L&T Finance Holdings Ltd
Company Overview
L&T Finance Holdings Limited (NSE:L&TFH) is one of India’s most valued and fastest-growing Non-Banking Financial Companies (NBFCs). Incorporated in 2008 and headquartered in Mumbai, the Company offers a diverse range of financial products and services in Rural, Housing and Infrastructure finance sectors. It also offers Investment management services.
Industry Overview
India’s GDP growth in FY20 continued on a downward growth trajectory which had begun in Q1FY19. The nation has been facing several structural stresses such as, sluggish private investment for more than six years, significant decline in savings rate for more than seven years and highest unemployment rate in the past 45 years. A broad-based consumption breakdown further accentuated the slowdown. The COVID-19 induced lockdown/social distancing measures started in March 2020 and put 75% of the overall economic activity into standstill. It consequently hastened the downward trajectory of GDP growth in Q4FY20 to 3.1%. For FY20, India’s GDP growth declined to 4.2% as compared to 6.1% in FY19. 1
On the sectoral front, deceleration in industrial and services activities contributed to the slowdown in GDP while growth in agriculture & allied activities accelerated during the year on the back of bountiful monsoon rainfall. While the rains were disruptive for Kharif crops, the healthy water reservoirs augured well for Rabi crops.
The slowdown in GDP growth had an adverse impact on Government revenue collections and the COVID-19 induced lockdown further exacerbated the situation. While revenues have suffered, the government expenditures rose significantly on account of additional costs arising from the virus containment efforts and enforcing the lockdown. Thus, actual fiscal deficit of the central government widened to 4.6% of GDP in FY20 which was significantly higher than its revised fiscal deficit target of 3.8% of GDP.
Financial markets remained jittery in FY20 due to domestic economic slowdown, concerns on fiscal slippage and geopolitical tensions. Weaknesses in overall economic activity also put pressure on business growth of lenders including NBFCs. The spread of COVID-19 in March 2020, further heightened uncertainties for Q4FY20. However, triple A-rated, large-sized NBFCs were relatively better placed with liquidity, comprising liquid assets, undrawn lines from banks, and in some cases funding lines from group companies.
Business Overview
Total income was R 14,548.13 Cr in FY 2019-20 as compared to R 13,301.52 Cr in FY 2018-19.
Profit before taxes was R 2,680.08 Cr in FY 2019-20 as compared to R 3,051.98 Cr in FY 2018-19.
Profit for the year attributable to owners of the Company was R 1,700.17 Cr in FY 2019-20 as compared to R 2,226.30 Cr in FY 2018-19.
During the year, the net loan book size grew from R 91,324.63 Cr to R 91,462.50 Cr.
The Average Assets Under Management (“AAUM”) in the Mutual Fund business stood around R 71,056 Cr for the quarter ended March 31, 2020 as against R 70,944 Cr for the quarter ended March 31, 2019.
The Assets Under Service (“AUS”) of the Wealth Management business stood around R 21,063 Cr for the quarter ended March 31, 2020 as against R 28,164 Cr for the quarter ended March 31, 2019.
The NBFC sector, in general, continued to witness stress throughout the year. However, even in this scenario, the company’s existing ratings were reaffirmed at ‘AAA’ by India Ratings, CARE and ICRA. CRISIL conducted rating exercise for L&T Financial Services for the first time and assigned a highest long-term rating of ‘AAA’ in October 2019.
Further, India Ratings and CRISIL recently reaffirmed the AAA ratings post lockdown, during April 2020 and May 2020, respectively
Rural Finance
During the year, the company continued to strengthen it’s ‘Right to Win’ by maintaining leadership position across businesses. Through rigorous usage of analytics driven Early Warning Signals and culture of ‘Zero DPD’, the asset quality showed remarkable improvement with NS3 falling to sub 1%, amongst the best in the industry. The company has introduced a new offering under the Consumer Loan segment targeting existing prime customers
Farm Equipment Finance
While the market has de-grown by 9% with sales of 7.8 Lakh tractors during the year, the company disbursed Rs 3,821 Cr of Farm loans, disbursements being flat YoY. Despite subdued sales in the month of March, the company has shown a healthy growth in book by 15% for FY20. This helped LTFH maintain its market share in the Farm Equipment Finance industry. The company has built rich customer base by providing tractor financing services for the last 15 years. The company is now extending refinancing facility to prime customers with good credit and payment history. Refinancing business contributed 13% of the total business in FY20.
Two-Wheeler Finance
In FY20, the Two-Wheeler industry saw a 18% de-growth in domestic sales due to overall economic slowdown from the beginning of the fiscal as well as the nationwide lockdown at its fag end. Through rigorous execution of digital proposition on the ground and domain expertise, the company has been able to remain amongst the leading financiers in Two-Wheeler finance in FY20. The year also saw the Company book increase by 15%.
A new scheme, ‘Sabse Khaas Loan’ was introduced to target the financially prudent customers with no hypothecation and lower rate of interest as compared to credit cards. The company disbursed an amount of Rs 91 Cr, benefiting over 18,000 customers
Micro Loans
The industry has grown by ~20% YoY on the back of enhanced needs and growing aspirations of microfinance customers across the country. Disruptions on account of union protests coupled with CAA protests caused repayment issues in Assam. At the back end of the year, the disbursements as well as collections were adversely impacted due to the COVID-19 outbreak and the ongoing nationwide lockdown
Consumer Loans
The company launched a pilot run of Consumer Loans in Q3FY20 and has disbursed personal loans to 11,794 active customers. The total book size of the Consumer Loans portfolio stands at Rs 154 Cr. The company leveraged the strong Two-Wheeler customer base and offered personal loans to its prime customers with good payment history. The loans are provided on an end-to-end digital platform thus making it a smooth and 100% paperless journey for its customers.
Housing Finance
In FY20, amidst the economic slowdown accompanied by slower GDP growth, the sector faced liquidity constraints. Moreover, growth was further impacted at the end of FY20 due to COVID-19 related lockdown.
Given the challenging market environment, the company deployed a calibrated approach in assessment of customer profiles and developer projects. This led to the company’s Housing Finance book growth to remain muted at 4%.
Home Loans
The Housing Loan portfolio of HFCs and NBFCs reduced due to continued funding constraints and portfolio sales during the year. This was further accentuated on account of lower disbursements in March 2020 resulting from the COVID-19 lockdown, thereby impacting the overall quarterly disbursements.
The company's Home Loan book has grown from Rs 6,243 Cr in FY19 to Rs 7,770 Cr in FY20, registering a growth of 24%. While Home Loan disbursements registered an overall decline of 2% from Rs 2,661 Cr in FY19 to Rs 2,612 Cr in FY20, the disbursements towards salaried segment grew by 23%.
Loan against Property (LAP)
An adverse business environment for MSME segment in FY20 coupled with the COVID-19 related lockdown further affected the cashflow and liquidity position of the LAP segment. Given the increasing risk perception, industry is expected to be conservative while lending in this segment.
The company continued its cautious approach in sourcing LAP proposals through policy tightening for assessment of self-employed profiles. Due to this, LAP disbursements witnessed a de-growth of 48% from Rs 1,144 Cr in FY19 to Rs 591 Cr in FY20. As a result, there was a decline in the share of LAP book of Housing Finance from 17% in FY19 to 15% in FY20.
Real Estate
Improvement in both residential and commercial space, in a limited manner, continued in FY20 with sales outpacing supply, leading to a decline in unsold inventory. There were fewer residential launches as developers focused on completion of existing projects. These releases were largely concentrated in the affordable and mid-segment, in line with the demand. In CY19, commercial office leasing witnessed an all-time high of 61.6 Mn Sq. ft., growing by more than 25% YoY.
In line with the economic slowdown and tightened underwriting policies, the Real Estate Finance disbursement of the company had a de-growth of 26% from Rs 6,633 Cr in FY19 to Rs 4,877 Cr in FY20. The company’s Real Estate loan book had a de-growth of 1% over the last year to stand at Rs 14,933 Cr in FY20, whereas contribution of commercial portfolio increased from 10% in FY19 to 18% in FY20.
Infrastructure Finance
FY20 was impacted by tight liquidity conditions leading to a slowdown in both disbursements and sell-down activity in the market. The company decided to further sharpen its focus on its core strength areas in Infrastructure Finance, where it commands leadership position i.e. renewable energy, roads and transmission.
Infrastructure investment continues to be the key focus area of the Indian Government. Its focus got reiterated with announcement of the National Infrastructure Pipeline (NIP) that envisages a projected capital expenditure of Rs 111 Lakh Cr for core infrastructure sectors from 2020 to 2025. Road sector continues to be one of the core development sectors for the Government with a planned capital expenditure of Rs 20.3 Lakh Cr under the NIP. Further, with an aim to increase the renewable energy capacity in India to 265 GW, and share in overall consumption to 20% by 2025, the NIP emphasised a capital expenditure of Rs 9.3 Lakh Cr for the renewable sector.
Infra Finance
The company has built sustainable advantages in terms of its strong underwriting ability and sell-down capabilities in its focused infrastructure financing segments. The company see continued sustainable growth opportunities in these segments viz. Renewable energy, Roads and Transmission. Further, the company also strategically entered into funding of City Gas Distribution (CGD) projects, as a step towards diversification
Infra Debt Fund
The policy and regulatory framework for Infrastructure Debt Funds (IDF) announced by the Government of India (GoI) and the Reserve Bank of India (RBI), respectively, were targeted at providing an innovative solution to the asset-liability mismatch and group exposure issues faced by the banking system in India.
In FY20, the sixth full year of operations, through the subsidiary IDF, the company was able to make significant progress towards achieving all the objectives indicated by GoI & RBI. The company also improved the viability of projects by providing long-tenor and low-cost structured refinance solutions. With a significant incremental market share and 0% impaired assets, the company continues to be one of the leaders in refinancing of operational road and renewable energy projects in India.
Mutual Funds
The Mutual Fund industry in India witnessed a 11% growth in FY20, increasing the Average Assets under Management (AAUM) to Rs 27,03,676 Cr as compared to Rs 24,44,838 Cr in FY19, mainly on account of Index and ETF funds
The average AUM of the company in FY20, amounting to Rs 71,056 Cr, remained flat as compared to Average AUM of Rs 70,944 Cr in FY19. Increase in credit concerns in the external environment and shutting down of 6 schemes by a fund house resulted in heavy redemption from credit oriented funds across the industry. Focus on longer tenure and high-quality fixed income products led to increase in AUM of fixed income assets by 15.24% in FY20.
Financial Highlights
29 April, 2021; The Board of L&T Finance Holdings announced the financial results for the fourth quarter and financial year ended 31st March, 2021. 2
The company posted a consolidated Earnings before Credit Cost (EBCC) of Rs. 1,481 Cr in Q4FY21, a 24 % increase YoY, from Rs. 1,192 Cr in Q4FY20.
The PBT for Q4FY21 stood at Rs. 828 Cr, up 135% QoQ and 88% YoY (Rs. 440 Cr in Q4FY20).
PAT (before exceptional items) of Rs.428 Cr in Q4FY21 vs Rs.386 Cr in Q4FY20
In the quarter, LTFH raised ~Rs 3,000 Cr through Rights issue in Q4FY21, which was oversubscribed by 15%. Furthermore, the Company completed the merger of its operating lending entities - L&T Infrastructure Finance Company Ltd. and L&T Housing Finance Ltd., with L&T Finance Ltd. to create a single unified entity for better operational efficiency, superior cash flow synergies and unparalleled growth.
Rural Finance
Farm Equipment Finance: LTFH established itself as the No.1 financier in this segment with a significant increase in market share to 15%. Overall disbursements were up 17% YoY in FY21, achieved on the back of early normalization in CE. The disbursements for Q4 were up 40% on YoY basis. The Company leveraged analytics to gain counter share with identified dealers
Two-Wheeler Finance: With improved market share, L&T Finance Holdings has been ranked 3rd in the segment with an 11% increase in market share. In Q4FY21, the business CE saw an uptick from Q3FY21, with disbursements in the quarter also up 14% YoY
Micro Loans (ML): With nearly NIL disbursements in Q1FY21 and moratorium till May, Micro Loans business registered its highest ever quarterly disbursement at Rs. 3,181 Cr in Q4FY21, up 54% QoQ and 44% YoY. Re-initiated disbursements to new customers in Q4 on the back of availability of customer repayment data.
Housing Finance
Home Loan: In Q4FY21, the business continued to witness a steady pick up, with home loan disbursements registering a QoQ growth of ~35%. The salaried Home Loan segment registered a growth of 32% QoQ in Q4FY21 and 41% YoY
Real Estate: LTFH continued its strategy of focus on project completion by lending only to existing projects during the quarter. The Company plans to start new underwriting in FY22.
Infrastructure Finance:
LTFH continues to be the market leader in Renewable financing and one of the leading players in Infrastructure finance business with robust pipeline to aid disbursement growth in FY22. The business maintained a steady growth QoQ as situation improved. There was a strong uptick in sell-down and pre-payments, led by a strong sell-down desk and pick up in the sector. Strong emphasis was placed on project monitoring through continuous engagement with contractors and developers as well as use of technology like drones, etc
LTFH strengthened its balance sheet by maintaining adequate PCR on GS3 book and additional provision on non-GS3 book for any future economic uncertainty. The GS3 assets of the company stood at 4.97% in Q4FY21 of its book, showing a reduction of 39bps YoY. NS3 registered the sharpest improvement since the introduction of Ind-AS and reduced from 2.28% to 1.57% YoY. The company also strengthened the PCR on Stage 3 assets from 59% in Q4FY20 to 69% in Q4FY21. Asset quality and PCR has improved in FY21 vis-à-vis FY20 despite the impact of Covid, showcasing strong underwriting, robust collection and stringent EWS
The Average Assets under Management (AAUM) of the Investment Management business stood at Rs.72,728 Cr in Q4FY21. The AUM for Equity and Fixed Income asset classes as on 31st March, 2021, stood at Rs. 40,374 Cr and Rs. 23,386 Cr, with a growth of 4% and 4%, respectively, on a QoQ basis.
Mr. Dubhashi, “The merger of its three operating lending entities into one entity will enhance governance standards and the company also believe that the simplified structure will lead to operational efficiencies and cash flow synergies, thereby creating long term value for stakeholders. Through FY21, LTFS has shown the ability to deal with extremely tough conditions and has emerged strongly. With the recent capital raise, L&T Finance Holdings is suitably placed to deliver medium to long-term growth with increase in retailisation & well positioned to weather any short-term disruptions arising from second wave of Covid.”
