L&T Finance once was a bank-licence aspirant. In fact, it transitioned from an in-house lender to a full-suit non-bank for this reason. A decade later, AM Naik, Group Chairman, L&T (parent company of L&T Finance), says he’s not happy with the performance of L&T Finance. On February 28, he announced that SN Subrahmanyan, CEO and MD, L&T, will be appointed as Chairman of L&T Finance, replacing Shailesh Haribhakti, a veteran Chartered Accountant. 

This announcement holds immense importance for investors of L&T Finance.

A warning sign

For one, it’s a warning sign from its parent to buck up its operations. Having subscribed to L&T Finance’s rights issues in 2021 and subscribing to its non-convertible debentures a year ago, the return on investments for L&T from its finance arm has been steadily falling from 17.92 per cent in FY19 to 12.1 per cent in FY20 and 5.7 per cent in FY21. Estimates for FY22 stand at 5.2 per cent. At a time when L&T’s other subsidiaries in technology space are delivering stellar returns upwards of 12 per cent, Naik’s disappointment over L&T Finance is understandable. 

But is retailsation the best answer to the problem? Recently, while announcing its 3 to 5 years’ strategy, the company indicated its retail loans will account for 80 per cent of the book against 50 per cent in Q3 FY22, with an urban-centric focus. Likewise, it aspires to grow the retail portfolio at 25 per cent CAGR from FY23-26, with 10-15 per cent contribution from the existing book. Growth of the existing retail book has been at sub-10 per cent so far in FY22, thus indicating that L&T Finance has a tall task set. Even as its pilot project (consumer loans) hasn’t kicked off materially, there would be much pressure on the new products to be launched.

Pricing competition

There is also intense volume and pricing competition to consider. Barring non-banks such as Bajaj Finance or Cholamandalam Investments and Finance, which have been successful in retaining their dominance and ring-fencing nicheness amid competition from banks, most NBFCs have ceded market share. L&T Finance may be in for a larger battle. 

After piloting consumer loans (largely personal loans) for about a year, it plans to launch the product for public at large. Bajaj Finance is already the market leader here and banks also find personal loans a convenient growth option, despite being as risky asset. Under such circumstances the question is if L&T Finance has adequate tailwinds. Analysts at Axis Capital, while trimming their loan growth estimates for FY22 by five per cent, note that while the company remains optimistic on retail book, the overall growth reverting to mean will be delayed. Consumer loans aside, L&T Finance’s retail book comprises two-wheeler, tractor, microfinance (combinedly referred as rural finance) and housing loans (see table). These portfolios took a beating during the pandemic, in terms of collection efficiencies and loan disbursements. 

While they are gradually back on feet, the risks haven’t abated entirely, given that asset quality of the lender doesn’t offer much comfort. Restructured assets at 3.6 per cent of the total loan book and gross stage three assets (loans due past 90 days and more) at 5.91 per cent in Q3 don’t paint a good picture (see table). Meanwhile, how the revised asset quality norms issued by the RBI, set to kick from June 2023, also needs to be seen. The revised provisioning requirements for non-performing assets is aimed at harmonising the practices for NBFCs and bank. 

With uncertainties looming over L&T Finance stock, even if valuations seem affordable at 0.8x FY22 estimated book, investors should tread cautiously. 

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