Downgrade L&T Fin to underperform, target Rs.53

Updated: Feb 1 2013, 05:42am hrs
We downgrade L&T Finance Holdings to underperform due to slower loan growth and pressure on profitability. We assign a target price of R53. We value L&T Fin Holdings lending business on two-stage Gordon growth model using P/BV = ROE * {(p(1+g) *(1- (1+g)n/(1+r)n)) + (pn(1+g)n(1+gn))/((r-gn)(1+r)n)} where g=growth rate for the first n (high-growth period) years, p= dividend payout ratio in the first n years, gn=perpetual growth rate, pn=perpetual dividend payout ratio.

L& Finance trades at a P/BV of 2.3x for FY14e. We find this valuation very expensive considering 1) drag on profitability (ROE of sub-15%) for next two years due to slower growth and losses in AMC business and 2) well run small/mid size private sector banks with decades of experience and decent franchises are trading below P/BV of 2.3x. We increase our FY13e earnings by ~25% due to one-time gain from the stake sale in Federal bank. FY14/15e earnings are fine-tuned.

We believe, the overall consolidated ROE is unlikely to improve beyond 13-14% mainly because of losses in the microfinance and AMC businesses which would hurt FY14/15e profitability. L&T Finance reported Q3FY13 adjusted net profit of R120 crore, below our estimates on higher provisions and AMC losses. Gross NPA jumped ~50% q-o-q. Out of the total increase of R240 crore in gross NPA, R140 crore was contributed by the legacy portfolio of FamilyCredit Limited (FCL). The remaining R100 crore was contributed by Infra/Corporate loans and CV loans due to stress in the economic environment. Restructured loans constitute ~3% of the L&T Infra Fin loan portfolio.

The company provided R14.4 crore and wrote off R29 crore against AP micro finance portfolio.

Loan growth was decent and is likely to moderate going forward. Loan book grew 31% y-o-y. The growth was mainly attributable to 32% y-o-y growth in infra loans (telecom sector registered 50% growth q-o-q). Adjusted for the bought out loan portfolio of FamilyCredit, L&T Fins loan book grew 19% y-o-y. Disbursements for L&T Finance in the nine months of FY13 grew only 3% y-o-y supported by rural products and the capital markets portfolio. Construction/Transport equipment and corporate disbursements declined by 25-30% for these nine months. Macquarie