Detailed Rationale

CRISIL Ratings withdrawn its outstanding ratings on bank facilities and debt instruments of L&T Finance Ltd (LTF).

 

CRISIL Ratings has also withdrawn its ‘CRISIL AAA/Stable’ rating non convertible debentures amounting to Rs 6555 crore of the company (See annexure 'Details of Rating Withdrawn') as CRISIL Ratings has received independent confirmation that these instruments have been redeemed. The withdrawal is in line with CRISIL Ratings' withdrawal policy.

 

Rating action is driven by the culmination of the scheme of merger of its operating lending entities L&T Finance Ltd (LTF), L&T Infra Credit Ltd (LTICL) and L&T Mutual Fund Trustee Ltd (LTMFTL), with LTFH post requisite approvals from various statutory and regulatory bodies. LTFH will act as single unified retail operating NBFC and has applied for ICC registration.

 

The rating action follows receipt of the required documentation in line with CRISIL Ratings’ withdrawal policy.

 

The ratings continue to reflect the strong and diversified presence of the merged entity across the lending business with rise in retail portfolio mix and a well-diversified resource profile. The ratings also factor in the improved granularity of the loan book with increase in the share of retail loans (88% as on September 30, 2023, 50% as on December 31, 2021), which is in line with the company’s strategy (Lakshya 2026) of increasing retail loan book to >80% by 2026.  It also centrally factors in the expectation of strong support from the parent, Larsen and Toubro Limited (L&T; rated 'CRISIL AAA/Stable/CRISIL A1+'). These strengths are partially offset by moderate asset quality.

Analytical Approach

For arriving at the rating, CRISIL Ratings considers the business and financial risk profile of L&T Finance Holdings Limited (LTFH, the merged entity; including LTF and LTICL). CRISIL Ratings has also factored in the strong support from the parent, Larsen & Toubro Ltd (L&T; rated 'CRISIL AAA/Stable/CRISIL A1+'), given the strategic importance of the entity to the parent along with the shared brand name. L&T is the majority shareholder of LTFH, with a shareholding of 66.02% as on September 30, 2023.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

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 association with L&T’s 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 association with L&T’s brand name 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

Liquidity: Superior

The consolidated asset-liability maturity profile as on September 30, 2023, reflects cumulative positive liquidity gaps in all buckets up to one year. LTFH generally maintains liquidity to meet obligations coming up over the next 30 days. As on September 30, 2023, total debt repayment (including interest) was Rs 8,476 crore for the next three months (until December 31, 2023). Against this, liquidity of Rs 18,182 crore was available in the form of cash and liquid investments (Rs 11,852 crore) and unutilised bank limits (Rs 5,330 crore). Support from the parent is also available in the form of a line of credit (Rs. 1,000 crore). 

 

Environment, Social, and Governance (ESG) profile

The ESG profile of the LTFH group supports its already strong credit risk profile.

 

The ESG profiles of financial institutions typically factor in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base, and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, lending decisions may have a bearing on environment and other sustainability related factors.

 

The group has demonstrated an ongoing focus on strengthening various aspects of its ESG profile.

 

Key ESG highlights:

• The group has integrated ESG in risk management framework across key businesses in fiscal 2022, and targets to incorporate that for all businesses by fiscal 2023.
• The group had raised Rs 200 crore through a Sustainability Linked Rupee Loan in fiscal 2022.
• The group aims to achieve carbon neutrality by fiscal 2035 and has been working towards decarbonising operations. It reduced fiscal 2022 estimated carbon footprint by around 20%.
• CSR activities are primarily focused on digital financial inclusion for women empowerment, disaster management, and other projects.
• Half of the board members are independent directors, with segregation in chairman and executive positions. A dedicated investor grievance redressal mechanism is in place and the disclosures put out by it are extensive.

 

There is growing importance of ESG among investors and lenders. LTFS group’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high share of foreign investors as well as access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes LTFH will remain highly strategically important to L&T and continue to benefit from the latter’s strong support over the medium term. Furthermore, LTFH is expected to maintain its strong and diversified presence across the financial services space and a well-diversified resource profile.

Rating Sensitivity factors

Downward factors:

• Weakening in L&T's credit risk profile by one notch could lead to a similar rating change for the merged entity LTFH
• Any material change in the shareholding or support philosophy of L&T for the merged entity LTFH
• Weakening in the capital structure of the merged entity LTFH, with gearing exceeding 7.5 times on a steady-state basis, and/or deterioration in asset quality leading to a substantial decline in profitability

About the Company

L&T Finance Ltd (LTF) is an NBFC incorporated in 1993 and wholly held by LTFH. Effective April 12, 2021, L&T Infrastructure Finance Company Ltd (LTIFC) and L&T Housing Finance Ltd (LTHF) merged with LTF. It had AUM of Rs 76,411 crore as on September 30, 2023, comprising rural business loans & microfinance (28% of total AUM), farm equipment loans (17%), two-wheeler loans (12%), consumer loan (8%), home loans (16%), LAP (4%), SME Finance (3%), acquired portfolio (1%), real estate financing (4%), infrastructure loans (5%) and balance in defocused. The gross and net stage 3 assets were 3.4% and 0.8%, respectively, as on September 30, 2023. In fiscal 2023, the company reported a loss of Rs 505 crore on total income of Rs 12,596 crore against a profit of Rs 808 crore and Rs 11,445 crore, respectively, for the previous fiscal. For six months ended September 2023, the company reported a profit of Rs. 979 crore on a total income of Rs. 6,548 crore as against a Rs. 596 crore and Rs. 6,026 crore for corresponding period in the previous fiscal.

Any other information: Not Applicable

Annexure - List of Entities Consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
L&T Finance Holdings Ltd	Full	Holding company
L&T Mutual Fund Trustee Ltd*	Full	Subsidiary
L&T Financial Consultants Ltd	Full	Subsidiary
L&T Finance Ltd*	Full	Subsidiary
L&T Infra Investment Partners Advisory Pvt Ltd	Full	Subsidiary
L&T Infra Investment Partners Trustee Pvt Ltd	Full	Subsidiary
L&T Infra Credit Ltd*	Full	Subsidiary
Mudit Cement Pvt Ltd	Full	Subsidiary
L&T Infra Investment Partners	Proportionate	Subsidiary

*Ceased to exist from date December 04, 2023