Exposure to crisis-hit IL&FS takes a toll on L&T Finance Holdings' stock

Company management though believes default probability is low, and overall liquidity levels are satisfactory

Nowadays, any association with defaulting companies is taken seriously by investors. Not surprising then, its exposure to step-down subsidiaries of IL&FS group and SuperTech pulled down L&T Finance Holdings’ (LTFH’s) stock by 7.6 per cent on Thursday, even as the company posted strong September-2018 quarter (Q2) numbers a day earlier post market hours.

For Q2, LTFH clocked 24 per cent year-on-year growth in loan book to Rs 912 billion and its net profit surged 66 per cent to Rs 5.6 billion. But, it’s Rs 18 billion exposure to SPVs of IL&FS Transportation Networks (IL&FS’ subsidiary) and Rs 8 billion to SuperTech, was more disappointing for investors. The worry is not without reason. With these loans accounting for about three per cent of total advances, it would have an impact on LTFH in case of a default.

The management however, does not see any defaults. “Cash flows from projects of SPVs of ITNL are sufficient to take care of debt repayments. We have full control of the escrow account, debt service and other reserves. There is also a fall-back to government guarantees and termination payments for the entire outstanding. Thus, we are confident of entire recovery,” says Dinanath Dubhashi MD & CEO at LTFH. The exposure to SuperTech is also secured, and the company expects credit cost to remain at current levels. An added comfort, though marginal, is that LTFH has made an Rs 2 billion extra provision for any unexpected events.

 

On the liquidity front too, there seems little to worry for now. The asset-liability management (ALM) figures indicate LTFH has more assets maturating in the short term than its debt obligations. LTFH has also maintained Rs 103 billion of liquidity cushion, and has an Rs 20 billion back up from its parent – L&T. Thus, any liquidity issue is unlikely to hinder its targeted loan book growth of 20-22 per cent, say analysts.

With more assets (than liabilities) getting repriced over the next one year, profit margins should remain firm. Comfort also stems from increased focus on more-profitable rural loans, besides home loan. Share of rural loan rose to 24 per cent in Q2 from 17 per cent a year back.

Analysts thus believe, negatives are priced in. But, given the weak sentiment towards NBFCs, waiting for the clouds to clear could be a better option.