| L&T Finance Holdings Limited | ||
| 'CRISIL A1+' assigned to CP | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has assigned its 'CRISIL A1+' rating to the Rs 1,500 crore commercial paper of L&T Finance Holdings Limited (LTFH; holding company of the financial services businesses). |
| Analytical Approach |
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For arriving at the rating, CRISIL has combined the business and financial risk profiles of LTFH and its subsidiaries and associates. That's because all these entities, collectively referred to as the LTFS (L&T Financial Services) group, have significant operational and management linkages, and operate under a common brand. CRISIL has also factored in 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 63.91% as on March 31, 2019. |
| Key Rating Drivers & Detailed Description |
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Strengths * Strategic importance to, and expectation of strong support from the parent, L&T The LTFS group is the vehicle that carries out the financial services businesses for the L&T group, which has identified this business as one of the key focus areas for its growth and profitability. L&T also provides strategic oversight to the LTFS group and has personnel from its senior management, including chief financial officer, on LTFH's board. L&T also has representation in the LTFS group's various committees including the asset-liability committee and credit committee. The group also benefits from the synergies and expertise of L&T, especially in infrastructure lending. The shared name also supports the liabilities side of the LTFS group. Further, the parent provides capital support to the LTFS group, and has infused Rs 3,600 crore till date (including Rs 2,000 crore in fiscal 2018). It has also provided an ongoing line of credit of Rs 2,000 crore to LTFH, which could be used in times of contingency. The capital support from the parent, along with internal cash accrual, is expected to keep capitalisation of the LTFS group adequate, with gearing expected at around 7.0 times, and not exceed 7.5 times, on a steady-state basis. 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 majority stake in various subsidiaries that operate in the wholesale lending (consisting of infrastructure finance, corporate loans, and real estate finance), mortgage finance (home loans and loans against property), rural lending (farm equipment, two wheeler, and micro loans), asset management, and wealth management businesses. In the lending space, the LTFS group has built a strong market position, with assets under management (AUM) of Rs 99,122 crore as on March 31, 2019. The portfolio has had a compound annual growth rate of 19% during the five fiscals ended March 31, 2019. Further, the portfolio is diversified, with presence across various asset classes such as infrastructure financing (38% of AUM as on March 31, 2019), structured corporate finance (6%), real estate finance (15%), home loans (6%), loans against property (4%), micro loans (13%), two-wheeler financing (6%), and farm equipment financing (7%). The investments book and the defocused book (consisting of products where the book is being run-down) comprise the remaining 4%. Under the fee-based businesses, the LTFS group had a sizeable average (quarterly) AUM of Rs 70,944 crore in the asset management business and closing assets under service of Rs 28,164 crore in the wealth management businesses. Going forward, the LTFS group intends to focus on and grow its fee-based businesses and the retail portfolio. Consequently, it expects higher growth in the rural and home loan portfolios. The share of the wholesale portfolio (excluding the Infrastructure debt Fund [IDF] loan portfolio) has been declining steadily, from 62% as on March 31, 2016, to 54% as on March 31, 2019; the management intends to reduce the share further in the coming quarters. This shift in proportion is also being supported by a higher sell-down strategy in the infrastructure financing book. While the group continues to use its (and L&T's) expertise in this segment to underwrite loans, majority of the disbursements are now sold-down. Moreover, within infrastructure finance, the focus will continue to be on operational infrastructure projects (under the IDF framework), the share of which has increased from 4% to 8% over three fiscals ended March 31, 2019. * 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 also has strong banking relationships. Of the total borrowing of Rs 91,507 crore as on March 31, 2019, non-convertible debentures (NCDs), commercial paper, and bank borrowing formed 44%, 16%, and 36% of the borrowing, respectively. The group has also raised Rs 2,500 crore retail NCDs recently. The diversified resource profile is also reflected in the competitive average borrowing cost of 8.2% for fiscal 2019, which is lower than most peers. The L&T 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 5.9% and 2.4%, respectively, as on March 31, 2019. This is primarily contributed by higher gross Stage 3 assets in the infrastructure portfolio due to legacy delinquent accounts. In the wholesale and real estate portfolios, the ticket size remains chunky given the nature of these asset segments. 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 past few quarters. This is also reflected in a decrease in gross Stage 3 assets to 5.9% as on March 31, 2019, from 8.7% a year earlier. Further, the group has formed a specialised team for overlooking recovery from stressed assets. Nevertheless, most of the segments in the retail portfolio have witnessed high growth in the recent past. The management's ability to keep the portfolio quality in check while scaling it up will remain a monitorable. Moreover, performance in the wholesale lending and real estate financing portfolios will be closely monitored given the chunkiness in ticket size and sensitivity of borrowers in these segments to an environment of prolonged liquidity tightness. Also, any deterioration in the asset quality, leading to significant impact on profitability, where returns are expected to be similar to current levels, will also be monitored closely. |
| Liquidity |
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The asset-liability maturity (ALM) profile as on March 31, 2019, was adequate. The consolidated ALM, on a contractual basis, has inherent negative mismatches, primarily given the relatively longer tenure of assets. Nevertheless, mismatches are managed efficiently through unutilised bank lines and a committed long-term line from the parent, L&T. The group generally maintains liquidity for a minimum period of next 30 days of upcoming repayments, under a business-as-usual as well as stress scenario. As on May 31, 2019, total debt repayment was around Rs 16,973 crore for the next three months (till August 31, 2019). Against this, there was liquidity in the form of cash and liquid investments (Rs 4,060 crore), unutilised bank lines (Rs 9,062 crore), and a committed line from L&T (Rs 2,000 crore) as on same date. Further, collections expected during these three months are about Rs 6,000 crore, which also supports liquidity. |
| About the Company |
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LTFH is the non-operating 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. |
| Key Financial Indicators - consolidated; as per Indian Accounting Standard | ||||||||||||||||||||||||||||
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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) | ||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
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