Strong fee income traction; meaningful asset quality improvement
* L&T Finance Holding’s (LTFH) 1QFY18 PAT grew 49% YoY to INR3.09b. Robust core disbursement growth of 95% YoY, strong fee income across all lending segments, sharp reduction in the GNPL ratio and shoring up of the provision buffer were key highlights of the quarter.
* Rural business: 2W/tractor disbursements increased 82%/169% YoY. While such strong growth in the tractors segments was expected (LTFH has been gaining market share from the lows of 4% in FY16 to 11% now), growth in the 2W financing segment was a positive surprise. With PPoP margins improving 180bp YoY to 10.72%, management chose to incur higher provisions and maintain RoE at 21-22% levels.
* Housing business: Growth in the retail home loan/LAP segment remains sluggish, but was compensated by 4x disbursements in the builder loans segment. Consequently, strong fee income helped improve RoA/RoE to 3.2%/30% in 1QFY18. However, we expect RoE to normalize to 18-19% by FY19.
* Wholesale business: LTFH has also started last mile financing for road projects in the past few quarters. This, coupled with a large number of operational projects coming up for refinance, drove 4.5x disbursement growth in the quarter. While margins are under pressure, fee income traction is strong. RoE remained largely stable YoY at 10%.
* Valuation view: LTFH has scripted an impressive turnaround over the past five quarters, with a renewed focus on profitable segments. It has delivered strong growth and consistent improvement in profitability. We are also encouraged by the strong fee income traction witnessed this quarter – we believe this will play a key role in achieving 18%+ RoE by FY19/20. We marginally reduce our FY18E EPS to factor in higher provisions, but increase our FY19/20 estimates by 5-7%. Buy with a TP of INR200 (3.3x FY19E BVPS).
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