Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/CRISIL PPMLD AAAr/Stable/CRISIL A1+' ratings on the debt instruments of L&T Infra Credit Limited (LTIC, erstwhile L&T Infra Debt Fund Limited; part of the L&T Financial Services [LTFS] group). The LTFS group includes L&T Finance Holdings Limited (LTFH; holding company of LTFS group) and its subsidiaries and associates. Rating on Rs 445 crore non-convertible debentures has been withdrawn given no outstanding again the same, in line with CRISIL Rating’s withdrawal policy. 

 

The ratings continue to reflect the strong and diversified presence of the LTFS group across the financial services space and a well-diversified resource profile. The ratings favourably factors in improved granularity of loan book with increase in share of retail loans (54% as on June 30, 2022, 45% as on June 30, 2021), which is in line with 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 & Toubro Ltd (L&T; rated 'CRISIL AAA/Stable/CRISIL A1+'). These strengths are partially offset by moderate asset quality.

 

In line with the relief measures announced by the Reserve Bank of India (RBI) during the Covid-19 pandemic, the group had provided moratorium to its borrowers. Though collections declined during the initial months of the first wave and second wave, they improved subsequently. During the third wave, there was limited impact on collections. However, any adverse change in payment discipline of borrowers may lead to higher delinquencies.

 

Under the one time restructuring (OTR) schemes announced by the RBI dated August 6, 2020 and May 5, 2021, LTFS had 2.3% of advances restructured as on June 30, 2022. Nevertheless, the ability to manage collections and asset quality is a key monitorable.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of LTFH and its subsidiaries and associates. This is because all these entities have significant operational and management linkages and operate under a common brand. CRISIL Ratings has also factored in the strong support from the parent, L&T, given the strategic importance of the group to the parent along with the shared brand name. L&T has majority shareholding in LTFH, at 66.23% as on June 30, 2022.

 

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

The LTFS group 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 LTFS group has been identified as a key focus area by the parent. L&T provides strategic oversight to the group and has personnel from its senior management - Mr. S. N. Subrahmanyan (CEO & MD, L&T Ltd) is the Director and Chairperson and Mr. R Shankar Raman (CFO, L&T Ltd) is the Non-Executive Director on LTFH’s board. The parent also has representation in some of the key committees of the group, such as asset-liability, risk management and credit committees. The group also benefits from the synergies and expertise of L&T, especially in infrastructure and real estate lending. The shared name also supports the liabilities of the LTFS group.

 

Furthermore, the parent provides capital support to the LTFS group and has infused around Rs 5,700 crore (till March 2022; including ~Rs 1,900 crore in fiscal 2021). L&T has also provided an ongoing line of credit to the LTFS group, which could be used during contingency. Capital support from the parent, along with internal cash accrual, is expected to keep capitalisation for the group 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 LTFS group 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.

 

Financial services business is expected to remain one of the key focus areas for L&T, which should continue to support the LTFS group.

 

Strong and diversified presence across the financial services space

LTFH is the holding company for the financial services business of L&T and has majority stake in various subsidiaries that operate in the lending and investment management business. Under the lending business, the group has built a strong market position, with assets under management (AUM) of Rs 88,078 crore as on June 30, 2022. The portfolio is diversified with presence across various asset classes, such as farm equipment financing (13% of AUM as on June 30, 2022), two-wheeler financing (9%), rural business loans & micro finance loans (16%), consumer loans (3%), home loans (10%), LAP (3%), infrastructure finance (34%) and real estate finance (11%). The group recently launched SME Finance in fiscal 2022 (0.1%). The remaining 1% is the defocused portfolio (consisting of products where the book is being run down) comprising the small retail portfolio (identified earlier), structured finance group, and DCM portfolio (classified since June 30, 2019). While the portfolio had registered a compound annual growth rate of around 20% over the five fiscals through 2019, it remained flat during fiscal 2020 and de-grew by 4% during fiscal 2021on account of a difficult macro environment. It further de-grew by 6% during fiscal 2022, on account of decline in wholesale business; heavy pre-payments in infrastructure finance and in real estate finance the group continues to mainly focus on tranche disbursements of existing projects. Retail business has however witnessed a growth of 10% during fiscal 2022 aided by higher disbursement in retail business. The growth in the business is expected to be driven by Retail (including SME Finance) segment over the near to medium term.

 

Under the non-lending business, the LTFS group currently is primarily present in the investment management business with an average (quarterly) AUM of Rs 71,571 crore as on June 30, 2022. However, LTFH has entered into a definitive agreement with HSBC Asset Management (India) Private Limited to sell 100% equity shares of L&T Investment Management Limited (a wholly owned subsidiary of LTFH, which carries out AMC business), subject to regulatory approvals. This is in line with strategic objective of LTFH of unlocking value from its subsidiaries to strengthen its balance sheet. The group sold its wealth management business to IIFL Wealth Finance Ltd (rated ‘CRISIL PP-MLD AAr/Stable/CRISIL A1+’) in April 2020.

 

Over the medium term, the group as part of its Lakshya 2026 strategy, intends to continue its focus on increasing retalization by growing its existing retail businesses and adding newer products. The share of the wholesale portfolio has declined steadily to 46% as on June 30, 2022, from 57% as on March 31, 2021; the management intends to reduce the share further in the coming years. Apart from growth in the rural and retail housing finance portfolios, this shift in proportion is supported by a higher sell-down / pre-payments in the infrastructure financing book (which also supports higher fee income) and limited disbursements towards existing projects in real estate financing. While the group continues to use its (and L&T’s) expertise in the infrastructure finance segment to underwrite loans, a majority of the disbursements is typically sold down. Moreover, the focus will continue to be on operational projects in the infrastructure segment.

 

Well-diversified resource profile

Resource profile is spread across capital markets and bank funding. The group is a large and frequent issuer in capital markets and has strong banking relationships. Of the total borrowing of Rs 81,778 crore as on June 30, 2022, non-convertible debentures (including retail), commercial paper, external commercial borrowings (ECB) and bank borrowings formed 45%, 8%, 4%, and 43%, respectively. The diversified resource profile is also reflected in the competitive average borrowing cost[1] of 6.8% for quarter ended June 30, 2022 (annualised; 6.8% for fiscal 2022). The parentage of L&T also supports resource profile.

 

Weakness:

Moderate 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 4.1% and 1.9%, respectively, as on June 30, 2022 compared to 6.7% and 2.3% respectively as on June 30, 2021. In real estate portfolio, the gross stage 3 increased on account of one large ticket slippage.

 

In the infrastructure portfolio, with resolution of legacy delinquent accounts, gross stage 3 assets continue to be on improvement trend. However, the share of wholesale portfolio remains high at 45% of AUM and the ticket size remains chunky given the nature of these asset segments. Nevertheless, the infrastructure lending portfolio is unlikely to see any expansion as the company plans to continue to operate on an asset / capital light model with focus on renewable and road projects. In the real estate portfolio, there will not be any new project sanctions and the company will continue to concentrate on existing projects and collections with the objective of reduction of the portfolio. LTFS is also exploring divestment of the real estate finance business. Furthermore, the higher focus on retail loans, stronger underwriting and collection practices, better early warning systems, and focus on digitisation, should support improvement in asset quality from current levels. Further, the group has a specialised team to oversee recovery from stressed assets.

 

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. Any significant deterioration in asset quality, leading to a sharp and continued decline in profitability from the current level, 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 June 30, 2022, reflects cumulative positive liquidity gaps in all buckets up to one year, after factoring in the line of credit from the parent. The group generally maintains liquidity to meet obligations coming up over the next 30 days. As on June 30, 2022, total debt repayment (including interest) was Rs 8,537 crore for the next three months (until September 30, 2022). Against this, liquidity of Rs 10,137 crore was available in the form of cash and liquid investments (Rs 7,770 crore) and unutilised bank lines (Rs 2,368 crore). Further, support from the parent is available in the form of a line of credit. 

Outlook: Stable

CRISIL Ratings believes LTFS group will remain highly strategically important to L&T and continue to benefit from the latter’s strong support over the medium term. Furthermore, it 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

• Decline in L&T’s credit risk profile by one notch, could lead to a similar rating change for LTFH and its subsidiaries
• Any material change in the shareholding or support philosophy of L&T for the LTFS group
• Weakening of the group’s capital structure, 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 LTFS Group

The group has a diversified product portfolio with presence in the wholesale as well as retail finance segments. Over the past couple of years, the management has exited some lending asset classes and currently caters to limited segments such as farm equipment finance, two-wheeler finance, micro loans, consumer loans, housing and real estate finance and infrastructure finance. As part of this strategy, the supply chain financing portfolio was sold to Centrum Financial Services Ltd in fiscal 2019. Furthermore, structured finance group and DCM were identified and classified as part of the defocused book during the quarter ended June 30, 2019. The group also has presence in the investment management business, however that is set to be sold to HSBC Asset Management (India) Private Limited. As on June 30, 2022, LTFH’s consolidated networth was Rs 20,193 crore.

 

In fiscal 2022, on a consolidated basis, profit after tax (PAT) was Rs 1,049 crore on total income of Rs 12,324 crore, against Rs 949 crore and Rs 13,753 crore, respectively, for the previous fiscal.

 

For the quarter ended June 30, 2022, PAT and total income were Rs 261 crore and Rs 3,136 crore, respectively, against Rs 177 crore and Rs 3,116 crore, respectively, during the corresponding period previous fiscal.

About L&T Infra Credit Ltd

L&T Infra Credit Ltd (LTIC; erstwhile L&T Infra Debt Fund Ltd) was incorporated as an infrastructure debt fund (IDF-NBFC) under the Companies Act and operated under the regulation and supervision of RBI. The company received its certificate of registration as an IDF-NBFC from the RBI on October 21, 2013. As per regulations, IDF-NBFCs can be held either by a bank or an infrastructure finance company (IFC) (as a sponsor with maximum 49% equity stake and minimum 30%). L&T Infrastructure Finance Company Ltd (LTIFC), an IFC as sponsor, held 48.36% stake in LTIC, with the remaining stake being held by other LTFS Group entities – L&T Finance Ltd (LTF) at 28.28% and L&T Housing Finance Ltd (LTHF) at 23.36% as on March 31, 2021. In April 2021, the scheme of amalgamation by way of merger by absorption of LTIFC and LTHF with LTF was completed post receipt of all requisite approvals. Consequently, effective April 12, 2021, LTF became the largest shareholder with 76.64% stake in LTIC. The remaining stake continues to be held by LTFH. Since with merger of LTIFC with LTF, the IFC status of sponsor ceases to exist, the company has applied to Reserve Bank of India for change in the NBFC classification to NBFC – Investment and Credit Company (NBFC-ICC) from an IDF-NBFC. LTIC had AUM of Rs 6,456 crore as on June 30, 2022, entirely into infrastructure finance. Stage 3 assets continue to remain nil. Networth and gearing were Rs 1,287 crore and 5.7 times, respectively, as on June 30, 2022 (Rs 1,324 crore and 5.9 times, respectively, as on March 31, 2021). For fiscal 2022, the company reported a PAT of Rs 4 crore on total income of Rs 731 crore as against a PAT of Rs 63 crore and total income of Rs 894 crore in the previous fiscal. For the quarter ended June 30, 2022, the company reported a loss of Rs 16 crore and total income of Rs 154 crore, compared with a PAT of Rs 4 crore on total income of Rs 204 crore for corresponding period previous fiscal.

Any other information: Not applicable