Decision to focus on more profitable segments such as two-wheeler, home finance paying off
The stock of L&T Finance Holdings (LTFH), one of the front-runners in the race for banking licences, declined 12 per cent last week when it failed to make the RBI’s first cut.
While the transition into a bank would have been a key positive for the company, its already well-diversified business, strong rural portfolio and a good brand name through L&T’s parentage continue to hold it in good stead compared to its peers.
At the current price of ₹67, the stock is trading at 1.6 times its one year forward book which offers a good opportunity to investors to buy and hold the stock for a two-to-three-year horizon. Some of its peers in the retail space such as Bajaj Finance, M&M Finance and Sundaram Finance currently trade at 1.8-2.2 times. IDFC, its comparable peer in the infrastructure space, trades at 1.1 times. LTFH is a holding company, with businesses spanning corporate, retail and infrastructure lending. LTFH also provides mutual fund and wealth management services.
The diversified lending portfolio has helped the company weather cyclicality in sectors well. Take, for instance, its infrastructure lending. With no significant improvement in the investment climate, the company’s disbursements in this segment grew by a meagre 1 per cent in the first nine months of 2013-14. But a healthy growth in its retail portfolio that constitutes about 55 per cent of its total loan book helped the company post a 14 per cent growth in total disbursements.
Within the retail business, the company caters to the rural market, two-wheeler, housing finance, commercial vehicle and construction equipment, as well as mid-market corporate finance. While the CV/CE and the mid-market corporate segment have been impacted by the economic slowdown, tractor funding, two wheeler and home finance have been driving the growth for the company.Retail in a sweet spot
The company’s decision to focus on the more profitable segments such as two-wheeler and home finance is paying off now. These advances, along with loans for the rural segment, constitute close to 41 per cent of its retail loan book, from about a third last year. The margins in the retail segment have increased from 5.6 per cent last year to 6.3 per cent in the December quarter.
LTFH acquired Family Credit last year, which helped it gain access to the two-wheeler business. The acquisition of Indo-Pacific Housing Finance and Citi Financial has given it a strong footing in the housing finance segment. The home loan portfolio is now close to ₹1,600 crore.
While high yielding loans have helped the company improve its net interest margin in the last one year, higher provisioning costs owing to slippages and increase in restructured assets have impacted profitability. The company continues to witness pressure in the CV/CE and corporate segments.
To counter this, the company has been increasing its lending to operational infrastructure projects, which are now about a third of the project financing. With restructured assets now at 6 per cent of loan book, the company follows a conservative policy and has made ₹143 crore of provisions in addition to regulatory requirements.
As the economy recovers, asset quality pressure in infrastructure should ease and lead to growth in profitability. In the first nine months of 2013-14, the company has seen its loans grow by 21 per cent and net profit by 13 per cent.