L&T Finance rated Hold with TP of Rs 200 by Axis Capital

L&T Finance Holdings (LTFH) reported a strong PAT of Rs 3.6 billion, up 45.2 % y-o-y, primarily on a lower tax outgo. Loan book growth was healthy at 19% y-o-y. Headline asset quality was largely stable with GNPAs at 5.8% and NNPAs flat q-o-q at 3.3 % along with comfortable PCR of 43%. LTFH’s RoE has been steadily increasing from 9.8% in Q1FY17 to 15.2% in Q2FY18 led by growth in focused business, run-down of non-core book with minimal hit to the P&L, improvement in fees and control on expenses. Though LTFH has further room for creating operating leverage, retaining high growth rates and improving return ratios, these are largely priced in. Downgrade to Hold on relatively rich valuations.

Disbursements grew 81% y-o-y leading to strong 23.2% y-o-y loan growth in focus portfolio and 18.8 % y-o-y growth in entire loan book; (b) On asset quality front, rural finance (GNPAs at 10.9%; improved 45 bps q-o-q) and housing (GNPAs at 0.8%; improved 11 bps q-o-q) portfolio improved, while wholesale book deteriorated by 47 bps q-o-q to 4.8 %; and (c) Investment & Wealth Management businesses posted strong growth. AAUM in Investment Management business increased 61% y-o-y at Rs 527 billion in Q2FY18 whereas AUM in Wealth Management increased 52 % y-o-y at Rs 165 billion. We raise our FY18E/FY19E estimate by 6%/4% factoring in the sharp 13.6% beat on PAT in Q2.

Though we remain constructive on LTFH’s business model and expect it to continue deleveraging non-core assets and focus on further improving return ratios, we believe, it is largely factored in the current market price of the stock. On relatively rich valuations, we downgrade the stock to Hold from Buy with a revised SOTP based TP of Rs 200. Rural finance grew 28.8 % y-o-y aided by improved momentum in MFI (45.4% y-o-y) and two-wheeler (40% y-o-y) loans, whereas growth in farm equipment was decent at 12.2% y-o-y. Share of rural book has increased by 102 bps q-o-q at 16.4% of loans.

Larsen & Toubro Limited