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