By Jindal Haria

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

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

NCDs*

-

-

-

INR60,000

IND AAA/Stable

Assigned

*Yet to be issued

KEY RATING DRIVERS

L&T Group’s High Propensity and Ability to Support: Ind-Ra had taken a consolidated view of L&T Finance Holdings Limited (LTHFL; NCDs rated at ‘IND AAA’/Stable) and its operating subsidiaries including LTFL (together referred to as financial services) for the ratings. This is because of the financial and operational flexibilities that the consolidated finance platform offers to itself as well as to the borrowers. Financial services is among the high growth and profitability businesses in the L&T group and has received regular capital infusions (about INR18 billion) from the group since inception. L&T 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 financial services’ growth and liquidity requirements. 


The L&T group has articulated that financial services 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 financial services on an ongoing basis. The management also indicated fungibility with financial services in terms of capital and liquidity over long term. Ind-Ra expects financial services to contribute about 20% to the group profits in the medium term. 

Diversified Business Segments:
LTFL is the largest subsidiary of LTFHL by loan book size (1HFY18: 46% of total loans) and houses the rural business (microfinance, tractor and two-wheeler loans). It also has real estate developer loans (13% of LTFL’s book and 63% of developer loans across the LTFHL platform) and wholesale finance (infrastructure, structured corporate finance and supply chain finance; 45% of LTFL’s book) on its books. LTFL also carries defocused book on its balance sheet (personal loans, car, commercial vehicle, construction equipment loans; 6% of LTFL book) that it expects to run down in the next one to two years. The assets in infrastructure, corporate finance and real estate financing are booked in LTFL and other operating entities based on available liquidity and tenors, capital availability and regulations. 

Moderate Asset Quality:
Overall, LTFL’s gross non-performing assets (GNPA) were about 8.4% of total assets under management in 1HFY18. The rural business has highest GNPA at 10.9%, primarily driven by farm equipment (in line with peers’) and microfinance (demonetisation-led credit costs) loans. Almost a third of the defocused book is non-performing while corporate finance has the biggest share in wholesale segment’s GNPA (5.4%). The provision coverage ratio is 41%; Ind-Ra expects the provision coverage to remain steady, given that it might write-off microfinance offsets and accelerate provisions on some infrastructure and corporate NPAs. Ind-Ra expects the asset quality to improve, given that the stress in the rural portfolio will moderate and the proportion of newer vintage infrastructure projects increase. These have shorter set-up periods and therefore lower project completion risks.

Adequate Liquidity:
The treasury operations and management are common for LTFHL and its operating subsidiaries. In terms of asset liability management, the company’s short-term assets are short of short-term liabilities by about 1% of total liabilities (including prepayments budgeted based on past behaviour). The company also has 24% of borrowings with tenor over three years. It also has unavailed bank lines of INR15.64 billion, which the management expects to increase roughly in line with the growth in the company’s loan book. It has access to LTFHL’s liquidity. LTFHL in addition to its own fund mobilising ability has access to L&T’s liquidity.


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 of LTFL or financial services 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. A change of ownership outside of the group could also lead to a negative rating action.


COMPANY PROFILE

LTFL is a wholly owned subsidiary of LTFHL. It houses the rural business of LTFHL. It also has on-book real estate developer loans and wholesale finance. LTFL was earlier known as Family Credit Limited. LTFL was formed in FY17 after the merger of the erstwhile L&T Finance Ltd with Family Credit.


FINANCIAL SUMMARY

Particulars (Standalone)

FY17#

FY16@

Total assets (INR million)

359,768.3

53,573.0

Total equity (INR million)

68,793.9

6,319.7

Net profit (INR million)

160.4

874.0

Return on average assets (%)

0.08

0.82

Equity/assets (%)

19.1

11.8

Source: LTFL

#LTFL merged entity

@erstwhile Family Credit

 

 



COMPLEXITY LEVEL OF INSTRUMENTS

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

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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