EUR 120.00 For Business Accounts Only

MOSL: L&T FINANCIAL HOLDINGS (Buy)-Focus on balance sheet quality with healthy RoE of 16-17%

(LTFH IN, Mkt Cap USD3.3b, CMP INR118, TP INR145, 23% Upside, Buy)

Stable across parameters; earnings largely unchanged
** LTFH reported 3QFY20 PAT of INR5.9b (+2% YoY), in line with our estimate of INR6.0b. The quarter was characterized by early teens loan growth across focused segments, stable asset quality and core RoE of ~16%.

** We largely maintain our earnings estimates. LTFH is expected to report moderate loan growth (7-8%), dragged by the defocused and wholesale book. With stability on cost of funds and growth in high-yielding assets, net income (NIM + fees) is expected to be healthy at ~7%. Overall PAT CAGR is expected to be ~12% with a robust RoE of ~17%.

Steady performance in core lending segments
** Loan book grew 5% YoY to INR994b, driven by 14% YoY growth in the focused book to INR940b. De-focused book declined ~55%/25% YoY/QoQ as the company sold off some DCM bonds without meaningful P&L impact.

** LTFH raised INR104b in the quarter, of which ~50% came from term loans and ~35% via NCDs. Cost of funds was largely stable at 8.5%. Calculated spread improved 20bp QoQ to 6.3%. Interestingly, liquidity on the balance sheet doubled to INR71b from INR34b in 2QFY20.

** Disbursements in microfinance have been range-bound at INR25-28b for the past eight quarters, while those in 2W and tractors picked up sharply on a QoQ basis due to the festival season. Overall rural loan growth was 14% YoY with profitability remaining intact (RoA/RoE at 4.1%/26%).

** While disbursements in home loans remain strong, LTFH remains cautious in LAP (disbursement down 47% YoY to INR1.5b). In builder loans too, disbursements have moderated. Note that the builder loan book has been largely stable since Mar’19 at ~INR150b.