L&T Finance Holdings : A value buy ?

04/29/2019

L&T Finance Holdings : A value buy ?

After the ILFS debacle, things have been going tough for all the NBFCs. There have been questions whether they would be able to maintain their profitability given the higher cost of capital. L&T Finance Holdings is one such NBFC  stock which fell from its high of 207 Rs to 137 Rs. But despite all the turmoil, it has been producing stellar results every quarter.`The company is growing its PAT approximately at 18.45% annually and maintaining a ROE of 18%.

PAT & ROE LTFH

PAT & ROE LTFH

Here is what makes it a value buy for investors:

Business Overview

L&TFH operates in 5 major business segments: Rural, Housing, Wholesale, Investment Management and Wealth Management. In the Rural business, L&TFH provides loan for farm equipment (4 lacs INR avg ticket size), 2 wheeler (52k INR avg ticket size) and micro finance (32k INR avg ticket size). The rural business corresponds is mainly consumer focused and contributes to 23% of the total loan book and 38% to the total PAT. The housing business caters to a mix of consumers and construction projects. To consumers, it provides home loans and loans against property. For construction projects, L&TFH gets involved in real estate financing. This segment contributes to 23.5% of the total loan book and 35.1% of the total PAT.

Business segments - L&T Finance Holdings

Business segments – L&T Finance Holdings

The wholesale business is involved in providing finance for power projects and roads. It contributes to almost 50% of the loan book and almost 36% of the projects. Their Investment Management includes their Mutual Funds which have almost 73,000 crores INR worth of assets under management and accounts for 4% of the companies’ PAT. Finally, wealth management deals with providing customized wealth management for clients and is at a very nascent stage at present. Wholesale forms the major chunk of the company’s business. There are ample opportunities in this area with increased infrastructure development. But, the sector is also affected by late payments and defaults at times. And that’s the reason, the company is reducing its exposure to wholesale and even sold a part of portfolio (700 crore Rs) to Centrum. The increased focus is on faster growing rural finance which has lower defaults. Housing finance segment will be supported by the expected upswing in the real estate market. Finally, investment management driven by high inflows in equity would be major growth driver for the company in coming times. L&TFH looks comfortably positioned with presence and good returns (ROE of 18.47%) in fast growing business segments.

L&TFH Segment results

L&TFH Segment results

Valuations

At a market capitalization of 27,553 crores INR, L&TFH trades 13 times its annual earnings. The profits from the consumer business account for almost 50% of the portfolio and the percentage share is likely to go further up in coming years.  With a high business pedigree, fast topline and bottomline growth and increasing retail focus, the valuations look comfortable at the moment.

Concerns resolved

Earlier, there were concerns raised about company’s exposure to ILFS. But, the company has clarified that they had no exposure to ILFS entities which defaulted. Their exposure was to a subsidiary of ILFS which was backed by government guarantees and annuities coming from toll projects. This subsidiary has not defaulted which means L&TFH has no exposure to ILFS defaults. Almost all the portfolios of LTFH have A1+ and AAA credit ratings from CARE and ICRA which demonstrates the strong books of the company.

ILFS Exposure

ILFS Exposure

L&T Finance Holdings Credit Ratings

L&T Finance Holdings Credit Ratings

There were also concerns about the liquidity available with NBFCs including L&TFH. Liquidity crunch was never a problem as the company had an additional liquidity of 6199 crores INR in form of cash, FDs and other liquid instruments, undrawn bank lines of 4146 crores INR and even a back up credit line of 2000 crores INR from L&T. Since 21st  September, 2018 (date of meltdown), LTFH raised approximately Rs 18,468 crores through market instruments and bank finance/ICDs. Despite all the concerns, the weighted average cost of raising capital stands at 8.3% for the company.

Given the strong pedigree, strong loan book and foray into retail business, the company seems poised to perform well in coming years. With improving sentiments around NBFCs, the stock can provide good returns.

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Disclaimer: I am not a SEBI registered analyst and not advising anyone to buy. The purpose of this article is to share my viewpoint about fundamentals and the future prospects of the company. So, please do not consider this as an investment tip. Talk to your financial advisor before taking any investing call.

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