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Shares of L&T Finance Holdings have been on the ascend ever since the company announced its financial performance for the April-June period on July 20. The stock jumped almost 22 per cent in just four days and closed at ₹184.25 on Wednesday on the NSE.
Robust growth in rural book, healthy fee income and strong asset quality were key positives and indicate a turnaround story for L&T Finance Holdings, said analysts.
Its consolidated PAT increased 71 per cent to ₹538 crore in the first quarter of the current fiscal against ₹314 crore reported in the year-ago period. Total revenue jumped to ₹3,178.51 crore (₹2,427.27 crore), a growth of 31 per cent. The Group has adopted Indian Accounting Standards from April 1, 2018, and the effective date of such transition is April 1, 2017, moving from previous GAAP standards.
The IND-AS transition helps to address weaker and stressed accounts with ₹1,800 crore of one-time provisioning adjusted through net worth, helping improve the provisioning coverage ratio (PCR), said Prabhudas Lilladher, which retained the ‘buy’ rating with a target price of ₹230.
JM Financial, while maintaining its ‘buy’ rating and a price target of ₹250, said: “We believe LTFH is on track to deliver sustainable, top quartile RoEs supported by, increasing the share of focused, profitable business; improving capital allocation by exiting/partial sell-down of its non-core assets/unprofitable businesses and redeploying it to RoE accretive businesses; focus on fee income through sell-down and DCM operations; focus on cost efficiencies by streamlining businesses and digitising operations; and increase in profitability contribution by the investment management business.”
Lower NPA provisioning
Citi raised PAT estimates for FY2019 and FY2020 by 12 per cent and 6 per cent, respectively, primarily on lower NPA provisioning given the up-fronting of provisions on transition to IndAS. It maintained its ‘buy’ rating with a target of ₹225 on the stock.
“The company has undertaken a strategic overhaul and is now focusing on ROEs (through cost cuts, fees and portfolio reduction) rather than purely growth or diversification. Higher provision coverage ratio, through voluntary provisions added recently, addresses the potential risk concerns arising from fairly elevated impaired loans in the wholesale business (nearly 10 per cent). With an improving returns profile, focused growth trajectory and lower costs, we believe LTFH is scripting a turnaround story,” said Citi in a research report.
Motilal Oswal analysts Piran Engineer and Alpesh Mehta in a report said: “L&T Finance Holdings is a quintessential turnaround story, in our view. From a company with 20+ product lines and sub-standard return ratios, it is gradually transforming itself into a focussed financier with eight product lines across three verticals, with a target to achieve 18-20 per cent RoE by FY20 (13 per cent in FY18).”
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