By Jindal Haria

India Ratings and Research (Ind-Ra) rated L&T Finance Holdings Limited’s (LTFHL) non-convertible debentures (NCDs) and commercial paper (CP) as follows:

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

NCDs*

-

-

-

INR5,000

IND AAA/Stable

Assigned

CP*

-

-

-

INR15,000

IND A1+

Assigned

*Yet to be issued

The ratings reflect the strong credit profile of Larsen and Toubro Limited (L&T), which is the parent and holds 64.14% in LTFHL. The ratings factor in the likelihood of high importance of financial services to the L&T group in the medium to long term. The ratings also factor in LTFHL’s strengthened financial and operational performance, large franchise, diversified presence across multiple product segments, improving asset quality, comfortable access to funding, and reasonable liquidity. L&T expects LTFHL to be a high growth business and value generator for the group. 

Ind-Ra understands that financial services is a strong focus area for the group and LTFHL has board oversight from L&T’s top management. This increases the likelihood of active support, in the event of liquidity tightness or even through timely availability of growth capital, as and when required. LTFHL is attempting to create a large lending franchise in retail (including housing) and wholesale finance.

For arriving at the ratings, Ind-Ra has taken a consolidated view of LTFHL and its operating subsidiaries, given the financial and operational flexibilities that the consolidated platform offers to itself as well as to the borrowers.

KEY RATING DRIVERS

L&T Group’s High Propensity and Ability to Support: Financial services is among the high growth and profitability businesses in the L&T group. LTFHL has received regular capital infusions (about INR18 billion) from the group since inception. The group has a strong operating profile with adequate resources in terms of on-book liquidity, ability to raise funds from banks as well as capital markets and assets/investments that can be monetised to support LTFHL’s growth and liquidity requirements. The L&T group has articulated that LTFHL is a core and integral part of its strategy and expected to be one of the key value drivers for the group. It will also maintain strategic linkages, management oversight and control, majority shareholding and support lines (INR20 billion increased from INR10 billion) towards LTFHL on an ongoing basis. The management also indicated fungibility with LTFHL in terms of capital and liquidity over long term. Ind-Ra expects LTFHL to contribute about 20% to the group profits in the medium term. 

Establishing Expertise-based Franchise Post Performance Recovery:
LTFHL is focusing on three lending verticals: rural finance (tractors and two-wheelers and microfinance), housing (real estate lending, loan against property (LAP) and retail home loans) and wholesale finance (infrastructure, corporate and supply chain lending). These segments constituted about 17%, 22% and 61%, respectively, of the loan book as of 2QFY18. LTFHL has experience (lending operations since about 20 years) and expertise in these segments on its own and along with the L&T Group. LTFHL’s management expects the share of wholesale finance to decline in the medium term and balance to be shared by housing and rural verticals.

Its consolidated loan book was at INR723 billion as of September 2017 and Ind-Ra expects it to grow at 15%-20% yearly. It is one of the largest non-banking finance company (NBFC) providing wholesale funding; over past few years, it has avoided thermal power (total impaired assets in wholesale segment: about INR40 billion in 1HFY18, of which INR10 billion are provided for) and focused on projects with a lower construction risk. Also, LTFHL provides flexibility to the developers through multiple financing platforms: NBFC, NBFC-infrastructure debt fund, sell-down and debt capital market desks. Consequently, LTFHL remains exposed to performing assets through the project cycle. In rural segment, the business is focused on digitisation, driving operational efficiencies and dealer focus. In the housing business, LTFHL focuses on minimising project completion risk, rule / policy-based lending and setting up and monitoring early warning systems. However, about 50% of this book comprises real estate lending and regardless, would be exposed to concentration risk, project completion risks and regulations such as Real Estate Regulatory Authority and Goods and Services Tax. In terms of additional businesses, LTFHL has a wealth management vertical and an asset management company, which could in the medium term contribute meaningfully to its financials.

Moderating Credit Costs:
At a consolidated level, LTFHL intends to undertake accelerated provisions in FY18 especially on impaired wholesale loans. The need to provide mostly emanates from the wholesale sector (earlier originations in fossil fuel energy and corporate loans) and the balance from the demonetisation-led credit costs impact in microfinance. Its performance in the retail housing loans and LAP is roughly at par with peers while its unseasoned developer finance book does not carry NPAs. However, Ind-Ra expects concentration risk and seasoning in the developer book to manifest in the form of 2%-3% credit costs at a steady state. LTFHL’s credit costs (provisions due to NPAs and write-offs to average advances) could increase to about 3.3% in FY18 (FY17: 2.1%) and then moderate to 2% at a steady state. Ind-Ra expects the steady state return on average assets at about 2% annually in the medium term.

 

Diversified Funding, Adequate on-book Liquidity: LTFHL’s funding profile is diverse in terms of funding mix, investors and tenor. Its borrowings are spread over several institutions. CPs constituted around 17% of the total funding mix as of September 2017. Actual CP issuances were 25%-30% of the total liabilities of which 35%-40% are covered by working capital lines. In its asset-liability management, LTFHL also factors in prepayments from housing and wholesale businesses with provision to review every six months. In case the prepayments are not factored in, LTFHL runs its asset-liability profile with minor gaps and Ind-Ra expects the same to continue. Under their risk framework, LTFHL runs a liquidity book (mostly government securities and T-bills) as buffers against short-term liquidity shocks. LTFHL maintains about INR30 billion of un-availed bank lines on a steady-state basis that would increase roughly in line with its loan book and LTFHL has access to support lines from the parent.

Average Capitalisation and Leverage:
The consolidated leverage (debt-equity) was about 7.1x in 1HFY18, which Ind-Ra considers to be on a slightly higher side. Given the dominance of wholesale and real estate financing in its portfolio, Ind-Ra expects the medium-term leverage to be in the range of 6x-7x. Ind-Ra also expects incremental capital allocation to the housing business, where concentrated book and real estate developer exposures warrant a lower leverage (currently about 9x). Consolidated equity to advances was about 12.5% in 2QFY18 and FY17. Ind-Ra expects this to remain in the range of 13%-15%. Ind-Ra expects internal accruals to support about 15% of loan growth with deleveraging while growth beyond this level would consume incremental capital. 


RATING SENSITIVITIES

Negative: Dilution of support expectations in Ind-Ra’s opinion, either on account of inability to manage asset quality (especially in view of the high loan growth strategy), resulting in higher-than-expected losses or diminished business prospects, materially weakened financial parameters, or decreased importance to the L&T group, or otherwise could lead to a rating downgrade. Lack of timely support in terms of equity capital for growth or a liquidity event would also lead to a negative rating action. Any deterioration in the credit profile of L&T group is also likely to impact the ratings.
 


COMPANY PROFILE

LTFHL is a core investment company and holds as investments various NBFCs that operate in the lending segment. LTFHL’s total advances were INR723 billion on 30 September 2017. It has 195 branches across the country, in addition to 743 microfinance branches as of September 2017.

FINANCIAL SUMMARY

Particulars (Consolidated)

FY17

FY16

Total assets (INR million)

7,251,35.9

6,380,10.6

Total equity (INR million)

78,939.4

71,951.5

Net profit (INR million)

10,424.7

8,536.9

Return on average assets (%)

1.6

1.5

Equity/assets (%)

10.9

11.3

Source: LTFHL

 

 



COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121