L&T Finance's asset stress rises

But improving profits of smaller subsidiaries are likely to sustain

L&T Finance Holdings’ (L&TFH) results for the March quarter, despite beating consensus earnings estimates, have cause for worry as well as rejoicing. Consolidated net profit was Rs 187 crore (up 7.5 per cent a year ago), 22 per cent higher than Bloomberg consensus estimates (analysts were expecting profits to fall 12 per cent to Rs 153 crore). Though the quarter marked an improved performance of smaller businesses such as housing finance and investment management, its core businesses, L&T Finance (retail and mid-market or mid-corporate finance) and L&T Infra Finance (wholesale finance) reported five per cent and 13 per cent fall in net profit, respectively, to Rs 94 crore each. Improving profitability of investment management (net profit of Rs 1 crore versus net loss of Rs 27 crore in year-ago quarter) and housing finance (net profit of Rs 8 crore versus net loss of Rs 0.9 crore in the March 2013 quarter) businesses aided profit.

The company expects the two smaller businesses to sustain their performance. "So long as we keep costs stable and grow assets under management (AUM), our investment management profitability will be sustainable. The Rs 8-crore profit posted by housing finance business could be a quarterly run-rate," says N Sivaraman, president and whole-time director, L&TFH.

On the other hand, rising credit costs (due to worsening assets) and cautious lending were key reasons behind the weak show by core businesses. For the quarter, L&TFH's gross non-performing assets (NPA) rose 115 basis points year-on-year and 25 basis points sequentially to 3.2 per cent, while net NPAs were up 100 basis points year-on-year and 24 basis points sequentially to 2.29 per cent. Construction equipment, commercial vehicles and corporate and restructured assets pulled down the overall asset quality. L&TFH says it made voluntary provisions of Rs 195 crore over and above the requirements of the Reserve Bank, pushing up credit costs.

Loan growth has come off from 30 per cent plus to 20 per cent in the quarter. This moderation began in the December quarter, when the loan book grew 21 per cent. The slower growth is a function of high-base effect, a weak macro scenario and cautious lending.

"While growth may be slightly muted in FY15, we expect to maintain an overall book growth at 15-20 per cent. Improved margins with a stable operating expense, lower credit costs and increase in gearing are expected to result in better return ratios for the business," L&TFH said. Rural lending, vehicle and housing finance, with a pickup in wholesale loans were key drivers of the loan book in the March quarter.

Against this backdrop, most analysts remain bearish on the stock amid expectations of lower loan growth and higher asset stress.

"We expect assets to remain under pressure, both for infrastructure and vehicle financing, and accordingly build in lower interest income and higher provisioning expense. The stock is trading at a consolidated price/adjusted book value of 1.8 times for FY15", says Yogesh Hotwani, financials analyst at IndiaNivesh Securities.

The company says it is working on keeping asset quality in check. N Sivaraman adds, "For the year as a whole, we expect stable to reducing credit costs, but they will be subject to quarterly volatility. Our focus is on improving collections and overall asset quality."

Of the nine analysts polled by Bloomberg in 2014, four have neutral and the rest sell. Their average target is Rs 64.7, six per cent lower from the current level of Rs 68.8.