Hold L&T Finance Holding, target price Rs 59: ICICI Securities

ICICI Securities maintains a hold rating on L&T Finance Holding with a target price of Rs 59.

L&T Finance Holdings reported its fourth quarter (Q4FY20) PAT at Rs 3.9 billion (compared to quarterly run-rate of Rs 5.6-6 billion) – as it has created additional provisions of Rs 3.14 billion (Rs 2.09 billion for RBI-required Covid-19 and enhanced provision of Rs 1.05 billion). This, coupled with existing macro prudential buffers, takes total provisions to 67 bps of assets.

Coming from a high-growth phase, performance in MFI ( more than 5 times in size), two-wheelers (more than 3 times) and real estate ( over 4 times) since FY16, the brokerage believes the provisioning will not be sufficient and is building-in higher costs for FY21E. The company is smugly placed on liquidity and the management is rising to the occasion with disproportionate focus on collections and tightening credit filters. However, the brokerage is sceptical about emerging pockets of concerns – construction financing, MFI, LAP, infrastructure, etc. and, till comfort emerges on its key operating segments, valuations will settle lower.

The share price moved down by -0.19 per cent from its previous close of Rs 52.05. The last traded stock price is Rs 51.95. Incorporated in 2008, L&T Finance Holdings has a market cap of Rs 10435.16 crore.

Investment Rationale

Given exposure of 50 per cent to vulnerable operating segments, the brokerage has built in a credit cost of 310bps/230bps in FY21E/FY22E (despite carrying a contingency buffer). L&T Finance, given its credit rating (AAA), parentage, PSL benefits and well-matched ALM – is able to attract liquidity. It is carrying liquidity of Rs 155 billion including liquid assets of Rs 85 billion, undrawn bank lines of Rs 50 billion and backup line of Rs 20 billion from L&T. Merging of various businesses in L&T Finance will help it manage liquidity and processes in a much better way.

Financials

For the quarter ended March 31, 2020, the company reported consolidated crore of Rs 3355.24 crore, down -7.59 per cent from last quarter crore of Rs 3630.64 crore and up 1.54 per cent from last year same quarter crore of Rs 3304.23 crore. The company reported net profit after tax of Rs 384.86 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 63, 72 per cent stake in the company as of March 31, 2020, while FIIs held 10.60 per cent, DIIs held 4.65 per cent and public and others 20.46 per cent.