Street cheers L&T Finance's clean-up act; net interest income up 51%

Net interest income up 51 per cent, net profit rises 71 per cent in first quarter

Shares of L&T Finance on Monday recovered the entire 10 per cent it had lost in the past six months, on Monday following strong June 2018 quarter (Q1) results announced late-Friday. Yet, analysts see further upside as its balance sheet clean-up will support earnings growth.

No doubt, the company put up a stellar show with its assets under management (AUM; loan book) and net interest income (NII) growing by 24 per cent and 51 per cent, year-on-year, respectively. This coupled with a 13 per cent fall in credit costs, saw net profit surge 71 per cent year-on-year in Q1.
 
Importantly, it started adopting IND-AS accounting norms from Q1, which involves stricter recognition of non-performing assets (NPAs or bad loans) based on future expected credit losses (considering past trends). L&T Finance thus, recognised its entire wholesale legacy stressed assets of about Rs 50 billion (11 per cent of wholesale book) as stage-3 (a category under IND-AS comprising NPAs and stressed accounts). Additional provisioning of Rs 18 billion required for these accounts (had already provided Rs 12 billion in the past) has been reduced upfront from reserves and surplus. The wholesale book accounted for almost half of AUMs in Q1.

“With the entire stress recognised and fully provided for, asset quality is only going to improve. Besides, we have provided Rs 920 million over and above the stage-3 provisions,” said Dinanath Dubhashi, MD and CEO of L&T Finance. Despite this clean-up, the stage-3 (gross NPA) ratio is down sharply at 7.9 per cent versus 11.7 per cent a year back, and provision coverage was healthy at 62 per cent as of June 2018.
 
“Despite IND-AS migration, asset quality remained strong, which is a significant positive. It has taken the entire expected credit loss on its legacy infra (wholesale) portfolio, and provisioning requirement on this book, for now, is complete. This would improve its earnings,” says Lallitabh Srivastava, AVP at Sharekhan, who believe stock valuations are still reasonable. He expects 18-20 per cent upside from the current levels.
 
Besides, focus on retail segments (rural and housing), with over 20 per cent growth in the total AUM and expected downturn in bad loans (as interest reversal will be contained) would propel L&T Finance’s earnings.