By Jindal Haria

India Ratings and Research (Ind-Ra) has taken the following actions on L&T Infrastructure Finance Company Limited’s (LTIF) 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^

-

-

-

INR 90

IND AAA/Stable

Assigned

NCDs

-

-

-

INR20*

IND AAA/Stable

Affirmed

^ INR90 billion limits shared by LTIF, L&T Housing Finance Limited (‘IND AAA’/Stable) and L&T Finance Limited (‘IND AAA’/Stable)

* Details in Annexure

Analytical Approach: Ind-Ra continues to take a consolidated view of the parent, L&T Financial Holdings Limited (LTFHL: ‘IND AAA’/Stable) and its 100% (direct and indirect) operating subsidiaries, L&T Finance Limited, L&T Housing Finance Limited and LTIF (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 it is 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 financial services to contribute about 20% to the group’s profits in the medium term.

 

Energy and Transportation Segments Dominant: LTIF is the second-largest subsidiary of LTFHL by loan book size (1QFY20: 27% of the total loans amounting to INR270.07 billion). The infrastructure business is housed in LTIF, L&T Finance and L&T Infrastructure Debt Fund. Project finance accounts for 81% of LTIF’s book, real estate finance accounts for 14%, while the remainder is constituted by capital market-treasury operations and structured finance. Assets in infrastructure, corporate finance and real estate financing are booked in LTIF and other operating entities, based on available liquidity and tenors, capital availability and regulations.

 

In addition, LTFHL provides flexibility to developers through multiple financing platforms: non-banking finance company (NBFC; through LTIF), NBFC-infrastructure debt fund, sell-down and debt capital market desks. Consequently, LTFHL (through LTIF and other subsidiaries) can remain exposed to performing assets through the project cycle. Over the last two-to-three quarters, the sell-down market and liquidity have tightened; as a consequence, the number of buyers of project exposure has declined. Furthermore, it might become slightly difficult to pass on the rise in LTIF’s borrowing costs. If the liquidity situation does not materially improve over the next two quarters, the yields in this segment could be under pressure, while projects with shorter tails (exposure of LTIF is low to such projects) and lower DSCR could face tail default risks.

 

Moderate Standalone Asset Quality; Overhang of Certain Large Group Exposures: LTIF (along with other operating subsidiaries of LTFHL) is one of the largest NBFCs providing wholesale funding. Over the past few years, it has avoided thermal power and focused on projects with a lower construction risk. The total impaired assets in the wholesale segment, including thermal power exposures, of LTFHL was about INR40 billion in 1QFY20, about 52% of which is provided. LTIF’s gross stage 3 assets accounted about 14.36% (INR38.77 billion) of the total assets under management in 1QFY20, of which about 60% are provided for. Ind-Ra expects the asset quality to improve in the medium-to-long term, as the stress in some infrastructure assets gets recognised and the proportion of newer vintage infrastructure projects (especially those in renewable energy and roads segment which have shorter set-up periods and therefore lower project completion risks) increases.

 

Modest Standalone Liquidity: The treasury operations and management are common for LTFHL and its operating subsidiaries. In terms of asset liability management, as on 1QFY20 the company’s short-term outflows are in excess of short-term inflows by 4.55% of total assets (including prepayments budgeted based on past behaviour and excluding committed lines from banks). In the absence of prepayment assumptions and committed lines from the lenders, there is a negative gap increases to 19.93% (INR57.04 billion) of the total assets as at end-June 2019. It also has unavailed bank lines of INR13.29 billion as on 1QFY20, which the management expects to increase roughly in line with the growth in the company’s loan book. The company also has 19% of borrowings with tenor of over three years. LTIF, in addition to its own fund mobilising ability, has access to L&T’s and LTFHL’s liquidity. Ind-Ra expects the pace of sell-down to reduce further implying that this subsidiary may need to build additional back-up bank lines. Nevertheless, given that there is stress in the industry for the borrower segments where LTIF and consolidated LTFHL also operates, Ind-Ra expects the standalone balance sheet liquidity as well as overall ALM position of the company to improve on an ongoing basis and will remain key monitorable.

Leverage Remains Key Monitorable:
The leverage of LTIF is 6.2x at FYE19 and 5.9x 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 a substantial portion of 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 LTIF 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 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

LTIF is a wholly-owned subsidiary of LTHFL which provides business loans for large-scale infrastructure projects in India.


FINANCIAL SUMMARY


Particulars (IND-AS)

FY19

FY18

Total assets (INR billion)

284.1

250.9

Total equity (INR billion)

39.3

24.0

Net profit (INR billion)

2.3

1.4

Return on average assets (%)

0.9

0.6

Equity/assets (%)

13.84

9.57

Source: LTIF

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

24 January  2018

NCDs

Long-term

INR110

IND AAA/Stable

IND AAA/Stable

ANNEXURE

Issue Type

ISIN

Date of Issuance

Coupon rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

NCDs

INE691I07EF9

19 July 2018

8.34%

27 December 2019

INR3.00

IND AAA/Stable

Utilised

INR3.00

Unutilised

INR107.00

Total

INR110.00


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