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HSBC
L&T Finance Holdings (Buy)
CMP: ₹120.4
Target: ₹130
We use an unchanged residual income valuation methodology to value L&T Finance Holdings. Under this methodology, the intrinsic value is estimated using three years of explicit forecasts (FY20-22e), 17 years of semi-explicit forecasts (FY22-39e) and the terminal growth stage (FY39e onwards). The present value of excess returns is the residual profit, which is added to the existing net worth to arrive at our intrinsic value. Our assumptions include: cost of equity of 11.4 per cent, risk-free rate of 3 per cent, risk premium of 6 per cent, long-term growth of 5.0 per cent and beta of 1.4 — all unchanged. We adjust our FY20-22e earnings by -3 per cent to 21 per cent in order to factor in lower tax outgo going forward. We retain a ‘Buy’ rating with a revised TP of ₹130 (from ₹120 previously) as valuations are undemanding. Management has maintained a fine balance between growth and asset quality. At our TP of ₹130 the stock would trade at 10.2x FY21e PE and 1.5x FY21e P/BV.
Risks: 1) Asset quality risks in the developer financing book remain elevated; and 2) maintaining strong fee income momentum on a rapidly growing balance sheet is a key risk.
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