terms of other income


Although, LTI has a lower RoA vis-a-vis IDFC, we see scope for gradual improvement in fee
income/other income (through infra project advisory / syndication etc.). This in turn would
result in an increase in ROA for the infra lending business. We believe the scale up in fee
income advisory and syndication business is possible based on managements strong
experience in assessing risk in the infra segment. We have also gradually built an
improvement in other income in LTI from 0.6% of its average AUMs in FY13 to 0.8% in FY16.

Retail & corporate lending - de-linked nature of the portfolio to


sustain growth; RoA weaker than that of peers but scope to
improve

Exposure to sectors is relatively de-linked

CE/CV
22%

Rural
23%

We expect the diversified nature of the retail & corporate portfolio (with an AUM of 196 bn) to
help the segment to grow despite the present subdued macro-environment. The hit on the
portfolio in terms of growth is expected to be lower than that of peers. The portfolios exposure
Retail
15%

risk is relatively mitigated with exposure to the following sectors corporate (40% of the AUM
including corporate loans, supply chain finance and capital market products), CE/CV (~22% of
the AUM including CE and CV finance), rural (~23% of the AUM primarily tractor finance) and

Corporate
40%

retail (~14% of the AUM including two wheeler finance and car finance and microfinance),
which are less correlated. This entry into new products business / diversification has enabled
the company to grow 23% y-o-y in FY13 even though growth of some segments declined
(such as lending to the CE/CV sector, declined 7%). Strong growth in tractors in the rural
segment (AUM growth of 33% in FY13) compensated for the decline in CV/CE segments.

Short-term growth challenges due to prevailing macro conditions


We expect an overall 8% CAGR in disbursements over FY13-16 in the retail & corporate
segment subject to improvement in the macro situation in most categories.

12

Source: Company, CRISIL Research

L&T Finance Holdings Ltd


RESEARCH

Table 5: Outlook on key retail and corporate lending segments


Key segment

Loan
book mix

CRISIL Researchs expected


Current market scenario

CRISIL Research outlook on the industry disbursement growth for the


company (FY13-16)

Weak investment climate owing to

muted capital expenditure plans by


corporates

Corporate

40%

Subdued credit confidence -

with tightly structured deals in

CRISILs credit ratio (proportion of

in the near term; flat growth over FY13-

terms of cash flows and

rating upgrades to downgrades) for

16

security

Chances of deterioration in asset

climate FY15 onwards

finance
(primarily

The robust growth is expected to taper


going forward but we still expect a

Rural

as incremental growth due to


gain in market share.

reduced replacement cycles, stable

Currently, the company is in

farm incomes, and increased focus of

due to good monsoon

the second position in the

the government on agriculture through

financing)

tractor lending market, behind

rise in MSPs and agricultural credit, and

Mahindra Finance

rural development

CE sales have declined in excess


of 20% because construction

Construction
equipment

players are experiencing slow

Subdued environment in the near term,

the near term. Improvement is

(15-18 months) with an assumption of

acquisition and government

contingent on improvement in

improvement in macro situation

clearances on projects, and tight

Flat growth over FY13-16;


15%-20% decline expected in

but 7-8% growth over the medium term

growth due to delays in land

14%

10% CAGR expected on the


back of industry growth as well

the next five years on the back of

realisations and higher crop output

tractor

strong 8% CAGR in tractor sales over

Robust growth in tractor sales in


1HFY14 on the back of high crop

24%

Growth is contingent on
improvement in the investment

quality

products

Company is moving cautiously

Subdued investment climate expected

1HFY14 was 0.87x.

A decline or a flat growth


expected

the economic situation.

cash flow situation of infra players

Personal
vehicle
(primarily

13%

Two-wheeler sales have picked up;


up 8% y-o-y in Q2FY14

monsoons.

two-wheeler)

Commercial
vehicle

8%

5-7% growth in FY14 on the back of


improving rural income aided by good

~14% decline expected in

CV sales have declined in excess


of 15% as of November 2013.

expectations of lower industrial growth,

Weak industrial demand,

freight availability and weak transporter

particularly from the manufacturing

sentiment (owing to their constrained

and construction sectors, has

finances)

40% CAGR on a small base

9-11% yoy growth in the long run


disbursements for CVs in FY14 on

hampered growth in the MHCV

8% CAGR with decline


expected in FY14

The growth is contingent on

CRISIL Research expects CV

improvement in the economic

category; the LCV category has

disbursements to grow by ~17% over

situation.

declined because of prolonged

FY13-18 with the likely improvement in

slowdown in consumption demand

the economic situation and healthy


freight traffic demand

Source: Company, CRISIL Research


With an overall repayment rate expected at 60%-80% of the loan book over FY13-16, we
expect an AUM growth of 18% over FY13-16.

13

CRISIL IER Independent Equity Research

Figure 16: Expect 18% CAGR for retail & corporate AUM over FY13-16
( bn)
350

45%

50%

45%

45%

300

40%

250

35%

200

30%

23%
20%

19%

150

25%
20%

14%

15%

100

10%

50
102

148

182

208

247

296

FY11

FY12

FY13

FY14E

FY15E

FY16E

5%
0%

Retail & Corporate AUM growth

yoy growth %

Source: Company, CRISIL Research

Family Credit acquisition and rural products to increase yields


The acquisition of Family Credit (FC) has provided the company access to the high-yielding (in
the range of 20%-21%) two-wheeler financing segment. Moreover, with the increase in the
share of rural products (primarily tractor lending with yields around 16%) in the overall mix, the
yields of retail and corporate division have increased from 14% as of FY13 to 15.1% as of
Q3FY14. Although we expect tractor sales growth to taper from FY14, the increasing share of
two wheeler financing is likely to result in increase in overall yields.

Table 6: Loan products characteristics


Finance category

Yields (%)

LTV (%)

Tenor (months)

CE

12%-15%

75%-90%

36

CV

12%-15%

80%-95%

48

Tractor

15%-20%

60%-90%

48

Supply Chain

13%-14%

Microfinance

24%

12to24

Corporate Loans

12%-14%

48

Capital Market

11%-16%

24

Cars

12%-16%

70%-75%

48

Two Wheeler

20%-21%

80%-100%

24

Source: Company, CRISIL Research

Weaker return profile vis-a-vis asset financing peers

AUM per branch metrics better than others


Bajaj Finance

LTF (the retail & corporate financing subsidiary) has a lower return profile compared to peers.

Shriram Transport Finance

In general, niche NBFCs (such as Shriram Transport, Mahindra Finance among others) enjoy

Mahindra Finance

better returns than diversified players (such as LTF and Magma) because of competitive
advantage backed by scale and years of experience. Niche NBFCs focus on specific asset

584
1,222
412

Cholamandalam Finance

367

Magma Fincorp

692

classes which help them build better systems and processes such as focussed sourcing
teams, better knowledge of appraisal systems and strong in-house collection teams. These
advantages are in turn reflected in their returns which are higher than that of diversified
NBFCs.

14

LTF

897
-

500

1,000
( mn)

Source: Company, CRISIL Research

1,500

L&T Finance Holdings Ltd


RESEARCH

Given that LTF has a diversified product range and lower yield products vis-a-vis peers, it has
a lower NIM. However, the subsidiary has a better AUM per branch. LTF lays emphasis on
analytics for central loan assessment which result in faster disbursement turnaround time. The
companys credit costs are higher than that of peers primarily because of the stress faced by
the company in its corporate loan book (corporate GNPAs have deteriorated from ~1% of
corporate loan book AUM in FY12 to ~2% of its AUM as of FY13). Moreover, the company
also follows a conservative provisioning policy for its retail & corporate loan book compared to
the norms laid down by the RBI. Thus, the provision for any asset going bad is more than
what the RBI suggests, which results in higher credit cost. As of 9M FY14 the provision in
retail & corporate segment was 1.6 bn over the RBIs norms. (Net NPAs was 1.1% as of
FY13, lying in between peers range - from 0.2% of Cholamandalam to 1.3% of Magma.)
Consequently, return on average AUMs is lower than that of peers.

Dupont analysis of LTF vs. asset financing NBFCs


Figure 17: Total income-to-average AUM

Figure 18: Opex-to-average AUM

FY13

FY13

Shriram City Union

11.2%

Bajaj Finance

12.2%

Shriram Transport Finance

6.3%

2.1%
3.5%

Magm a Fincorp

4.4%

2.4%

LTF

5.9%

0.0%

4.1%

Cholamandalam Finance

7.1%

LTF

1.5%

Sundaram Finance

5.8%

Magma Fincorp

5.5%

Mahindra Finance

9.1%

Cholamandalam Finance

4.1%

Bajaj Finance
Shriram Transport Finance

Mahindra Finance
Sundaram Finance

Shriram City Union

5.0%

10.0%

15.0%

0.0%

2.1%
2.0%

4.0%

6.0%

*Net of interest costs


Source: Companies, CRISIL Research

Source: Companies, CRISIL Research

Figure 19: Provision & write-offs to average AUM

Figure 20: Return on average AUM

FY13

FY13

Shriram City Union

2.5%

Bajaj Finance

1.2%

Shriram Transport Finance

Sundaram Finance
Cholamandalam Finance
Magm a Fincorp

3.8%

Shriram Transport Finance

1.2%

2.4%

Mahindra Finance

0.4%

3.6%

Sundaram Finance
0.8%

Magm a Fincorp

Source: Companies, CRISIL Research

2.0%

1.9%
0.8%

LTF

1.4%
1.0%

2.3%

Cholamandalam Finance

0.5%

LTF
0.0%

3.1%

Bajaj Finance

1.4%

Mahindra Finance

Shriram City Union

3.0%

0.0%

1.6%
1.0%

2.0%

3.0%

4.0%

Source: Companies, CRISIL Research

15

CRISIL IER Independent Equity Research

Figure 21: Leverage

Figure 22: Return on average networth


FY13

FY13
Shriram City Union

5.7 x

Bajaj Finance

Shriram City Union

2.9 x

Shriram Transport Finance

4.7 x

Mahindra Finance

Bajaj Finance

21.9%

Shriram Transport Finance

22.0%

3.4 x

Sundaram Finance

Mahindra Finance

3.6 x
7.8 x

Magm a Fincorp

21.2%

Cholamandalam Finance

7.5 x

18.0%

Magm a Fincorp

5.7 x

0.0 x

23.4%

Sundaram Finance

Cholamandalam Finance

LTF

22.7%

11.0%

LTF

5.0 x

10.0 x

Source: Companies, CRISIL Research

10.2%

0.0%

10.0%

20.0%

30.0%

Source: Companies, CRISIL Research

Potential upside to RoA of retail & corporate segment in terms of


improving opex and credit costs
We expect retail & corporate segment RoA to improve on the back of the following:

Improvement in opex - We expect a slight improvement in opex cost to be primarily


driven by integration of Family Credit (including improving cross-sell opportunities to

Pressure on asset quality in the retail &

Improvement in asset quality going forward - Currently the asset quality is under stress

corporate segment

due to slippages in the CE, CV and the corporate segments. However, we expect an

4.0%
3.0%

segment.

1.0%

1.1%
0.6%

0.5%

Q4FY12

The mutual fund business has still not broken even, on a full year basis, and this has affected
the companys ROE. In 2012, to acquire scale, the company acquired Fidelitys mutual fund
business at 6,300 mn one of the biggest acquisitions with a transfer of nearly two million
folios. This was also one of the expensive acquisitions, at ~6.5% of AUM, in the mutual fund
industry. Around 10% of the net worth is allocated to the investment management business
and the business is still not profitable at the PAT level. This has affected the companys ROE.

Table 7: Recent acquisitions in the mutual fund space


Date

Buyer

Target

2013

HDFC MF

Morgan Stanley MF

2013

SBI

Daiwa MF

2012

L&T MF

Fidelity MF

6.5%

2012

Schroders PLC

Axis MF

6.5%

2012

T Rowe Price

UTI AMC

3.6%

2012

Invesco

Religare

2012

Nippo Life

Reliance MF

16

Valuation Multiple (% of AUM)


5.2%
NA

NA
6.6%

2.0%

1.2%
1.1%

1.5% 1.6%

2.3%

1.5%
1.8%

1.2%

1.3%

1.3%

1.9%
1.6%

0.1%

0.0%

Fidelity acquisition has impacted the companys ROE

2.0%

GNPA

NNPA

Source: Company, CRISIL Research

Credit Cost

Q3FY14

1.5%

2.1%

3.5%

Q2FY14

Consequently, we expect the credit costs to come down for the retail & corporate

3.4%

Q1 FY14

2.0%

1.8%

2.0%

Q4FY13

growing the loan book in the segments in which it is facing stress such as CV and CE.

3.4%
2.5%

2.5%

Q3FY13

conditions (which remains a monitorable); and b) the companys cautious approach in

Q2FY13

improvement in asset quality in FY15 based on a) likely improvement in macro-economic

3.5%

Q1FY13

existing rural customers).

L&T Finance Holdings Ltd


RESEARCH

Date

Buyer

Target

2011

Bank of India

Bharti Axa

Valuation Multiple (% of AUM)


4.0%

2011

Goldman Sachs

Benchmark

4.1%

2010

Nomura

LIC MF

2.5%

2010

Natixis Global AMC

IDFC MF

5.5%

2008

IDFC MF

StandardChartered MF

5.9%

Source: CRISIL Research

Fidelity acquisition = Scale + Synergies


We believe that the Fidelity acquisition provided the company with instant scale as well as
synergies in terms of diversity in investor mix, diversity in products and enhanced distribution
network.

Scale in AUM: We believe the company has adopted the right strategy to achieve scale;
the mutual fund business does offer economies of scale. The costs are more of fixed in
nature. Thus faster asset growth reduces the opex per AUM ratio. Before the acquisition,
the company had ranked ~30 in terms of AUM size with an AUM of ~39 bn. Post the
acquisition, its AUM increased to 120 bn (and its rank jumped to 15). As of Dec 2013,
the average AUM is 170 bn (with a ranking of 13).

Diversity in investor mix: Prior to the acquisition, the company primarily catered to the
corporate sector. The Fidelity acquisition provided it access to a retail audience HNIs
and the urban population within India.

Diversity in products: L&T Mutual Fund was a debt-oriented AMC. The Fidelity
acquisition provided the company with an equity portfolio which provides a high fee
business vis-a-vis debt. Today, the portfolio is diversified across equity, fixed income,
FMP and hybrid products.

Mutual fund business turned PAT positive


in Q2FY14
( mn)
250

150

Diversity in distribution network: L&T Mutual Funds distribution network was more

100

through Independent Financial Advisors and Fidelity has provided it with access to

50

banking channels and some large national distributors. The company now has a
balanced mix of distributors to sell its products across investor segments.

96
21

As of 9MFY14, the mutual fund business is incurring losses but is on its way to become PAT
positive as per the run rate in Q3FY14. Q3FY14 PAT was positive at 13 mn whereas

17

13

Q2FY14

Q3FY14

(50)
(100)

(34)
(84)

(150)

PAT breakeven near but payback to take time

225

212

210

202

200

(149)

(200)
Q2FY13

Q3FY13

(139)
Q4FY13

Q1FY14

PAT (before exceptional & amortization)

Operating Revenue

Source: Company, CRISIL Research

9MFY14 reported a loss of 4 mn. CRISIL Research expects the business to turn PAT
positive in this year; however, payback could be four to five years down the line. Turnaround

An Infrastructure debt fund (IDF) is a

in the business remains a monitorable.

government initiative to channelise

Further levers - banking license, IDF and private equity


There are further levers to LTFHs growth story banking license, infrastructure debt fund and
private equity operations; we have not included these in our estimates but they can offer a
potential upside.

Banking license a wider canvas to play on

long-term funds to operational


infrastructure projects (roads, ports
and airports), enabling them to
refinance their existing bank loans as
well as release bank resources to fund
new infrastructure projects

If the company gets a banking license, we expect opportunities in terms of revenue increase
and capital structure. The company today is unable to provide lending solutions to large ticket

17

CRISIL IER Independent Equity Research

size AAA rated customers but it will be able to unlock this opportunity as a bank. There is also
the opportunity to increase contribution from fee / other income by cross-selling products
which a typical bank can offer. We also expect opportunities to generate low cost funds
through CASA as well as to lever up the balance sheet, similar to a bank.
Moreover, we believe the company has a good probability to get a banking license given the
diversity of its lending profile, a strong rural portfolio to cater to priority sector lending,
professional management with significant experience, a strong L&T brand equity and a
simpler shareholding structure with parent having past record of sound credentials and
integrity.

IDF could become a strong growth driver


The launch and development of IDF should boost LTIs growth as it is expected to evolve as
an additional route for funding infrastructure projects. The regulatory structure will help it
compete with banks. Two IDFs have already been rated AAA, which will help them raise
resources at the best/lowest rate. The summary of key features of the IDF is as follows:

The IDFs will re-finance only PPP projects (roads, ports and airports) that are already
operational for at least a year; this is expected to ensure minimal construction risk and
certainty of cash flows.

The IDFs will work in a well-defined and regulated framework to provide protection of
asset quality through a tripartite agreement - between the project authority, project
company and the IDF - and with a suitable credit enhancement mechanism.

There will be limited asset-liability mismatch as IDFs can raise long-term funds with
minimum five-year maturity.

However, as this is a new channel, we expect various stakeholders to face some teething
problems. The evolvement of the IDF structure is a key monitorable.

Private equity on the anvil


In line with the strategy to become a comprehensive financial services player, LTI is in the
process of setting up a private equity asset management platform by mobilising funds from
domestic and overseas investors. This has the potential to add to the fee income base for the
company.

18

L&T Finance Holdings Ltd


RESEARCH

Key Risks
Delay in removing bottlenecks in infrastructure could delay the
investment cycle
We have based our assumptions on the likely improvement in investment cycle in
infrastructure in FY15 on the back of improvement in economy and ironing out of policy issues
(such as financial restructuring of state discoms, signing of FSAs for power producers, faster
environmental and forest clearances, and faster land acquisition). Therefore, a hung
parliament, persisting slowdown and delay in reform measures pose a risk to our estimates.

Further deterioration of asset quality in infra business


We expect improvement in asset quality of the infra business post FY14 on the back of
cautious approach in lending by the management increased frequency of project monitoring
and conservative lending based on debt protection metrics. Also, we expect the macro climate
to improve post FY14, boosting the financial health of borrowers. Therefore, any worsening of
financial health of borrowers due to delay in improvement in macro environment could affect
our estimates

Tight liquidity situation


Though L&T Finance Holdings has a strong brand equity, a tighter-than-expected liquidity
situation in the market could make it difficult to raise resources at a lower cost and could also
result in lower growth because of lack of funding. Moreover, we are not factoring in any more
rate hikes in the future. Further rate hikes could lead to NIM compression for the retail &
corporate division because of fixed nature of the loans, which will affect our estimates.

Faster improvement in macro-environment could result in


faster growth in CV and CE as well as infra business
Our estimate on growth of CE, CV and infra business is hinged on improvement in the
economy post FY14. Any faster improvement could result in faster growth in AUM than
expected and post an upside risk to our valuation.

Changes in the regulatory norms for NBFCs


The notification of 90+ dpd NPA classification norms (currently 180+ dpd) will increase the
provisioning requirement for the company. Further changes in regulatory norms are thus a
monitorable.

Equity dilution risk


We have not factored an equity capital raise as we expect the company to meet its capital
requirements by raising debt and tier-II capital. The company follows a strategy to maintain
about 20%-25% of the consolidated net worth in the form of leverage as preference capital
or other tier-II borrowing. However, with the rising leverage, the company may find it difficult to
raise further tier-II capital. The company may have to raise common equity capital which
poses an equity dilution risk to the investors.

19

CRISIL IER Independent Equity Research

Financial Outlook
AUM to clock 23% CAGR over FY13-16
CRISIL Research expects the companys lending AUM to increase at 23% CAGR over FY13-

AUM to clock 23% CAGR over

16 driven by growth in loan book; we expect 18% CAGR in the retail & corporate segment and

FY13-FY16 on a diversified base

26% CAGR in the infrastructure finance segment. New products, housing finance and twowheeler finance, are together expected to contribute ~13% to the loan book mix in FY16, up
from ~6% in FY13.

Figure 23: Expect 23% growth in AUM over FY13-16


( bn)
700

57%

600

60%
45%

50%

500

40%
30%

400

23%

300

22%

24%

30%
20%

200

10%

100
177

257

333

411

502

623

FY11

FY12

FY13

FY14E

FY15E

FY16E

0%

Total

yoy%

Source: Company, CRISIL Research

NIMs to remain stable; opex to improve


CRISIL Research expects NIMs to remain stable at 5.0% levels in FY16 driven by slight
increase in yields in the retail & corporate division. The increase is attributable to rise in share
of high-yield two-wheeler financing offset by cautious approach in the infrastructure lending.
Further, the increase in borrowing costs due to recent monetary tightening will also impact
NIM in the retail & corporate division (where the loans are primarily at a fixed rate). In the
other income, we expect rise in contribution from fee income from infrastructure lending as
well as investment management; we expect this segment to grow at 46% CAGR over FY1316. Operating income is expected to grow at 27% CAGR to 33 bn in FY16. We expect slight
improvement in operating costs FY14 onwards - to 1.56% in FY16, from 1.68% in FY13 and
1.78% in FY14 - driven by integration of the new businesses. CRISIL Research expects preprovision profit to grow at 31% CAGR over FY13-16 to 24 bn in FY16.

20

L&T Finance Holdings Ltd


RESEARCH

Figure 25:Operating income to grow at 27% CAGR over


Figure 24:NIMs to remain stable
6.0%

FY13-16
( mn)

5.3%

5.3%

5.0%

4.9%

5.0%

5.0%

35,000

45%

39.0%

40%

30,000

4.0%

35%

28.9%

25,000

25.7%

20,000

3.0%

15,000
2.0%

25%

18.4%

20%

13.3%

15%

10,000

1.0%

10%

5,000
12,353

15,923

22,126

26,203

32,940

FY12

FY13

FY14E

FY15E

FY16E

FY12

FY13

FY14E

FY15E

FY16E

Total Operating Income

NIMs (as a % of AAUM)

Source: Company, CRISIL Research

5%
0%

0.0%

30%

yoy growth

Source: Company, CRISIL Research

Figure 26: Opex costs to improve


2.5%
1.9%

1.8%

2.0%
1.6%

1.7%

1.6%

FY15E

FY16E

1.5%

1.0%

0.5%

0.0%
FY12

FY13

FY14E

Opex cost (as a % of AAUM)

Source: Company, CRISIL Research

Asset quality to improve in FY15


The asset quality has been under pressure due to the subdued macro environment. We
expect the asset quality to remain under pressure in FY14, raising NPAs from 2.2% in FY13 to
3.1% in FY14. However, given the expected improvement in economy, as well as a cautious
approach to lending, we expect asset quality to improve in FY15.

21

CRISIL IER Independent Equity Research

Figure 27: Asset quality expected to improve


3.5%

45%

3.1%
2.9%

3.0%

38.9%

2.5%

2.5%
39.7%

2.1%

2.0%

40%

39.2%
35%

37.5%

2.2%
35.2%

1.5%

30%
1.5%

1.0%
0.5%

0.8%

0.9%

FY12

FY13

1.0%

25%

0.8%

20%

0.0%

GNPAs (calc)

FY14E

FY15E

Credit costs

FY16E

Provision coverage (RHS)

Source: Company, CRISIL Research

Improvement in returns profile expected


CRISIL Research estimates the companys return on average assets (RoAA) to improve from
1.6% as of FY13 to 2.1% in FY16. This is expected to be driven by the following:

Stable NIMs because of slight yield expansion (due to improving mix of high yielding
products in the retail & corporate offset by a decline in yields in the infra segment due to
cautious lending)

Improvement in contribution of other income to the total operating income of the infra
subsidiary

Improvement in opex because of better integration of new acquired businesses and

improvement in credit costs in FY15, as discussed above

Figure 28: RoAA and RoAE to improve from FY13 levels


17.1%

18%
16%

15.5%
14.2%

14%

12.1%

12%

10.1%

10.9%

10%
8%
6%
4%

2.5%

2.0%

1.6%

1.6%

1.9%

2.1%

FY12

FY13

FY14E

FY15E

FY16E

2%
0%
FY11

RoAA

RoAE

Note: FY13 PAT for ROAA and ROEE calculation does not include sale of shares of
Federal Bank
Source: Company, CRISIL Research

22

L&T Finance Holdings Ltd


RESEARCH

Capital adequacy of subsidiaries to remain at a comfortable


level
We expect the standalone capital adequacy of the subsidiaries to remain comfortable at
17.5% in FY16 of LTF and 16.5% of LTI, well above the regulatory requirement of 15%. This
is on the back of a diversified resource base, strong brand equity, flexible capital structure of
the holding company (as discussed below) and profitability of the subsidiaries.

Holding company structure provides flexibility to raise leverage at the


standalone company level for capital requirement in subsidiaries
The companys holding company structure provides headroom for the standalone parent to
infuse equity capital in its subsidiaries to fund their growth and also to maintain their CAR
requirements by taking debt on the parents balance sheet. This helps the consolidated entity
generate a superior ROE without diluting the stake of existing investors by raising leverage.
E.g. the company raised 7,500 mn as preference equity in FY13 at the standalone level to
meet the funding requirements of its subsidiaries. The parent company had a CAR of 74% as
of FY13 (against the requirement of 30% by RBI). The retail & corporate division had a CAR of
17.4% while the infra lending subsidiary had a CAR of 15.8%.
Moreover, the company follows a strategy, on a long term basis, to maintain about 20%-25%
of the consolidated net worth in the form of leverage as preference capital or other
borrowing. As a result, we have built a preference capital raise of 5,000 mn each in FY15
and FY16.

Figure 29: CAR trend of LTF


20%
18%

16.6%

17.4%

Figure 30: CAR trend of LTI


18.0%

17.6%

17.5%

18%

16%
14%

20%

17.1%

16.8%

16.7%

13.9%

13.8%

2.6%

2.9%

2.9%

FY14E

FY15E

FY16E

15.8%

16%
15.8%

12%

14.9%

15.5%

15.0%

14.9%

14%
10%

8%

8%

6%

16.0%
14.2%

12%

10%

14.6%

6%
2.4%

4%
2%

16.4%

2.6%

2.6%

2.6%

0.8%

2%

0%
FY12
Tier I

4%

FY13

FY14E
Tier II

Source: Company, CRISIL Research

FY15E

FY16E

CAR (reported)

1.6%
0.3%

0%
FY12
Tier I

FY13

Tier II

CAR (reported)

Source: Company, CRISIL Research

23

CRISIL IER Independent Equity Research

Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of management
quality, apart from other key factors such as industry and business prospects, and financial
performance.

Highly experienced senior management


The top management of the company - Mr. Y.M.Deosthalee and Mr. N.Sivaraman - is drawn
from L&T (but on the payrolls of LTFH). The management has strong domain knowledge, vast
experience and an established track record of growing businesses.

Strong second line of management


The company has a strong second line of management with CEOs for various business units.
These professionals have significant experience in their respective fields.

Mr. Suneet K. Maheshwari, the MD and Chief Executive of LTI, has about 32 years of
experience in infrastructure and corporate finance, financial advisory, infrastructure and
energy sector reform, investment banking and private equity. Mr. Maheshwari has been
involved with various infrastructure sector reform/PPP initiatives at the national and state
level since 1984.

Mr. Dinanath Dubashi, Chief Executive of LTF, has over 23 years of experience in
various fields of financial services across organisation such as BNP Paribas, Birla
Sunlife, Care Ratings and SBI Capital Markets. He has been with LTF since April 2007
ans has occupied various senior level positions in the organization.

Ms. Ashu Suyash, CEO of L&T Investment Management Ltd, has over 25 years of
experience in the financial services industry. Prior to this she was Country Head and
Managing Director, India, for Fidelitys Asset Management Business in India. She is on
the board of the Association of Mutual Funds of India and the Advisory Board of the
Chartered Institute for Securities and Investment.

Aggressive approach towards diversification


The management is focussed on offering a comprehensive range of products. It has been
aggressive in its approach towards diversification. It has launched new products as well as
acquired new businesses.

24

The senior management team


consists of eminent people with
strong experience

L&T Finance Holdings Ltd


RESEARCH

Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate
governance and management quality, apart from other key factors such as industry and
business prospects, and financial performance. In this context, CRISIL Research analyses the
shareholding structure, board composition, typical board processes, disclosure standards and
related-party transactions. Any qualifications by regulators or auditors also serve as useful
inputs while assessing a companys corporate governance. Overall, corporate governance at
LTFH exceeds the statutory requirement supported by reasonably good board practices and
involvement of an independent board

Board composition
The companys board consists of eight members, including five independent directors (IDs),
which is in line with the requirements under Clause 49 of SEBIs listing guidelines. The
directors on the board have a rich experience in their own fields. Our interaction with the
independent directors revealed that the independent directors have a good understanding of

Corporate governance exceeds


statutory requirement

the companys business and its processes, and their participation in strategic decision making
is good.
Earlier (as of FY13), there were 11 members on the board. Out of these 11 members, three
members (all of them IDs) have recently taken up positions in the boards of the subsidiaries.
Thus even at the subsidiary level, the board is strong with experienced people at the helm.

Boards processes
The boards processes are well organised with all the necessary committees - audit,
remuneration, investor grievance, shareholders grievance, asset liability and management - in
place to ensure good corporate governance practices. Most of the committees are chaired by
independent directors. The audit committee is chaired by an independent director, Mr. S. V.
Haribhakti, who, during his career span of four decades, has successfully established and led
many services. He is a chartered and cost accountant, and a Certified Internal Auditor,
Financial Planner & Fraud Examiner. Other independent directors include:

Mr. Ajit Kumar Jain retired IAS officer who has served across departments of Ministry of
Finance and Power. He is also the nominee director on board of L&T Ltd

Mr. B.V. Bhargava He has almost three decades of experience in development banking
and project finance

Mr. P.V. Bhide He is a retired IAS officer and has decades of experience across
various departments of Ministry of Finance, Energy and Home Affairs

Mr. Harsh Mariwala He is the Chairman and Managing Director of Marico Ltd and has
three decades of experience in the industry. He was also the president of FICCI during
2010-11

Ms. Kamakshi Rao She is an investment professional with over 15 years of experience.
Her last assignment was with Capital Group of Companies as senior VP responsible for
managing investments across regions

25

CRISIL IER Independent Equity Research

The companys independent directors have diverse background viz., finance, policy etc and
are leading professionals in their respective fields.

Related party transactions


The companys related party transactions are primarily resources taken from the group
company in the form of debentures, inter corporate deposits, and interest on corporate
deposits. The company also pays brand license fees to L&T to use its name (2-3% of PAT).
These are done at arm length.
Key transactions (> 100 mn)
Fee income from L&T Infrastructure Development Projects Ltd
Brand license fees paid to L&T
Interest expense on ICD paid to L&T
ICD taken from L&T
ICD taken from L&T Capital
Secured debentures issued by L&T

FY12

FY13

101

77

174

229

64

2,700

179

229

2,000

Security deposit received from L&T General Insurance

135

Term loan/Operating lease given to EWAC Alloys

160

240

Investment in equity shares of Feedback Ventures

379

Issue of redeemable NCD by L&T

600

26

L&T Finance Holdings Ltd


RESEARCH

Valuation

Grade: 2/5

We have valued LTFH by the SOTP method to arrive at a fair value of 65 per share.

26 per share Retail & corporate. The retail & corporate finance business (including
housing finance) has been valued at a P/B multiple of 1.3x FY15E adjusted book value
per share of 20 to arrive at a fair value of 26. We have given a 25% discount to the
FY15 median P/B (adjusted book) multiple of 1.6x of asset financing peers primarily
because of lower returns profile, and pressure on corporate loan book

31 per share Infra lending. The infra lending business has been valued at a P/B
multiple of 1.6x FY15E adjusted book value per share of 20 to arrive at a fair value of
31. The multiple is at a 30% premium to IDFCs FY15 P/B (adjusted) multiple of 1.2x.
We believe this is justified given a decent ROE, better growth potential vs. peer IDFC,
and improvement in fee income

6 per share Investment management. We have valued investment management


business at 5% of its expected FY15 AUM of 213 bn (implying a 37% CAGR over FY13
AUM of 114bn)

2 per share Other businesses including wealth management.

At the current market price of 76, our valuation grade is 2/5 indicating market price has
downside from the current levels.

Implied P/B multiple at a discount to the market multiple


Our implied P/B multiple (on FY15 adjusted book value) is 1.6x. This is at a discount to the
current market FY15 P/B multiple of 2.0x which is also the median multiples over the past six
months. Our multiple is at a discount to the market multiple primarily because the market is
factoring a banking license possibility which we have not factored in our estimates.

Market is providing a premium for banking license


The companys stock re-rated from the levels of 40 (P/B of ~1.6x) to 90, since the news for
the company applying for banking license started doing rounds. Over the past six months, the
stock has remained at high levels of P/B of 2.0x higher than other NBFCs (median FY15 P/B
of 1.6x), implying that the market is factoring a premium because of banking possibility.
If LTFH is provided a banking license then we expect a possible rerating as large and mid,
sized private banks enjoy better multiples than NBFCs. Our analysis of past four years
average P/B of private sector banks and NBFCs indicate that median multiple of private sector
banks is higher at 2.9x against NBFCs at 1.7x.

27

CRISIL IER Independent Equity Research

One-year forward P/B band

One-year forward P/B movement


(Times)

()

120

35

100

30
25

80

+1 std dev

20

60

15
10

LNTFH

1.3x

1.8x

2.3x

2.7x

1yr Fwd PE (x)

Source: NSE, CRISIL Research

Feb-14

Dec-13

Jun-13

Aug-13

Apr-13

Feb-13

Dec-12

Oct-12

Jun-12

Aug-12

Apr-12

Feb-12

Dec-11

Oct-11

-1 std dev

Aug-11

Feb-14

Dec-13

Jul-13

Oct-13

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-12

Feb-12

May-12

Dec-11

Oct-11

Aug-11

20

Oct-13

40

Median PE

Source: NSE, CRISIL Research

Peer comparison
P/B (x)

M.Cap

RoE (%)

RoA (%)

Name of company

CMP

bn

FY13

FY14E

FY15E

FY13

FY14E

FY15E

FY13

FY14E

FY15E

Rural Electrification Corporation

185.1

182.8

1.2

0.9

0.76

23.8

25.7

24.40

3.2

3.4

3.22

Power Finance Corporation

156.3

206.3

0.9

0.7

0.60

19.6

22.7

20.80

2.8

3.2

3.00

IDFC

95.7

145.0

1.6

1.0

0.87

14.1

13.8

13.36

2.8

2.8

2.79

1.2

0.9

0.8

19.6

22.7

20.8

2.8

3.2

3.0

Infrastructure finance NBFCs


M&M Financial services

250.0

142.2

2.4

2.7

2.30

24.4

19.5

20.60

4.0

3.2

3.37

Shriram Transport

590.5

134.0

1.9

1.7

1.40

19.9

16.6

18.10

3.2

2.5

2.50

Shriram City Union

971.0

57.6

2.5

2.1

1.80

22.7

19.8

16.80

3.1

3.0

2.70

1,553.4

77.9

1.7

1.9

1.61

21.9

19.8

20.24

3.8

3.6

3.54

Sundaram Finance

605.4

67.3

2.0

2.2

1.81

23.6

21.8

21.30

2.8

2.9

3.10

Cholamandalam Investment

234.0

33.5

2.0

1.5

1.28

18.1

17.2

18.36

1.9

1.8

1.84

Magma Fincorp

72.3

13.7

0.9

0.8

0.70

11.1

10.2

11.80

1.3

1.1

1.30

2.0

1.9

1.6

21.9

19.5

18.4

3.1

2.9

2.7

Bajaj Finance

Asset financing NBFCs


HDFC

811.4

1,265.3

4.0

4.6

4.04

23.6

21.1

22.00

2.9

2.5

2.57

LIC Housing Finance

209.2

105.6

1.7

1.4

1.21

17.1

18.9

19.10

1.4

1.5

1.60

2.9

3.0

2.6

20.4

20.0

20.6

2.1

2.0

2.1

Housing finance NBFCs


State Bank of India

1,506.0

1,124.3

1.1

0.8

0.73

15.5

10.9

11.88

0.9

0.7

0.74

Bank of Baroda

537.3

230.7

0.9

0.7

0.60

15.1

13.4

13.66

0.9

0.8

0.77

Punjab National Bank

538.0

194.8

0.8

0.6

0.51

15.7

11.3

13.09

1.0

0.7

0.84

Canara Bank

214.5

98.9

0.7

0.4

0.36

12.1

9.6

10.91

0.7

0.5

0.57

Union Bank

102.1

64.3

0.8

0.4

0.35

13.6

9.9

11.66

0.8

0.5

0.56

0.8

0.6

0.5

15.1

10.9

11.9

0.9

0.7

0.7

PSU Banks
HDFC Bank

671.1

1,608.2

4.1

3.7

3.14

20.3

21.3

22.16

1.8

1.9

1.99

ICICI Bank

1,031.1

1,190.6

1.8

1.6

1.50

13.1

13.7

14.10

1.6

1.7

1.67

Axis Bank

675.8

520.2

3.2

2.8

2.46

15.5

14.5

14.88

2.1

2.0

2.19

1,236.8

580.5

1.8

1.5

1.34

18.5

16.7

16.66

1.7

1.6

1.64

IndusInd Bank

402.7

211.5

2.8

2.4

2.10

17.2

16.8

17.87

1.6

1.7

1.75

Yes Bank

302.3

109.0

2.6

1.5

1.24

24.8

24.2

23.09

1.5

1.5

1.51

2.7

2.0

1.8

17.8

16.7

17.3

1.6

1.7

1.7

2.7

2.5

2.2

10.1

10.9

14.2

1.6

1.6

1.9

Kotak Mahindra Bank

Private Sector Banks


L&T Finance Holdings

Source: Industry, CRISIL Research

28

72

123.6

L&T Finance Holdings Ltd


RESEARCH

Company Overview
Incorporated in 2008, L&T Finance Holding Company (LTFH) offers a comprehensive portfolio
of financial products and services through its wholly owned subsidiaries. The company is
present in most categories of retail lending; infrastructure lending across sectors; and
investment management services such as mutual fund and wealth management. Prior to
March 2009, the company had minimal operations with some passive investments. It
subsequently, acquired 100% stake in L&T Finance Limited (LTF), L&T Infrastructure Finance
Limited (LTI) and L&T Fincorp.
The company came up with an IPO in FY12, consequent to which L&Ts stake was diluted to
82.64%. However, L&T continues to hold a controlling stake in the company and backs the
management team. The company entered the housing finance space by acquiring
shareholding in Indo Pacific Housing Finance. Post the acquisition, the company was
rechristened as L&T Housing Finance Ltd. In November 2012, the company acquired Fidelity
AMC. Post the acquisition, the schemes of Fidelity Mutual Fund was transferred to L&T Mutual
Fund. In January 2013, the company acquired 100% stake of Family Credit Ltd. (FC) from
Frances Socit Gnrale Consumer Finance. FC is an NBFC having presence across twowheeler financing.

L&T Finance Holdings Corporate Structure


L&T Finance Holdings

L&T Finance

L&T Access

L&T
Vrindavan

L&T HFC

Family Credit

L&T Infra
Finance

L&T Fincorp

L&T Capital
markets

L&T Invest.
Mgmt.

L&T MF
Trustee

Overview of the subsidiaries


Primary subsidiaries of the company are LTF and LTI which are housed separately because of
their special status.

LTF was incorporated in 1994 and classified as an AFC through which it can take more
exposure to a single party by an additional 5% of its owned funds vis--vis other non
AFC NBFCs. It is housed as a separate entity because ~60% of LTFs book has to be
asset backed for the AFC status.

LTI was incorporated in 2006 and is an IFC as well as a PFI. The company is housed
separately because the company needs to maintain ~75% of assets in infra projects for
the IFC status. The IFC status provides the company access to cheaper funds.

L&T Fincorp was incorporated in 1997 and primarily does corporate lending.

L&T Access is a distribution company in the group and its primary business is distribution
of insurance products.

L&T Vrindavan (L&T Unnati earlier) is the subsidiary that houses the real estate of the
group

29

CRISIL IER Independent Equity Research

Family Credit was acquired from Frances Socit Gnrale Consumer Finance; it is into
two-wheeler financing.

L&T HFC is the erstwhile IndoPacific HFC, acquired in 2012. The subsidiary provides
housing finance loans, LAP as well as builder loans

L&T Capital Markets provides wealth management solutions.

L&T MF is the investment management arm of L&T Finance Holdings and provides
mutual fund services. The company has grown through the inorganic route by acquiring
DBS Cholamandalam AMC in 2010 and then Fidelitys mutual fund business in 2012.

Key Milestones
1994

Incorporation of L&T Finance Ltd (LTF)

2007

LTF started CV financing


L&T Infrastructure Finance Company Ltd established

2008

LTF forays into microfinance & capital market products

2010

LTF acquire DBS Cholamandalam Asset Management Ltd

2011

IPO; the company became the first listed subsidiary of L&T

2012

LTF acquires Indo Pacific Housing Finance Ltd, enters housing finance
Acquires Fidelity's Mutual Fund
Acquires Family Credit

2013

30

Incorporates L&T Capital Markets - a platform for wealth management

L&T Finance Holdings Ltd


RESEARCH

Annexure: Financials (Consolidated)


Income Statement
( m n)
Net Interest Income
Non Interest Income

Ratios
FY12
11,475

FY13
14,396

FY14E
19,804

FY15E
22,812

FY16E
28,207

878

1,526

2,323

3,390

4,733

12,353

15,923

22,126

26,203

32,940

Operating Expenses

3,560

5,300

7,125

7,653

Staff Costs

1,518

2,057

2,629

Other Operating Expenses

2,042

3,244

Total Operating Incom e

FY12

FY13

FY14E

FY15E

FY16E

Spread Analysis
13.2%

12.8%

13.7%

13.5%

13.5%

Cost of borrow ings

Yield on AUM

9.2%

9.4%

9.8%

10.2%

10.1%

9,179

Spread

4.0%

3.4%

3.8%

3.4%

3.3%

3,153

3,676

Net Interest Margin (NIM)

5.3%

4.9%

5.3%

5.0%

5.0%

4,496

4,501

5,503

Return Ratios

Pre- provision profit (PPP)

8,794

10,622

15,001

18,549

23,761

ROA (%)

2.0%

1.6%

1.6%

1.9%

2.1%

Provision & Contingency

1,834

2,734

5,429

4,712

4,726

ROE (%)

12.1%

10.1%

10.9%

14.2%

17.1%

Profit before depreciation and tax

24.0%

6,959

7,888

9,572

13,837

19,035

Depreciation On Fixed Assets

117

169

308

337

374

Assets under Management (AUM)

Extra-ordinary gain / (Loss)

2,180

Disbursements

PBT

6,842

9,899

9,264

13,499

18,661

Provision for tax

2,295

2,594

3,057

4,455

6,158

Reported Net Profit

4,548

7,305

6,207

9,045

12,503

2,180

4,548

5,125

6,207

9,045

12,503

Extra-ordinary gain / (Loss)


Adjusted Net Profit

Grow th ratios
45.1%

29.8%

23.3%

22.2%

-10.7%

4.0%

9.2%

10.9%

17.9%

Net Interest Income

12.2%

25.5%

37.6%

15.2%

23.6%

Non Interest Income

30.4%

73.9%

52.2%

46.0%

39.6%

Total Operating Income

13.3%

28.9%

39.0%

18.4%

25.7%

Operating Expenses

40.2%

48.9%

34.4%

7.4%

19.9%

Staff Costs

60.9%

35.5%

27.8%

19.9%

16.6%

5.2%

20.8%

41.2%

23.7%

28.1%

Provision & Contingency

10.0%

49.1%

98.5%

-13.2%

0.3%

Adjusted Net Profit

14.5%

12.7%

21.1%

45.7%

38.2%

Pre- provision profit (PPP)

Balance sheet
( m n)
Equity share capital

FY12
17,148

FY13
17,168

FY14E
17,168

FY15E
17,168

FY16E
17,168

Adjusted EPS

-5.4%

12.6%

21.1%

45.7%

38.2%

Book Value

37.5%

31.0%

8.5%

19.6%

20.3%

7,500

7,500

12,500

17,500

Asset Quality

Total Share Capital

17,148

24,668

24,668

29,668

34,668

Gross NPA %

2.1%

2.2%

3.1%

2.9%

2.5%

Reserves

29,964

37,119

42,394

50,534

61,787

Net NPA (%)

1.3%

1.4%

1.9%

1.8%

1.6%

Shareholders Funds

47,111

61,786

67,062

80,202

96,455

Valuation Data
28.7

17.9

21.0

14.4

10.4

211,813

284,792

345,865

419,447

517,976

2.9

2.6

2.5

2.2

1.9

9,213

17,757

23,245

27,296

32,812

Preference capital

P/E (x)
Borrow ings
Other Liabilities & Provisions

P/ABV (x)
Key Param eters

Deferred tax liability

199

121

121

121

121

Sources of funds

268,337

364,457

436,294

527,066

647,364

Total lending AUM ( mn)

256,690

333,094

410,648

501,947

622,649

Disbursements ( mn)

220,281

229,175

250,216

277,472

327,091

Cash & Bank Balances

1,127

3,716

28

815

860

Capital adequacy ratio

18.1%

20.9%

18.1%

17.8%

17.2%

Investments

7,749

18,500

19,281

20,102

20,964

Tier I capital ratio

17.6%

17.4%

15.7%

14.6%

13.6%

251,904

324,501

397,132

483,719

599,695

Tier II capital ratio

0.6%

3.5%

2.4%

3.2%

3.6%

2,820

9,572

10,168

10,936

11,930

Efficiency ratio
29.8%

34.3%

33.6%

30.5%

29.0%

1.7%

1.9%

2.0%

1.8%

1.7%

4.5

5.4

5.9

6.4

6.8

Capitalisation ratios (calc)

Net Loans and advances


Net Fixed Assets and Capital WIP
Deferred tax asset
Other Assets
Application of funds

809

1,390

1,390

1,390

1,390

3,938

6,778

8,295

10,103

12,526

268,347

364,457

436,294

527,066

647,364

Cost to Income ratio


Opex/ average assets
Leverage (x) - D/E

Quarterly Financials - Consolidated


Per share
Adj EPS ()
Adj Book Value ()
Dividend per share ()
Actual o/s shares

( m n)
FY16E

Total operating income

Q4FY13

Q1FY14

Q2FY14

Q3FY14

5,035

4,937

5,485

5,179

2.7

4.3

3.6

5.3

7.3

Change (q-o-q)

25.8

33.6

35.0

42.0

51.0

Adjusted PAT

2,946

FY15E

4,024

FY13

1,715

FY14E

Q3FY13

FY12

2%

25%
1,707

-2%
1,447

11%
1,557

-6%
1,097

0.7

0.5

0.5

0.6

Change (q-o-q)

105%

-42%

-15%

8%

-30%

1,717

1,717

1,717

1,717

Adjusted EPS

1.7

1.0

0.8

0.8

0.6

Source: CRISIL Research

31

CRISIL IER Independent Equity Research

Focus Charts
AUM growth trend
700

NIM trend
6.0%

57%

60%

600

5.3%

5.3%
4.9%

45%

40%
30%

400

23%

300

30%

24%

22%

200
100
177

257

333

411

502

623

FY11

FY12

FY13

FY14E

FY15E

FY16E

Total

FY15E

FY16E

4.0%
3.0%

20%

2.0%

10%

1.0%

0%

0.0%
FY12

FY13

yoy%

FY14E

NIMs (as a % of AAUM)

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Operating income trend

Asset quality trend

( mn)

3.5%

35,000

40%
35%

28.9%
25.7%

20,000

30%
25%

18.4%

20%

13.3%

15%

10,000

10%

5,000
12,353

15,923

22,126

26,203

32,940

FY12

FY13

FY14E

FY15E

FY16E

5%
0%

Total Operating Income

3.0%
2.5%

39.7%

2.1%

2.5%

40%

37.5%

35%

39.2%

2.2%
35.2%

30%
1.5%

1.0%
0.5%

2.9%

38.9%

2.0%
1.5%

45%

3.1%

45%

39.0%

30,000

15,000

5.0%

50%

500

25,000

5.0%

5.0%

0.8%

0.9%

FY12

FY13

1.0%

25%

0.8%

0.0%

yoy growth

20%
GNPAs (calc)

FY14E

FY15E

Credit costs

FY16E

Provision coverage (RHS)

Source: Company, CRISIL Research

Source: Company, CRISIL Research

RoA/RoE trend

Performance of L&T Finance Holdings (LTFH) vs CNX500


180

14.2%

14%

160

12.1%

12%

10.1%

200

140

10.9%

120

10%

100

8%

80
60

6%
2.5%

40
2.0%

1.6%

1.6%

1.9%

2.1%

2%

20

RoAA

RoAE

CNX 500

-Indexed to 100
Source: Company, CRISIL Research

32

Source: Company, CRISIL Research

LNTFH

Dec-13

Oct-13

Aug-13

Jun-13

Apr-13

Feb-13

FY16E

Dec-12

FY15E

Oct-12

FY14E

Jun-12

FY13

Aug-12

FY12

Apr-12

FY11

Feb-12

0%

Aug-11

4%

Dec-11

16%

17.1%
15.5%

Oct-11

18%

Feb-14

( bn)

RESEARCH

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CRISIL IER Independent Equity Research

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RESEARCH

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CRISIL IER Independent Equity Research

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