By Jindal Haria

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

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

NCDs*

-

-

-

INR30,000

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 LTHF (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. 

Construction Finance Dominates Housing Business Vertical:
LTHF is the third largest lending subsidiary of LTFHL by loan book size (15% of total loans) in 1HFY18. It houses retail home loans (40%), loan against property (33%) and construction finance (24%) businesses. The company plans to reduce the direct sales agents-led origination of loan against property business and focus on salaried home loans, and some of it has materialised this year. It also has access to customers of L&T’s real estate construction business. Construction finance is also undertaken by L&T Finance Limited, one of LTFHL’s subsidiaries. On developer finance book, LTFHL (through LTHF and L&T Finance) focuses on minimising project completion risk, rule / policy-based lending and setting up and monitoring early warning systems. However, the business (across operating subsidiaries) 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.

Steady State Credit Costs to be higher:
Overall, LTHF’s gross non-performing assets (GNPA) were about 1.2% of total assets under management in 1HFY18. The home loans business has highest GNPA at 1.6%, largely emanating from the self-employed segment. Although the construction finance book exhibits GNPA of 0.6%, it is largely unseasoned book with a substantial portion of the loans under moratorium. Ind-Ra expects the steady state GNPA and credit costs to be higher in this segment, given the concentrated exposure. The provision coverage ratio is 34% and LTFHL intends to maintain about 40% provision cover across businesses.

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 in excess of short-term liabilities by 18% of total liabilities; prepayments are also budgeted based on past behaviour. The company also has 26% of borrowings with tenor of over three years. It also has unavailed bank lines of INR1.01 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 LTHF 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

LTHF is a wholly owned subsidiary of LTFHL. It is registered as a housing finance company with the National Housing Bank (‘IND AAA’/Stable).


FINANCIAL SUMMARY

Particulars

FY17

FY16

Total assets (INR million)

88,162.5

75,814.3

Total equity (INR million)

8,052.8

5,944.0

Net profit (INR million)

1,364.1

580.4

Return on average assets (%)

1.7

1.0

Equity/assets (%)

9.1

7.8

Source: LTHF

 

 



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