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Analyst Meet / AGM - Analyst Meet

Proposes business restructuring to consistently improve ROEs to high teen by 2020

L&T Finance Holdings

04-May-2016, 10:25
L&T Finance Holdings conducted an analyst meet on 03 May 2016 to discuss the results for the quarter ended March 2016 and strategy ahead. YM Deosthalee, CMD, Dinanth Dubhashi, Deputy Managing Director of the company addressed the meet:
Highlights:

Given weak infrastructure and rural sector activity, the company has recorded recent financial performance in FY2016. The company has posted healthy 22% increase in loans and advances to Rs 57831 crore at end March 2016, driven by disbursement growth of 29% to Rs 41765 crore FY2016 in the segments such as housing, micro-finance and operational projects.
The operating performance has continued to remain steady with healthy margins, steady fee income and stable opex. The asset management business continues to contribute positively. The company has exhibited stable performance across various indicators in FY2016
Gross NPA% has shown a marked improvement over December 2015 level, with GNPAs reducing from 3.33% to 3.05% at end March driven by substantial improvement in GNPAs of the farm portfolio and stable asset quality for the rest of the portfolio.
Overall asset quality (net NPA + net restructured advances+ net securities receipts) was flat on sequential basis at 4.85% at end March 2016.
The company has made additional prudential provisions of Rs 129 crore in FY2016 to take care of higher NPAs and consequent interest income de-recognition on account of regulatory shift in NPA recognition norms to 120 days from 150 days in FY2017. The company would continue to make such prudential provision in FY2017 also to take care of regulatory shift in NPA recognition norms to 90 days from 120 days in FY2018.
As per the company, the additional provisions caused 60 bps rise in the credit cost, while impacted RoEs by 175 bps in FY2016.
Of Rs 308 crore increase in provisions in FY2016, about Rs 208 crore was attributed to the farm sector.
Mutual fund business is recording healthy growth, with the share of equity AUM rising to 41%

Retail Finance

In retail business, the company has exhibited increase in the share of B2C products to 61% from 19% in last five years, driven by reduction in the share of construction vehicles and equipments business from 41% to mere 5%.
Retail disbursements grew by 29% while loan book increased by 17%.
Retail credit cost increase due to above normal stress in farm segment. Credit costs related to farm portfolio at 106 bps in FY16.
With the second straight year of drought, the company has revised its farm lending strategy. The company has moderated the fresh disbursements to the farm sector. The loan book in the farm segments is getting shifted to the areas with the higher share crop irrigation coverage. The company has also started second hand tractors financing.
The forecast of above normal monsoon rainfall is positive for the farm and rural lending segments. However, the company is expecting marginal uptick in its farm sector NPAs in Q1FY2017, as the cash flows would improve in Q3&Q4 on account of benefits of above normal southwest monsoon rainfall in 2016.
The company is confident of improving its farm sector NPAs by March 2017. As per the company, about 51%of NPAs in the farms segment has only one EMI due.
In the Two-Wheelers segment, the company has recorded strong 22% disbursement in FY2016 against 2% sales growth.
The company has more than doubled the microfinance book in FY2016. The company is the seventh largest MFI lender in India. The company has lowest MFI cost structure India and 4th lowest in the world.

Housing Finance

Housing Finance loans book surged 78% to Rs 6859 crore at end March 2016 over a year ago.
In the housing loan segment the company is shifting from salaried home loans to self employed home loans.

Wholesale finance

In wholesale business, the company has showed increase in the share of operational project loans to 61% from 21% in last five years. The company is consistently raising the share of renewable energy project loans.
About 78% of the fresh disbursement in the wholesale segment related to renewable energy sector, roads and transmission sector in FY2016. About 52% of the disbursement were to the operational projects.
The Asset quality of the wholesale segment is the control.
The amount of voluntary provisions related to the wholesale segments to stood at Rs 64 crore.

Investment Management

Average Assets Under Management (AAUM) of the investment management business grew 15% to Rs 25945 crore at end March 2016.
The share of equity assets increased to 41% of the total AAUM, reaching Rs 10316 crore, representing an increase of 20%.
L&T mutual fund has posted 4% growth in India against industry on growth of 1%.

Wealth Management

The company continues to exhibit healthy growth. The business is expected to achieve break even in FY17. Thereafter the business would not require any capital support.

Business strategy roadmap 2020

The company is planning internal re-structuring and several initiatives to boost earning. The company is expecting several changes over next 2 to 3 years.
The primary objective of the company is to consistently improve RoE to high teens by 2020. The company would be exiting from the low RoE businesses.
Among the core strength, the company is amongst the largest NBFC in India with 700 branches spread across 24 states. The company is the key entity in shaping up the rules for infrastructure debt fund. In the farm lending segment, the company is among top 3 lender with a market share of 8%. In two wheelers lending, the company is among top 5 lender with a market share of 10%. The microfinance business of the company is the seventh largest in the country. With so many strength, the company has decided to re-orient strategy to focus on select products and deliver steady improvement in RoE.
The company has prepared its strategy roadmap which is validated by the leading International consultant
Business wise, the lending business would focus on select products to grow asset book and RoEs. In the investment management business, the company would focus on maximizing the value creation. In the wealth management business, the company proposes to augment fee income to boost RoEs.
Company is currently offering 17 products in the lending business, which would be curtailed to product offering 7 products in three lending areas namely Wholesale, Rural and Housing.
In the wholesale segment the company would focus on infrastructure and structured corporate lending. Within rural products segment, the company would focus on lending to farm equipment, microfinance and two wheelers. In the housing loan segment the company would shift focus from salaried home loans self employed home loans and developer loans along with the LAP. With the parent into construction business, the company expects to benefit on developer loans front from parents relations.
The company proposes to focus on prioritizing capital allocation, making right investments, effective use of management bandwidth and handling industry downtown better than competitor.
The company proposes to invest in analytics and technology to control risks.
In the investment Management Business the focus would be on continued growth of equity AUM.
As regard to restructuring of the business, the company proposes to merge 4-5 subsidiaries into one which is expected to help on saving regulatory cost, management time etc.
As a part of the strategy, the short term goal of the company is to drive efficiency to bring down costs, while medium term goal is to unlock capital and investments. In the long term, the company intends to deliver improved RoEs.
As per the company, loan growth from the targeted three segments would be enough to compensate for run down of the loans by exiting some of lending segments.
The company would also follow sell down strategy to run down the targeted book. However, the company would not be in a hurry to exit the de-focussed loan segments.
As per the company, it does not have any capital raising requirements, as the capital would get released from the business to be exited. Also, the infrastructure lending is getting transferred to the Infrastructure Debt Fund having various benefits.
In case any any capital requirement, the preference capital would be raised at the holding company level and distributed among subsidiaries.
The company remains aspirant for banking license but not at the cost of RoEs.