L&T Finance Holdings: Possible NPA shocks dampen outlook, stock falls

Watch out for high exposure to non-retail loans of the company

Just when things were turning favourable for L&T Finance Holdings — a mid-sized non-banking financial company (NBFC) promoted by India’s infrastructure giant Larsen & Toubro — the liquidity crunch of 2018 has put a spanner in the works. 

Consequently, the L&T Finance stock lost about 20 per cent last year and analysts remain cautious.

Exposure to troubled names such as IL&FS and Supertech Developers (New Delhi-based real estate firm) could spell asset quality issues for L&T Finance. 

These loans add up to about Rs 2,600 crore, which is about 3 per cent of its total loan book or 5 per cent of the financier’s wholesale loan exposure. Given how IndusInd Bank recently increased its provisioning towards loans to IL&FS, mainly the parent entity, investors could expect another quarter of elevated provisioning for L&T Finance.

The firm has worked hard to reduce the share of wholesale loans, or non-retail business loans, from 63 per cent two years ago to 52 per cent in the September quarter (Q2). But even at current levels, its share of wholesale or non-retail loans to its total book is the highest among front-line NBFCs. 

This is why brokerages such as Edelweiss and Emkay Global Financial Services choose to remain cautious, despite having a positive view on the stock. 

“We believe L&T Finance’s large lumpy loans, and the recent growth in corporate developer and high wholesale book, are likely to continue being an overhang for the stock in the near-term,” note analysts at Edelweiss. On the other hand, Emkay Global has raised its credit cost estimates for FY19 to 2.1 per cent from 1.6 per cent, and for FY20 to 1.8 per cent from 1.5 per cent. Earnings estimates have also been revised downward by 9.2 per cent and 4.3 per cent for FY19 and FY20, respectively. 

Additionally, analysts at Sharekhan say its efforts to expand in the rural markets could put pressure on profitability. “Near-term hardening of interest rates may impact NIM, as the company may look to build scale and market share in the rural business vertical,” the brokerage notes. Rural markets now account for 24 per cent of total loan assets. 

For investors, this means that while the firm could possibly expand its return on equity to 18 per cent by FY20 (from 13 per cent in FY18), it remains to be seen whether it will touch the upper limit target of 20 per cent.