By Jindal Haria

India Ratings and Research (Ind-Ra) has taken the following actions on L&T Housing Finance Limited’s (LTHF) debt instruments:

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Non-convertible debentures (NCDs)/bank borrowings/subordinated debt^

 

 

 

INR90

IND AAA/Stable

Affirmed

NCDs*

-

-

-

INR30

IND AAA/Stable

Affirmed

^ INR90 billion limits shared by LTHF, L&T Finance Limited (‘IND AAA’/Stable) and L&T Infrastructure Finance Company Limited (‘IND AAA’/Stable)
* Details in Annexure


Analytical Approach: Ind-Ra continues to take a consolidated view of the parent L&T Finance Holdings Limited (LTFHL; ‘IND AAA’/Stable) and its 100% (direct and indirect) operating subsidiaries L&T Finance Limited, L&T Infrastructure Finance Company Limited and LTHF (together referred to as financial services) while arriving at 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.

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 and has received regular capital infusions (about INR35 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) towards financial services on an ongoing basis. The management also indicated fungibility with financial services in terms of capital and liquidity over the long term. Ind-Ra expects the financial services to contribute about 20% to the group profits in the medium term.

 

Increasing Share of Construction Finance in Housing Business Vertical: LTHF is the third-largest lending subsidiary of LTFHL by loan book size (12% of total loans) as of 1QFY20. It houses retail home loans (55%), loan against property (33%) and construction finance (7%) businesses. The company has increased its focus on reducing the share of originations through direct sales agents. Subsequently, the share of direct sourcing has increased to 74% in 4QFY19 from 31% in 1QFY18 in home loans (HL), and increasing the proportion of salaried home loans. It also has access to customers of L&T’s real estate construction business as well as projects financed by itself. Construction finance is also undertaken by L&T Finance, one of LTFHL’s subsidiaries.

 

On developers finance book, LTFHL (through LTHF and L&T Finance) focuses on minimising project completion risk, rule/policy-based lending by setting up and monitoring early warning systems. The real estate business is facing headwinds in terms of sales and liquidity; the agency expects the business to witness substantial stress over the next two-to-three quarters. 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 pre-2018 originations of self-employed LAP and HL are witnessing higher delinquencies and the agency expects higher credit costs to emanate out of this portfolio.

 

Steady State Credit Costs to be Higher: Overall, LTHF’s gross stage 3 (GS3) were about 1.92% of the total assets under management in 1QFY20. The HL business has GS3 at 1.4%, largely emanating from the self-employed segment; while GS3 in the LAP segment is 2.9%. Although the construction finance book exhibits GS3 of 0.98%, it is largely unseasoned book with a substantial portion of the loans under moratorium. Ind-Ra expects the steady state GS3 and credit costs to be higher in this segment, given the concentrated exposure and the stress building up in the real estate sector. The provision coverage ratio is 33% excluding the macro-prudential provisions of INR1.15 billion on the segment. The increase in credit cost in 1QFY20 includes one-time mark down of INR28.40 billion towards exposure to a specific HFC.

 

Modest Standalone On-Balance Sheet Liquidity: The treasury operations and management are common for LTFHL and its operating subsidiaries. In terms of asset liability management, as on 1QFY20 the cumulative negative mismatch in the short-term maturity bucket is 5.8% of the total assets (including prepayments budgeted based on past behaviour and excluding committed lines from banks and parent). In the absence of prepayment assumptions and committed lines from the lenders and L&T, the gap increased to 18.37% (INR25.31 billion) of the total assets at end-June 2019. It also has unavailed bank lines of INR26.13 billion, which the management expects to increase roughly in line with the growth in the company’s loan book. The company also has 18% of borrowings with tenor of over three years. It has access to LTFHL’s liquidity. LTFHL, in addition to its own fund mobilising ability, has access to L&T’s liquidity. Nevertheless, given that there is stress in the industry for segments such as real estate and small businesses (who are generally customers for LAP) where LTHF operates, Ind-Ra expects the company’s standalone balance sheet liquidity as well as overall asset-liability management position to improve materially on an ongoing basis and will remain a key monitorable.

Leverage Remains a Key Monitorable:
LTHF had leverage of 7.3x at FYE19 and 7.6x at 1QFYE20. The consolidated leverage of LTFHL has reduced to 6.2x in 1QFY20 from 7.0x in 1QFY18. Although Ind-Ra does not expect LTFHL and its operating subsidiaries to face funding challenges, the consolidated leverage of LTFHL is expected to continue its pace of decline especially given that a substantial portion of the portfolio is non retail. 


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, lack of improvement in standalone as well as overall liquidity position, inadequate decline in leverage in the opinion of the agency 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. Also, any material deterioration in the credit profile of L&T group or 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 houses the group’s housing finance, construction finance and LAP business segments. It is registered as a housing finance company with the National Housing Bank (‘IND AAA’/Stable).


FINANCIAL SUMMARY

Particulars*

FY19

FY18

Total assets (INR billion)

131.0

119.6

Total equity (INR billion)

15.3

14.0

Net profit (INR billion)

2.7

1.8

Return on average assets (%)

2.2

1.8

Equity/assets (%)

11.70

11.71

Source: LTHF

*Calculated as per IND-AS

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

3 April 2019

24 January 2018

NCDs

Long-term

INR120

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

ANNEXURE

Issue Type

ISIN

Date of Issuance

Coupon rate (%)

Maturity Date

Size of Issue (billion)

NCD

INE476M07BJ5

27 March 2018

8.30

6 April 2021

INR0.90

NCD

INE476M07BK3

6 June 2018

8.60

28 April 2022

INR0.45

NCD

INE476M07BL1

6 July 2018

8.95

10 June 2022

INR0.67

NCD

INE476M07BM9

6 July 2018

8.80

23 June 2021

INR0.15

NCD

INE476M07BO5

5 September 2018

8.71

20 September 2021

INR1.37

NCD

INE476M07BP2

12 September 2018

8.71

3 August 2021

INR0.89

NCD

INE476M07BO5

21 September 2018

8.71

20 September 2021

INR0.50

NCD

INE476M07BP2

24 October 2018

8.71

3 August 2021

INR0.35

NCD

INE476M07BQ0

24 October 2018

9.40

11 October 2021

INR0.41

NCD

INE476M07BR8

24 October 2018

9.38

11 March 2022

INR0.697

NCD

INE476M07BR8

6 November 2018

9.38

11 March 2022

INR0.676

NCD

INE476M07BS6

11 January 2019

8.90

11 January 2024

INR0.27

Utilised

INR7.33

Unutilised

INR112.67

Total

INR120.00


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level 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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121