Key Rating Drivers & Detailed Description
Strengths:
- Strategic importance to, and expectation of strong support from, L&T
LTFH has demonstrated healthy growth and improved its return on equity over the last few fiscals. Due to L&T’s focus on building a strong services portfolio including IT, technology and financial services, the LTFH has been identified as a key focus area by the parent. L&T provides strategic oversight to the entity and has personnel from its senior management on the board of LTFH. These includes Mr. S. N. Subrahmanyan (Chairman & MD, L&T Ltd) is the Non-Executive Director and Chairperson and Mr. R Shankar Raman (CFO, L&T Ltd) is the Non-Executive Director. The parent also has representation in some of the key committees of the company, such as asset-liability and risk management committees. LTFH also benefits from the synergies, extensive experience and expertise of L&T, especially in infrastructure and real estate lending. The parentage of L&T, along with the brand name, also supports resource profile.
Furthermore, the parent provides capital support to the entity and has infused around Rs 5,700 crore (till March 2022; including ~Rs 1,900 crore in fiscal 2021). L&T has also provided a line of credit to the merged entity, LTFH, which could be used during contingency. Capital support from the parent, along with internal cash accrual, is expected to keep capitalisation adequate, with gearing not expected to exceed 7.5 times on a steady-state basis.
The ratings also factor in the strong support from the parent, as demonstrated by the articulation of its intention to (i) maintain strategic linkages and management oversight so that, among others, the merged entity, LTFH conducts its business in a manner such that it honours its stakeholder obligations in a timely manner (ii) maintain majority shareholding in LTFH, and (iii) provide growth and risk capital, if and when required.
The financial services business is expected to remain one of the key focus areas for L&T, which should continue to support LTFH.
- Strong and diversified presence across the lending business
LTFH, post-merger, has become the single unified retail focused operating NBFC. LTFH has built a strong market position, with assets under management (AUM) of Rs 78,734 crore as on September 30, 2023. Overall growth as on September 30, 2023 stood at 13% year-on-year on account of continued run down of wholesale portfolio while retail book continues to grow (33% year-on-year). The growth in the retail segment has also been supported by enhanced digital presence and usage of data analytics. Overall portfolio is well diversified with presence across various asset classes, such as Farmer Finance (farm equipment financing; 17% of AUM as on September 30, 2023), Two-wheeler Finance (12%), Rural Business Loans & Micro Finance Loans (28%), Personal Loans (8%), Home Loans (16%), Loan Against Property (LAP 4%), SME Finance (3%), Acquired Portfolio (0.9%), Infrastructure Finance (8%) and Real Estate Finance (4%).
As a part of its strategy, Lakshya 2026, to become a digitally enabled retail focused NBFC, LTFH will concentrate on scaling up and adding new products to existing retail book. LTFH plans to extensively make use of digitization in all the functional areas of sourcing, underwriting, disbursement, servicing and collections. As on September 30, 2023, business momentum has been strong across retail products, with retail portfolio at ~Rs 70,000 crore (year-on-year growth of 33% and quarter-on-quarter growth of 10%). Retail portfolio stood at 88% as September 30, 2023; which meets the company’s target of achieving a retail portfolio share of >80% by fiscal 2026. Retail portfolio showed strong quarterly disbursement of Rs 13,499 crore, which has grown by 32% year-on-year and 21% quarter-on-quarter aided by digital and data analytics. The company launched new products SME finance under its retail portfolio in fiscal 2022 and Personal Loans in fiscal 2021, which showed sustained growth momentum.
Wholesale portfolio continues to witness a declining trend with AUM falling to Rs 9,255 crore as on September 30, 2023, from Rs 41,731 crore as on March 31, 2022. LTFH had commenced accelerated sell down of its wholesale portfolio in Q3FY23. Based on change in business model, wholesale portfolio which was measured at amortized cost is now measured at fair value through profit and loss account. Consequent to change in business model in order to facilitate accelerated sell-down of wholesale finance, a one-time provision of Rs 2,687 crore was made during Q3FY23. The share of the wholesale portfolio has declined steadily to 12% as on September 30, 2023, from 48% as on December 31, 2021 and is expected to decline further.
Going forward, the growth in the business is expected to be driven by Retail (including SME Finance) segment over the near to medium term.
- Well-diversified resource profile
Resource profile is spread across capital markets and bank funding. The company is a large and frequent issuer in capital markets and has strong banking relationships. Of the total borrowing of Rs 76,557 crore as on September 30, 2023, non-convertible debentures (including retail), commercial paper, external commercial borrowings (ECB) and bank borrowings (including PSL and FIs) formed 40%, 6%, 2%, and 52%, respectively. The diversified resource profile is also reflected in the competitive average borrowing cost[1] of 6.8% for the half-year ended September 30, 2023 (annualized; 6.8% for fiscal 2023). The parentage and brand name of L&T, also supports resource profile.
Weakness:
- Moderate, albeit improving, asset quality
The asset quality of the lending portfolio remains moderate. Asset quality metrics have shown an inch up on account of second wave of Covid-19 pandemic, however the same is on improving trend on account of improvement in collection efficiency and controlled slippages. On a consolidated basis, gross stage 3 and net stage 3 assets improved further and stood at 3.3% and 0.8% as on September 30, 2023 (4.7% and 1.5% as March 31, 2023) for LTFH marked by strong collection efficiency across businesses. PCR was 76% as on the same date.
In the Infrastructure portfolio, with resolution of legacy delinquent accounts, gross stage 3 assets continue to improve. LTFH has been focusing on accelerated sell down of its wholesale portfolio which stood at 12% of AUM as on September 30, 2023, down from 42% as on September 30, 2022. LTFH had created one time provision of Rs 2,687 crore (Q3FY23) to facilitate accelerated sell down of the wholesale portfolio. Furthermore, the higher focus on retail loans, stronger underwriting and collection practices, better early warning systems, and focus on digitisation and data analytics, should continue to support improvement in asset quality. LTFH also has a specialised team to oversee recovery from stressed assets. More so, increased proportion of retail assets in the portfolio has imparted granularity to the overall AUM.
Management’s ability to keep the portfolio quality in check will remain a monitorable. Performance of the wholesale lending portfolios will also be closely monitored given the chunkiness in ticket size and sensitivity of borrowers in these segments to an environment of prolonged stretch in liquidity. The wholesale loan book as a proportion to the overall lending book has however seen a significant reduction and is expected to decline further, on account of growth in the retail segment and rundown of the wholesale book. Any significant deterioration in asset quality, leading to a sharp and continued decline in profitability, will be closely monitored.
[1] Borrowing cost = Annualised interest cost during the period divided by the average of outstanding borrowings at the beginning and the end of the period