L&T Finance rating: Retain ‘buy’ with revised target price of Rs 130

Annualised credit cost of 2.3% was also largely in line with expectations and similar to Q1FY20 credit cost.

By HSBC Global Research

Adjusted earnings higher on account of lower tax outgo: Adjusted profits at `650 crore were ~20% higher than our expectations on account of lower tax outgo for the quarter at an effective rate of 14%. However, reported profit for the quarter came in at Rs 175 crore on account of a one-time charge of `473 crore on account of change in opening deferred tax asset (DTA) due to transition to proposed lower corporate tax regime. Net operating income (+10% y-o-y/+3% q-o-q) and pre-provisioning profit (+18% y-o-y/+1% q-o-q) were in line with estimates. Annualised credit cost of 2.3% was also largely in line with expectations and similar to Q1FY20 credit cost.

De-focused loan book drags growth: Assets under management (AUM) stood at `1 lakh crore, up 10% y-o-y and largely flat q-o-q; impeded by run-down of the de-focused loan book. Focused loan book grew 19% y-o-y led by a 24% y-o-y growth in rural and housing loans, respectively. Disbursements continued to decline across business segments leading to a 42% y-o-y drop in overall disbursements (largely flat q-o-q). Notably, micro-loans disbursements grew 25% q-o-q. We estimate an AUM growth CAGR of 9% between FY19-22e.

Asset quality remains largely stable: Reported Gross Stage 3 (GS3) assets increased marginally at 6.0% vs 5.7% in Q1FY20 and provision coverage ratio stood at 54% vs 58% in Q1. Deterioration in the asset quality of the de-focused loan book largely accounted for the decline in overall asset quality. Additionally, GS3 % of rural business also rose to 3.6% vs 3.4% in Q1FY20. The management is confident of reversal in asset quality of the rural portfolio in the coming quarters on the back of a better-than-expected monsoon season. We believe asset quality movement remains a key monitorable given the high risk perception towards the wholesale mortgage segment.

We adjust our FY20-22e earnings by -3% to 21% in order to factor in lower tax outgo going forward. We retain ‘buy’ with a revised TP of `130 (`120 previously) as valuations are undemanding.