Rating Rationale
April 01, 2020 | Mumbai
L&T Finance Holdings Limited
Rated amount enhanced
 
Rating Action
Rs.500 Crore Non Convertible Debentures CRISIL AAA/Stable (Reaffirmed)
Rs.2000 Crore Preference Shares CRISIL AAA/Stable (Reaffirmed)
Rs.2500 Crore Commercial Paper (Enhanced from Rs.2000 Crore)  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' rating on the debt instruments of L&T Finance Holdings Limited (LTFH; holding company of the L&T financial services [LTFS] group). The LTFS group includes LTFH and its subsidiaries and associates.
 
The rating reflects the LTFS group's strong and diversified presence across the financial services space and a well-diversified resource profile. It also centrally factors in expectation of strong support from the parent, Larsen and Toubro Ltd (L&T; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'). These strengths are partially offset by moderate, albeit improving, asset quality.
 
The 21-day nationwide lockdown declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have near-term impact on disbursements and collections of companies. While most of the measures are applicable till April 14, 2020, their revocation will be contingent on further directives from the central government and the extent of spread of Covid-19. Any delay in return to normalcy will put pressure on collections and asset quality metrics. Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels. On the liabilities side, although moratorium on bank facilities for 3 months, as permitted by the Reserve Bank of India (RBI), may provide some respite to companies (if granted by lenders and availed by borrowers), there could be challenges for those with high share of capital market borrowings as repayments will have to be made while collections, on the other hand, will remain low. CRISIL will continue to monitor the situation closely for all its rated companies.

LTFH, through its lending entities operates in diversified retail and corporate segments, wherein some segments may witness challenges with income streams being affected by the lockdown. Of the various retail segments that LTFS group caters to, micro loans segment is expected to be the most impacted during the lockdown because collection of repayments involves visit to households, such borrowers typically have weak credit profiles and their income generation activities would be disrupted. On the other hand, home loan segment is expected to be the least affected as sizeable proportion of the borrowers are salaried and collections are through auto-debit instructions.
 
In terms of liquidity, LTFS (consolidated) currently has adequate liquidity to meet all obligations over the next 3 months till June 2020.

CRISIL has also taken note of the announcement by LTFH on the scheme of amalgamation by way of merger by absorption involving amalgamation of L&T Infrastructure Finance Company Limited (LTIFC) and L&T Housing Finance Limited (LTHFC) with L&T Finance Ltd (LTFL). The scheme has received board approval, however is subject to approval from NCLT and other approvals, as may be required. The proposed merger will not have an impact on the rating, given the analytical approach as outlined below.

Analytical Approach

For arriving at the rating, CRISIL 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 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 is the majority shareholder of LTFH, with a shareholding of 63.86% as on December 31, 2019.

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 (ROE) over the last few years. 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 for the parent. As a result, L&T provides strategic oversight to the group and has personnel from its senior management, including the chief financial officer, on LTFH's board. L&T also has representation in some of the LTFS group's key committees, 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 3,779 crore to date (including Rs 2,000 crore in fiscal 2018). It has also provided an ongoing line of credit of Rs 2,000 crore to the LTFS group, which could be used in times of contingency. Capital support from the parent, along with internal cash accrual, is expected to keep capitalisation of the LTFS group adequate, with gearing (debt/networth) expected at around 7.0 times - not exceeding 7.5 times - on a steady-state basis.
  
The rating also factors in the strong support from the parent L&T, demonstrated by the articulation of its intention to (i) maintain strategic linkages and management oversight so that, among others, 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 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 holds a majority stake in various subsidiaries that operate in the wholesale lending (consisting of infrastructure finance, structured finance group, debt capital markets [DCM] and real estate finance), mortgage finance (home loans and loans against property [LAP]), rural lending (farm equipment, two-wheelers, and micro loans), asset management, and wealth management businesses. In the wholesale lending segment, structured finance loans and DCM have been classified as defocused by LTFS starting from the quarter ended June 30, 2019. In the lending space, the LTFS group has built a strong market position, with assets under management (AUM) of Rs 99,453 crore as on December 31, 2019. The portfolio has had a compound annual growth rate of 20% over the five fiscals through March 31, 2019. The growth in the focused loan book has slowed down to 14% year-on-year as on December 31, 2019 and is expected to remain moderate in the near term.
 
Furthermore, the portfolio is diversified, with presence across various asset classes, such as infrastructure finance (31% of AUM as on December 31, 2019), Infra Debt Fund (IDF, 9%), real estate finance (16%), home loans (8%), LAP (4%), micro loans (13%), two-wheeler financing (7%), and farm equipment financing (8%). The group is also planning to foray into personal loans and SME business loans and has been running pilots. The remaining 6% 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).
 
Under the non-lending businesses, the LTFS group had sizeable average (quarterly) AUM of Rs 71,587 crore in the asset management business and closing assets under service of Rs 25,405 crore in the wealth management businesses as on December 31, 2019. In August 2019, LTFH entered into an agreement to sell its entire stake in L&T Capital Markets Ltd (LTCM; carrying out the wealth management business of the group) to IIFL Wealth Finance Ltd (rated 'CRISIL A1+') for a consideration amount of Rs 230 crore, plus the cash and cash equivalents balance of LTCM. The transaction is subject to regulatory approvals.
 
Going forward, the LTFS group intends to focus on growing its retail business and concentrate to grow its fee-based income to supplement the net interest margins (NIMs). Consequently, it expects higher growth in the rural and home loan portfolios. The share of the wholesale portfolio (excluding the IDF loan portfolio) has been declining steadily, from 62% as on March 31, 2016, to 50% as on December 31, 2019; the management intends to reduce the share further in the coming quarters. This shift in proportion is supported by a higher sell-down strategy in the infrastructure financing book (which also supports higher fee income) as well as through growth in the retail and housing finance portfolios. 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 are now sold down. Moreover, the focus will continue to be on operational projects in infrastructure segment. The share of the lending portfolio of L&T Infra Debt Fund Ltd (IDF portfolio) has increased from 4% to 8% (of the total consolidated lending portfolio) over the three fiscals through March 31, 2019. The IDF portfolio comprises projects with an average of five years of satisfactory operations and around 70% of the portfolio is either backed by a tripartite agreement or guaranteed/ supported by a government/ state authority. Furthermore, with the classification of structured finance group and the DCM book as defocused products, no additional disbursements are being done in these portfolios, and hence, their rundown should also support an increase in the share of the retail book.
 
* Well- diversified resource profile
The resource profile is diversified 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 92,997 crore as on December 31, 2019, non-convertible debentures (NCDs; including retail), commercial paper, external commercial borrowings (ECB) and bank borrowings formed 43%, 9%, 3%, and 43%, respectively. The group has raised retail NCDs of Rs 2,408 crore and ECB of around Rs 3,013 crore recently.
 
The diversified resource profile is also reflected in the competitive average borrowing cost1 of 8.45% in fiscal 2019 (8.25% annualised for the nine months ended December 31, 2019), which is lower than most peers. L&T's parentage also supports the resource profile.
 
Weakness:
* Moderate, albeit improving, asset quality
The asset quality of the lending portfolio remains moderate. On a consolidated basis, gross stage 3 and net stage 3 assets stood at 5.94% and 2.67%, respectively, as on December 31, 2019. This is primarily contributed by higher gross stage 3 assets in the infrastructure portfolio due to legacy delinquent accounts.
 
In the wholesale portfolio, the ticket size remains chunky given the nature of these asset segments. Also, most of the segments in the retail portfolio have witnessed high growth in the last three years. However, with the management bringing in change in its strategy in terms of focusing on renewables and roads (for infrastructure finance), higher focus on retail loans, stronger underwriting and collection practices, better early warning systems, and focus on digitisation, the asset quality has improved over the past few quarters. The group has formed a specialised team to oversee recovery from stressed assets.
 
The management's ability to keep the portfolio quality in check while scaling it up will remain a monitorable. Moreover, performance of the wholesale lending portfolios will be closely monitored given the chunkiness in ticket size and sensitivity of borrowers in these segments to an environment of prolonged stretch in liquidity. Also, any deterioration in the asset quality leading to a significant decline in profitability from current levels, will be closely monitored.
Liquidity Superior

The consolidated asset-liability maturity (ALM) profile as on December 31, 2019 reflects cumulative positive liquidity gaps in all buckets up to one year, after factoring in unutilised bank lines and a committed long-term line from the parent, L&T. The group generally maintains liquidity for a minimum period of the next 30 days of upcoming repayments, under a business-as-usual as well as stress scenario. As on March 26, 2020, total external debt repayment was around Rs 7,970 crore for the next three months (until June 30, 2020). Against this, LTFS had a liquidity of around Rs 11,500 crore (comprising of cash and liquid investments, unutilised bank lines and a committed line from parent). Furthermore, collections from advances expected during these three months are about Rs 8,200 crore, further supporting liquidity.

Outlook: Stable

CRISIL believes LTFS will remain highly strategically important to L&T and continue to benefit from the strong support from the parent 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 in the capital structure of the LTFS group, 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 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 wealth and asset management businesses. As on December 31, 2019, LTFH's consolidated networth was Rs 14,606 crore.
 
In fiscal 2019, on a consolidated basis, profit after tax (PAT) was Rs 2,232 crore on total income of Rs 13,302 crore against Rs 1,278 crore and Rs 10,266 crore, respectively, for the previous fiscal. For the nine months ended December 31, 2019, PAT was Rs 1315 crore (PAT of Rs 1788 crore before the one-time impact of DTA) on total income of Rs 11,137 crore (against Rs 1,680 crore and Rs 9,918 crore, respectively, for the corresponding period of the previous fiscal).
 
About the key companies
LTFH is the holding company for the financial service businesses of L&T. It was incorporated in 2008 and is listed under the National Stock Exchange and Bombay Stock Exchange; it is also registered with the Reserve Bank of India as a non-banking financial company - Core Investment Company. On a standalone basis, LTFH reported a PAT and total income of Rs 267 crore and Rs 526 crore, respectively, in fiscal 2019 (against Rs 266 crore and Rs 478 crore, respectively, in fiscal 2018). For the nine months ended December 31, 2019, LTFH reported loss of Rs 73 crore on total income of Rs 110 crore (PAT of Rs 40 crore on total income of Rs 216 crore for the corresponding period of the previous fiscal). 
 
L&T Finance Ltd is a non-banking finance company (NBFC) incorporated in 1993 and wholly held by LTFH. It had AUM of Rs 48,846 crore as on December 31, 2019, comprising micro loans (26% of total AUM), farm equipment loans (17%), two-wheeler loans (13%), LAP (1%), real estate financing (20%), infrastructure loans (15%) and balance in defocused. The gross and net stage 3 assets were 4.7% and 2.2% respectively as on December 31, 2019 (3.59% and 1.24%, respectively, as on March 31, 2019). Networth and gearing were Rs 9,201 crore and 5.1 times, respectively, as on December 31, 2019. In fiscal 2019, the company reported a PAT of Rs 846 crore on total income of Rs 7,383 crore against Rs 117 crore and Rs 5,071 crore, respectively, for the previous fiscal. For the nine months ended December 31, 2019, PAT and total income were Rs 347 crore and Rs 6,717 crore, respectively (Rs 687 crore and Rs 5,432 crore, respectively, for the corresponding period of the previous fiscal). PAT before the one time impact of DTA was at Rs 550 crore for the nine months ended December 31, 2019. 
 
L&T Infrastructure Finance Company Ltd is an NBFC - infrastructure finance company, incorporated in 2006 and wholly held by LTFH. It had AUM of Rs 26,703 crore as on December 31, 2019, comprising infrastructure loans (83% of total AUM), real estate financing (15%) and balance in defocused. The gross and net stage 3 assets were 12.2% and 5.3% respectively as on December 31, 2019 (13.55% and 5.88% as on March 31, 2019). The gross stage 3 predominantly pertains to the legacy book, which in absolute terms has seen an improvement; the gross stage 3 has reduced to Rs 3,165 crore as on December 31, 2019 from Rs 4,029 crore as on December 31, 2018. Networth and gearing were Rs 4,762 crore and 4.7 times, respectively, as on December 31, 2019. In fiscal 2019, the company reported a PAT of Rs 232 crore on total income of Rs 2,864 crore against Rs 138 crore and Rs 2,667 crore, respectively, for the previous fiscal. For the nine months ended December 31, 2019, PAT and total income were Rs 131 crore and Rs 2,354 crore, respectively (Rs 161 crore and Rs 2,218 crore, respectively, for the corresponding period of the previous fiscal). PAT before the one time impact of DTA was at Rs 389 crore for the nine months ended December 31, 2019. 
 
L&T Housing Finance Ltd is a housing finance company incorporated in 1994 and wholly held by LTFH. It had AUM of Rs 12,946 crore as on December 31, 2019, comprising home loans (58% of total AUM), LAP (29%), and real estate financing (10%). The gross and net stage 3 assets were 1.8% and 1.3% respectively as on December 31, 2019 (1.89% and 1.33% as on March 31, 2019). Networth and gearing were Rs 1,588 crore and 8.0 times, respectively, as on December 31, 2019. In fiscal 2019, the company reported a PAT of Rs 269 crore on total income of Rs 1511 crore against Rs 184 crore and Rs 1,185 crore, respectively, for the previous fiscal. For the nine months ended December 31, 2019, PAT and total income were Rs 57 crore and Rs 978 crore, respectively (Rs 174 crore and Rs 1,128 crore, respectively, for the corresponding period of the previous fiscal). PAT before the one time impact of DTA was at Rs 69 crore for the nine months ended December 31, 2019. 
 
L&T Infra Debt Fund (incorporated in 2013) is an infrastructure debt fund incorporated as a company under the Companies Act. It operates under the regulation and supervision of the Reserve Bank of India. It had AUM of Rs 8,990 crore as on December 31, 2019. The gross stage 3 assets were nil, and networth and gearing were Rs 1,229 crore and 6.7 times, respectively, as on December 31, 2019. In fiscal 2019, the company reported a profit after tax (PAT) of Rs 132 crore on total income of Rs 755 crore against Rs 139 crore and Rs 568 crore, respectively, for the previous fiscal. For the nine months ended December 31, 2019, PAT and total income were Rs 168 crore and Rs 676 crore, respectively (Rs 116 crore and Rs 584 crore, respectively, for the corresponding period of the previous fiscal).

1Borrowing cost = Annualised Interest Cost during the period divided by the average of outstanding borrowings at the beginning and the end of the period
Key Financial Indicators - L&T Finance Holdings Ltd  (Consolidated; as per Indian Accounting Standard)
As On/For the period ended December 31, Unit 2019 2018
Total Assets Rs crore 1,08,684 1,01,883
Total income Rs crore 11,137 9,918
PAT Rs crore 1,315* 1,680
Gross stage 3 % 5.9 6.7
Return on Average assets (RoA) % 1.6* 2.4
Gearing  Times 6.4 6.8
*PAT and RoA prior to deduction of the one-time DTA stood at Rs 1,789 crore and 2.2% respectively for the nine months ended December 31, 2019.
Note: The financial numbers mentioned in the rationale for the period ended December 31, 2019 are on unaudited basis.

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of the instrument Date of
issuance		 Coupon
rate (%)		 Maturity
Date		 Size of the
issue (in Cr)		 Rating assigned
along  with Outlook
NA Commercial Paper NA NA 7-365 days 2,500 CRISIL A1+
NA Non-Convertible
Debentures*		 NA NA NA 500 CRISIL AAA/Stable
INE498L04159 Preference Shares 5-Dec-19 N.A 5-Dec-22 60 CRISIL AAA/Stable
INE498L04167 Preference Shares 23-Dec-19 N.A 22-Dec-23 205 CRISIL AAA/Stable
NA Preference Shares* NA NA NA 1735 CRISIL AAA/Stable
*Not yet issued
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation Rationale for consolidation
L&T Finance Holdings Ltd Full Holding Company
L&T Infrastructure Finance Company Ltd Full Subsidiary
L&T Investment Management Ltd Full Subsidiary
L&T Mutual Fund Trustee Ltd Full Subsidiary
L&T Financial Consultants Ltd Full Subsidiary
L&T Housing Finance Ltd Full Subsidiary
L&T Finance Ltd Full Subsidiary
L&T Capital Markets 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 Debt Fund Ltd Full Subsidiary
Mudit Cement Pvt Ltd Full Subsidiary
L&T Capital Markets (Middle East) Limited Full Subsidiary
L&T Infra Investment Partners Proportionate Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  2500.00  CRISIL A1+      20-12-19  CRISIL A1+    --    --  -- 
            14-11-19  CRISIL A1+           
            04-10-19  CRISIL A1+           
            27-06-19  CRISIL A1+           
Non Convertible Debentures  LT  0.00
01-04-20  		CRISIL AAA/Stable      20-12-19  CRISIL AAA/Stable    --    --  -- 
            14-11-19  CRISIL AAA/Stable           
            04-10-19  CRISIL AAA/Stable           
Preference Shares  LT  265.00
01-04-20  		CRISIL AAA/Stable      20-12-19  CRISIL AAA/Stable    --    --  -- 
            14-11-19  CRISIL AAA/Stable           
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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