By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed 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

Affirmed

CP

-

-

7 to 365 days

INR15,000

IND A1+

Affirmed

*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% in LTFHL. The ratings factor in Ind-Ra’s expectation of increasing 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, improved 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 and treasury 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. 

Analytical Approach:
For arriving at the ratings, Ind-Ra continues to take a consolidated view of LTFHL and its 100% (direct and indirect) subsidiaries L&T Housing Finance Limited, L&T Infrastructure Finance Company Limited, L&T Finance Limited and L&T Infra Debt Fund, given the financial and operational flexibilities that the consolidated platform offers to itself as well as to the borrowers.

KEY RATING DRIVERS

&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 INR35 billion) from the group since inception, including the last infusion of INR20 billion in 4QFY18. 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 likely to be one of the key value drivers for the group. L&T intends to maintain strategic linkages, management oversight and control, majority shareholding. L&T has provided support lines (INR20 billion) towards LTFHL on an ongoing basis. The management also stated fungibility with LTFHL in terms of capital and liquidity over the long term. 

Establishing Expertise-based Franchise:
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 and corporate lending). These segments constituted about 26%, 25% and 49%, respectively, of the loan book as of 3QFY19. 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 grew by 14% in last three quarters on a consolidated basis to INR937 billion at end-December 2018. The biggest contributors to the growth were the microfinance and two wheeler segments (above 50% growth) and real estate financing (31% growth). The share of the wholesale business has declined to 49% from 61% and the book size has remained almost steady in the last five quarters. L&T has articulated that rural and mortgage business would grow faster and hence would entail higher allocation of capital and funding. 

LTFHL provides flexibility to the infrastructure projects through multiple financing platforms: non-banking financial institutions (NBFCs), NBFC-infrastructure debt fund, sell-down and debt capital market operations. Consequently, it 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 both, the two-wheeler and tractor dealers. 

In the housing business, LTFHL focuses on real estate financing and mid-ticket size (median ticket size of INR5 million) home loans and LAP. However, about 57% of this book comprises real estate lending. In terms of additional key businesses, LTFHL has a wealth management vertical and an asset management company, which could in the medium term contribute meaningfully to its financials. 

Credit Costs Moderated, but Pressures May Build Up:
At a consolidated level, LTFHL carries almost 65% provisioning on the legacy stressed wholesale book (INR45 billion). The company has made INR2.7 billion of macro-prudential provisions on the rural and housing books; Ind-Ra expects three sub-segments to witness higher credit costs – microfinance on account of early delinquencies (0 dpd of the micro loans portfolio has increased to 4.3% in 3QFY19 from 3.7% in 2QFY19) especially in Odisha, real estate – on account of the liquidity stress that developers are likely to face over the next two-three quarters and housing and LAP – high delinquencies in the self-employed segment for the loans originated before FY18. 

The company has made INR2.6 billion of macro-prudential provisions. The real estate lending model incorporates longer tenor loans, market intelligence operations, technical evaluations and early warning based internal reporting across the loan tenure. This implies that potential stresses in the real estate book, in the agency’s opinion, could show up later than for other lenders while providing LTFHL more time to resolve project level issues. 

The wholesale book has exposure to a major infrastructure and financial conglomerate of about INR19 billion, most of which is towards operating assets and hence could have lower eventual credit losses. The profitability buffers of the wholesale book are lower than that for other businesses and hence are more sensitive to Ind-Ra’s stress tests than other segments. Bulk of the non-legacy infrastructure exposures are towards operating projects in the renewable energy and transportation segments. 

However, Ind-Ra expects the aforementioned risks to manifest in the form of 2%-3% credit costs at a steady state. This could be at higher end in case any one of the three main segments is stressed materially. Ind-Ra expects the steady-state return on average assets at about 2% annually in the medium term. 

Diversified Funding, Adequate Liquidity:
LTFHL’s consolidated funding profile is diverse in terms of funding mix, investors and loan tenor. Its borrowings are spread over several institutions. CPs constituted around 19% of the total funding mix as of end-December 2018. In its asset-liability management at the consolidated level, LTFHL also factors in prepayments from housing and wholesale businesses with a provision to review the prepayment assumptions every month. In case the prepayments and back-up credit lines are not factored in, LTFHL runs its asset-liability profile with 5%-6% funding gaps; Its back-up bank funding lines and unutilised limits amount to about INR90 billion and are likely to be adequate to manage the liquidity position. In addition, the company has demonstrated ability to borrow funds from the market materially even in 3QFY19, indicating credit profile at par with most other large group NBFCs. 

Ind-Ra expects the same to continue. Under their risk framework, LTFHL runs a liquidity book (mostly government securities and T-bills; about INR18 billion) as buffers against short-term liquidity shocks. LTFHL also has immediate access to INR 20 billion line from L&T. On a standalone basis, LTFHL does not have back-up lines for its CP borrowings and depends on its subsidiaries and liquidity of L&T Group for back-up funding. 

Moderate Capitalisation and Leverage:
The consolidated leverage (debt-equity) has improved to about 6.3x in 3QFY19 from 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 the leverage to remain on the lower side of the range as growth in some segments that witnessed high growth in last one year tapers. Consolidated equity to advances has improved to 13.8% in 3QFY19 from 12.5% in 2QFY18, mainly on account of higher profitability and an equity infusion of INR30 billion in 4QFY18. 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 modest deleveraging while growth beyond this level would consume incremental capital. 

Standalone Profile:
LTFHL on a standalone basis is a non-operating core investment company-NBFC with INR22.3 billion of loans and advances to its subsidiaries and INR87.4 billion of investments in its subsidiaries in 1HFY19. Its borrowings of about INR35 billion mostly consist of commercial papers. Over 9MFY19, the company made a net profit of about INR390 million, its leverage was 0.46x and double leverage (book value of investments to adjusted net-worth) was 1.2x. 


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, material deterioration in the credit profile of L&T group and a change of ownership outside the group could 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 consolidated advances were INR947 billion on 31 December 2018. It has 233 branches across the country, in addition to 1,181 micro loans branches (as of December 2018). 

FINANCIAL SUMMARY

Particulars (Consolidated)

FY18

FY17

Total assets (INR billion)

892.31

725.14

Total equity (INR billion)

125.508.8

78.94

Net profit (INR billion)

14.65

10.42

Return on average assets (%)

1.8

1.6

Equity/assets (%)

14.1

10.9

Source: LTFHL

 

 


RATING HISTORY

Instrument Type

Current Rating/Stable

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

24 January 2018

NCD

Long-term

INR5,000

IND AAA/Stable

IND AAA/Stable

CP

Short-term

INR15,000

IND A1+

IND A1+


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

    Associate 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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121