L&T housing finance is a NBFC (non-banking finance company) with a diversified asset model versus the traditional single asset class model. It focuses on 2 of the most underpenetrated segments of the Indian economy—rural & infrastructure— which offer diversification in retail (34%), infrastructure (40%) and corporate (25%), as well as a good long term growth opportunity.
L&T housing finance has a strong parent & an experienced management team with intellectual and execution capability to deliver. A potential banking licence would be a long-term positive.
Long-term outlook..!
While we believe the long-term outlook is promising, there are some concerns in the medium term, most importantly related to the efficacy of its business model versus the traditional model.
Its quasi-banking strategy has received mixed reactions from investors, who generally prefer NBFCs for specific asset segment expertise & banks for diversity.
HSBC believe investors were concerned about LTFH’s high growth over the last 2 years, and lacklustre performance on margins and asset quality expected in 2011-12 could further dampen investor sentiment.
Returns are bottoming and should improve, but ROA will decline significantly to 1.7% in FY 12e from 2.5% in FY11, well below the average peer ROA of 3%. The expected sharp decline should be driven by funding cost increase and high slippages from the microfinance segment.
HSBC believe margins will bottom out in Q4 FY12 before improving, but will not go back to FY11 levels until FY14.
Returns should improve..!
Asset quality remains a concern, given the nascency of most asset segments, a high unseasoned loan book, and the fact that LTFH has yet to see a full NPL cycle. Therefore, credit costs should remain high at the current levels. Overall, returns should improve — ROA to 2% and ROE to 15% in FY14e, from 1.7% and 11% in FY12e, respectively – but should remain below peers’.
LTFH is trading at 12-month rolling forward PE of 13x and PB of 1.5x, a respective 60% premium and 8% discount to peers. Our target price is R51, implying a 7% potential return.
Review By HSBC
Registered office
L&T House,
Ballard Estate,
Mumbai - 400 001.
Tel: +91-22 – 6752 5656
Fax: +91-22 – 6752 5893
Administrative office
The Metropolitan
8th Floor,
C-26/27, E-Block, Bandra - Kurla complex,
Bandra (East),
Mumbai - 400 051
Tel.: +91-22 – 6737 2951, Fax: +91-22 – 6737 2900
Corporate Finance Helpdesk - corporatefinance-helpdesk@ltfinance.com
Retail Finance Products - retailfinance-helpdesk@ltfinance.com
Toll Free no: 1800-209-4747
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