L&T Finance Holdings - Walking the Talk


(Investor_No_1) #25

Looks like markets did not like the disclosure and honesty of the management. Market is very risk averse now. When tide turns, everyone rushes to the shore it seems…evident from the fact that we also are discussing about only exposure in the results and not about other positive metrics…interesting…


(Naveen) #26

Any idea at what time is the con call today and the dial-in details?


(d.investor) #27

(smehta) #28

L&T Finance Ltd

Highlights of Q2 FY19 and H1 FY19 Results

Key Highlights

  • Completed provision requirement on Infrastructure Legacy requirement and increase provision on an overall substantially based on company ECL model and in addition to that company started aadditional macro provisioning to butter the counter cycle. With all these levers in force company have delivered a 18 % ROE in Q1 FY19 and follow it up by another 18 % ROE in Q2 FY19 as well.
  • Company with the strength of its business model formed risk management framework and company group will continue the journey of posting excellent results despite the issues in the market.
  • In last 10 quarters company have faced atleast one strong headwindalmost every quarter. Each headwind was made by company in two ways
    • One immediate actions were taken to minimize any negative side of headwind
    • Using the learning to further strengthen company business model
  • Headwinds were :-Demonetization , Farm Loan Waiver , GST , NCLT Implementation of IND-AS

Q2 FY19 Headwinds

  • System Headwinds
    • Kerala deluge :- Company have total exposure of 800 Cr in Kerala and about 550 Cr in the districts which were affected by the flood. The situation on ground were extremely tough. Company resisted two responses which company peers gave by declaring a collection holiday for august and even September. Giving emergence personal loans to take care of their outstanding payments. Such responses will damage the long term borrowing culture and company will never take this route. Instead there were no collection holiday no emergency loan after 8th august company first reach out first to company staff and then to customers to make sure they are safe. Company reach to the customers through our call centerto check their wellbeing. Company make sure with their CSR effort material to reach to company worst affected customers directly through company staff and then after making sure that things are back to normal collection effort continues in a very humanitarian manner. As a result collection efficiency for September crossed 92 % an that of October crossed 98 % .79 % of the customer who missed payment in September have at least paid one EMI in October. Today company can confidently say that they will not have any material losses in company Kerala portfolio.
    • IL&FS default :- Company has NIL exposure to the entities which have defaulted which is ILFS , CSP the holding company and ILFS finances the NBFC,ITNL. Company entire exposure of 1800 Cr is to road SPV out of it 1700 Cr is to operating project and 100 Cr for a project which has already complete and has applied for COD. Company expect very soon operation realization getting soon the COD. The overall exposure is over 4 annuity and 2 toll projects where there is toll record of 3 and 10 years respectively. The actual point of discussion is O&M expenses projections and in future too very conservative traffic growth has been considered . There is no further equity which is expected from ILFS in fact from direct payment through IFD and termination payment in the agreement. More than 80 % of the exposure is guaranteed by the government Each of these project are completely reinvest and secure water tight escrow accounts on which company was having earlier. These projects are having DSRA and other repairs also to Rs 450 Cr which are in company control. All accounts are current so company will never loss in any of portions. Also all these projects are equity positive and hence likely to be sold first once the process begins. This will lightly result in refinancing of debts and perhaps in optimistic ways. Company do not expect a single rupee of loss from these projects.
    • Rumors on default of Supertech :- It has not default only ratings are being downgrade by certain rating agencies. Construction funding is an important and core funding for company as company have the advantage of differential knowledge of various developers , projects , micro markets and monitoring micro mechanism to L&T group synergy. Company business model focuses mainly on category A developers and also low and midlevel projects which company believe have less cyclical demand.Company lend primarily construction finance at project level at mid and late stage. Normally company is the core lenders to builders to have full control on the project cash flow security andmost importantly company ability to push the developer to correct the things if things are going bad. Company also carry out independent carry out valuation to make sure more accurately the projects in the fix cost. This is easily supported by strong sight level monitoring and early warning signal mechanisms. Company have exposure of Rs 800 Cr to Supertech construction project to three residential project of Supertechwhich are on a average 75 % sold already. Company receivable cover from this project is 1.98 times and security cover is 2 times for this exposure. The ticket size of the flat for this category falls into 40-60 lakh category which is a mid segment in term of affordability. About 37 Cr of retail sales are happening in this project every month. Company cancategory states that this project are ahead of projections as far as sales and collections are concerned and as par with construction projections.All payment to company are current and in fact through company escrow mechanism there is 42 Cr of prepayment in this project. The loss given default of these projects will be NIL.
    • Prevailing liquidity conditions in the market :- Current scenario throw two concerns regarding the ALM of any NBFC liquidity gap and Interspecific gap.Company is more than comfortably positionregarding both of this. Company had filed the funds with the regulator on a monthly basis Company structural liquidity on a monthly basisshow the positive gap in every bucket and this vary positive 467 % which is 10320 Cr in a one month bucket to positive 58 % which I 18500 Cr in the one year bucket. In addition to this company also do a extreme stress scenario which is that company risk consultant are held 1 in 10 scenario. Company assume that 40 % of unused bank line will get cancelled andonly 85 % of the payment that company expect will come not come in a stress scenario . Eve in that scenariocompany one month gap is positive 6200 Cr So company inflow from payment is less than in 1 year bucket and any payment lower than 1 year far exceed the payment scenario. The gaps which are calculated are calculated over zero rollover because this is the gap between the expected inflow and expected outflow so there is no question of rollover. So assuming any of the loan that is maturing within one year doesn’t get rollover. Company still are positive. There are two three measures of liquidity One more strong measure is the cash that company is carrying on the balance sheet . As on 30th Sep company carry 6661 Cr of liquid assets in terms of cash , FD and other liquid investments.Cash is close to 7 % of balance sheet no normal NBFC will carry this kind of thing but it just show the extinct to show that how much company is liquid not only the debt obligation but to make sure that company growth continues. In addition of cash company has undrawn bank line of 4200 Cr and plus back up liquidity of 2000 Cr from L&T. From 21st Sep 2018 this was the supposed date of market turn LTFS has raise total 18,500 Cr at an average cost of 8.56 %.
    • Interest rate Gap :- Company repressible assets within one year exceed company repressible liabilities by 13,500 Cr. Thus placing company in a extremely comfortable scenario. So company have assets at variable and fix rates , liability at variable rate and fix rate. Assets that company can reprise are 13,500 more than liabilities which may get reprised and that is called a positive interest rate gap and this is possible because 50 % of company liability is at fix rate for a period of 4 years. This make sure thatcompany total liability cost in last six month has increased marginally from 8.23 % to around 8.33 %. The comfortable position on liquidity and on interest rate is not by accident but it is a result of rigorous ALM management framework that company fall. Company current liquidity position and the demonstrated ability to raise funds are at little higher rates than what company is used to naturally in the current situation makes company quite confident that company growth in the retail housing loan will not face any fund constraints in Q3. In case of the tightening continuous at worst company will moderate little bit at wholesale growth to some extent.

Financials

  • PAT stood grew by 66 % to 560 Cr over last year same quarter
  • Achieve all time ROE of 18.47 % in Q1 and continue that in Q2
  • Focus book has increase by 26 % to around Rs 90,000 Cr over Q2 FY18. The De-focused book is now down by just 1000 Cr which is about 1 % of the overall portfolio.
  • Company retail growth continue at excellent rate with rural and housing now contributing above 47 % compare to 38 % last year of the portfolio.Even out of the wholesale book IDF which a steady high ROE business now contributes 9 % whereas rest of the whole sale book contribute 33 % down from 52 % last year. Company have finalized a slum sale of 700 Cr of supply chain portfolio to centrum thus further concentrating on core. With further increase steady retaliation will further increase profitability and granularity of portfolio.
  • Company focus NIMS plus fees very closely. It is at 6.86 % for Q2 FY19 up from 5.74 % last year and 6.75 % last quarter aided by competitive cost of funds pricing power in the market a positive interest rates gap and increasing granularly fee income. Company wll maintain it in this range even though company expects the weighted average cost increases by 20-25 basis points in Q3. .
  • Cost to income remain steady in range of 23-24 % on the back of continuing cost control and initiatives automation. Company have invested quite heavily in retail network. Retail growth is coming back in form of investments growing in rural network and despite that cost to income remain steady again.
  • Company asset quality :-It continue to steady improve. In show substantial reduction in stage-3 assets both in absolute and percentage terms. Gross stage-3 now stands at 7.1 % against 10.95 % last year and even 7.93 % last quarter. SO there is reduction YOY and QOQ. Next stage-3 stands at 2.73 % compare to 5.4 % last year and 3.17 % last quarter. And this achieved by rigorously monitoring the Early warning signal , tremendous concentration on early bucket collection. If one collect zero DPD then expenses will remain in control. Company had show the reduction in wholesale legacy as stated last year by management
  • Provision coverage has also increased to 62.5 % from 53.6 % last year indicating the strength of company balance sheet perhaps even the conservativeness of company ECL model. So between last quarter and this model it has gone up slightly but from last year to this year it has gone up to 9 % .In addition to this provision company have set aside another 110 Crout of which 60 Cr in rural and 50 Cr in Housing specially for construction funding as macro provisioning funding. In this quarter taking overall additional funding to Rs 200 Cr.
  • Company core strategy remain relevant and execution engine remain robust. Company will be able to deliver credible performance in coming quarters also.

Q&A

  • Is there any downgrade in the real estate at a group level portfolio and if yes than what is the quantum of that ?
    • On a group level there is an downgrade. It has pick on the EWS mechanism. The EWS mechanism is on the two level one is project one is general corporate . In General corporate on do not have EWS that is what one has to used about. So for these projects EWS was not triggered because everything was happening on time and some of the parameters were ahead of it so that gives the confidence that the projects are good but company started monitoring closely andcompany have put their own auditors and engineers on the site when company started hearing of corporate level downgrades. Company response is on corporate level immediately increase lens. Once this happenscompany persons were all the time on the sites. Company have used corporate level news to strengthened the monitoring mechanism.
  • On the full project size how much would be premium and how much would be mass in the overall book for geographical what would be in NCR , Mumbai and other locations ?
    • There are segments on which company is not positive , one is super luxury and not in absolute affordable segment. Both these segment company do for very well known developers only. So large past of company exposures in 700-1300 sqftcategory which makes it very low and mid-level affordability. Ticket size varies base on Mumbai , Pune , Bangalore, NCR but largely company has continuously concentrated on the 700-1300 kind of range which make it relatively less cyclic and geographically company is in fix cities. When company started there was Bhopal and other places and luckily the exposures were small so somehow company get exit or even write them off. Company job actually starts after doing credit and lending the money and it’s a very engineers way of monitoring and company want to very close monitoring on that. That is why company will be present only where company can present in numbers. These are fix markets Like Mumbai , Bangalore , Chennai , NCR largely.
  • What is the ROE outlook for the Near term view ?
    • In Q3 company will remain in top by
      • Growth :- For growth company have already money in the bank to make sure that rural and housing growth will continue at same rate. Company will not let go the opportunity. Company will have enough money to do full wholesale disbursements. Little bit shortage in wholesale fees can be there.
      • Positive Interest Rate Gap :-Company expect it average cost from 8.33 %to go to 8.5 %. Most definitely the yield increase will be more or more than that. So company don’texpect its NIM to contract. The model of 18 % ROE is to keep NIM+Fees 6.5 to 7 %. , Expenses and credit cost remaining at around 3 to 3.1 % thus bringing company Pre-tax ROA to about 3.5 % , post tax ROA to about 2.6-2.7 %. And hence ROE to 17.5-18.5 % kind of range. So whatever happen in near company will not go beyond the boundaries of model. In crises time the companies which can execute very well is very good and company will always tighten its productivity.
  • Company have presented a segmental ROA on which there is 1050 Cr negative flow which lead to negative 71 Cr ?
    • This is largely balancing figure . Company total net worth is 12,300 Crand than company place net worth for different business and this is the balance net worth number.
  • On liquidity how much is from ICD and what was the reason to borrow from ICD when company liquidity position is quitecomfortable ?
    • 1500 Cr is from ICD and that is from own group companies at 8.5 %. Necessity is that to give confident that company can raise it any time. So it is 1500 Cr raised and 8.5 % paid and just FD interest received. So company can carry that much negative and still give good result and company will not sacrifice liquidity for anything.
  • In Liquidity crunch now where does the company see the pricing power increase ?
    • Company expect the pricing power to be there everywhere generally but company will probably not take a price increase in the rural area. One can take the advantage of pricing power one by increasing priced and second by doing more volumes. Company will increase the volumes even further. Company did not look at NIMS for that particular product. That NIMS are so good that a 20 basis point reduction does not matter but if the proportion of rural increases overall and NIMS will get increase automatically.
    • In Housing and wholesale company has already taken price increases . In wholesale company total PLR increase over the last one two month is about 1 % and in home loans company have taken 40-50 bps increase. In LAP company have taken to 1 % around and construction funding average is little more than 1 %.
  • On micro loans that grown 115 % so that is growing faster than the industry So How much will be the volume and how much will be the ticket size ?
    • In the base rate, Last year second quarter that was just coming out of 2-3 post demonetization quarter so the disbursement growth between Q1 and Q2 was almost flat so this is where company have reach and now consolidate here for couple of more quarters by 2700 to 2800 Crfor 3-4 quarters till company get confident that it has gathered much operational strength even additional strength to control the operational risk. Because in this business operational risk is more than credit risk. Once company will become confident company will increase. In next quarter this growth will be much more moderated because ofhigher base.So over compare to last year company is just doing more number of customers also from nex branches that company have open in the last one year. The disbursement is 800 Cr out of 2700 Cr new meeting centers from last year which is almost 29 % of the disbursement. SO from 1600 Cr to 2700 Cr the gap of 800 Cr is coming from new meeting centers. So company has expanded into new geographies.
  • When were the loan given to ILFS and Supertechby company ?
    • ILFS and SPV loans are from long time and P&L is ongoing from Toll project history . The 3 projects have operating history of 4 years . 6 years and 14 years . So company refinance those when they were operational and good on cash flow. Each of them have history of more than 3 years and cash positive. Largely 2017 would be largely the sanctions.
  • What is the coverage on stage-1 and stage-2 loans ?
    • Stage-1 is 0.57 and Stage-2 is 6.4 so it will not change QOQ.
  • What is the De-focused loan book ?
    • 1100 Cr and it went down by large reduction and than 200 Cr of supply chain that company have added. So original De-focus is come down more sizeable than naturally.
  • What would be company yield on ILFS and Supertechexposure ?
    • Around 14-15 % on ILFS and 9.5-11.5 % on supertech. Company always match them with liability because they are long term exposure so whenever company contract exposure company also contract liability accordingly.
  • What is company outlook on the rural business and renewables verticals ?
    • Two-wheeler Business :-Company is clearly seeing significant tailwinds in this business is the festival season which is the biggest quarter of the year. This will be in line as expected , company is looking to enjoy positive competitive journey in the market place not so much by taking advantage of the pricing power but by gaining volumes that are already comfortable with NIMS positions.
    • On the farm side last year company had taken a contrarian call as company called out that market is likely to grow far more than 10-11-12 % that has been called out. This year also company has a contrarian call on it when there is expectation of a far higher growth rate company believe that this year would be a moderate growth rate at the best 10 % in the low teams area. In two years company do expect to take more than the proportionate share. Company is already 14 % of farm equipment market.
  • In which segment reduction in GNPL happen on QOQ basis ?
    • In stage-3 company has been articulated before company focus has been extremely high on increase in Zero DPD proportion of company book and extremely high collection. There are resolution taking place in the higher book and forward on the lower buckets of very hard control and seeing positive results. Last year to this year it is across and last quarter to this quarter farm will be slightly up in September that also it is almost compare to Q1 farm which actually should be high because of the 90 DPD scenariothe collection bulges will be in September and march they are actually avoided. So farmthere is no big reduction it is almost flat despite the September being the bulge month and other two there is a reduction. But from last year there is a substantial reduction in every business and quality of collection is very good.
  • What is the outlook on the renewable business ?
    • Company renewable is heavily load of operating renewable assets so risk ratio is 8:1 operating to under construction and solar is 4:1 that is current portfolio. However there is no change in central tailwind they are continuing in terms of new capacity addition. The model will continue to soft to a great extent the reduction in module prices has been able to neutralize the rupee depreciation. The issues related to safeguard duty has also been settled now with a clear opinion that will be pass through expenses but a good part is also now reflecting in lowering of panel prices. So safeguard a lower rupee has already absorbed for faster solar projects . In near term in solar capacity addition there could be a bid of slowdown because now government is bidding on larger projest and also giving longer time period to developer to execute them so there would be few bids have been cancelled. In very very near term there will be relatively slower capacity addition but 24 months down the line they will be still be there. Sector is seen significant amount of M&A activity.Some extent of company is guided by downside velocity So if there is slow down in market than only there will be slow down in underwriting but in terms of fresh opportunity it continue as attractive as ever.
  • How does the ILFS issue get resolved at a consolidated level if it go to NCLT ?
    • No they are totally ring free .Company don’t expect anything from ILFS in terms of equity On the contrary is all company projects are equity positive and even before NCLT the new management sells this project than also this project can generate equity to stream upwards to the lenders of the holding company. Company is not affected at all.
    • This SPV are supposed to be special purpose vehicle completely ring free and bankruptcy removed so unless and until there is a specific payment default till that other no other have right expect this SPV holder to take them to NCLT. Even ILFS cant take it to NCLT.
  • If 75 % of flats are sold in that project only 25 % left then why is there distress ?
    • These detail are about only the three project so may be these three projects are doing well and may be others not it is certificate to company choosing mechanism so company comment is that 75 % flats are sold.
  • How is the company 800 Cr payment structured and how will be the recovery ?
    • Flats are in construction and payment comes in construction phases so 75 % sold doesn’t mean that 75 % received because company have 2 times cover receivable so in underconstruction projects they don’t pay 100 %. So collection velocity is more than the risk undertaken.
  • In LAP segment what would be the average ticket side and major market company is present in ?
    • Market is same .Company home loans is largely flat. Main thing to communicate is how the picture in home loan is changing and that is positive point and company don’t want to loss it in LAP and other thing. So quality of home loan is changing. In this quarter also company have sourced 65 % direct compare to last year less than 30 %. Salaried ratio last year was 25 % has now gone above 50 %. So both direct and more salaried persons making company home loan portfolio stronger. Now company is also showing a good 50 % growth and both 388 and 600 are small numbers company acknowledge that. Company will take it to 1000 Cr first in a quarter then more. LAP is of 340 Cr and company is very choosy in that and maximum LTV is about 50-55 %. Even today company is facing competition with some providing 75-80 % of the LTV. If the business is not done at good risk-reward paradise company don’t want to do it.Self occupied residential is bulk of the portfolio at least 60-65 % of the outstanding. The large Tier- cities like Mumbai , NCR , Pune and Bangalore so that are above more than 75 % of the exposure.Company don’t see any chance of getting the NPA rise over there. Largely Mumbai and delhi will be 50 % of the portfolio. It is a bottom up approach based on the developer. Company finance the project that information come from L&T and than again re-check is done with L&T. Total projects are about 100 and client list would be about 60-65. Company is properly dealing with them with EWS.
  • Does company on home loan side have 80-20 kind of schemes ?
    • Yes
  • Any exposure to supertech with the 80-20 kind of schemes ?
    • No
  • What is company internal definition for CAT-A and CAT-B kind of developer ?
    • It derived from the experience of the developer the kind of Sq Ft He has delivered , number of on going projects with lenders then financials , ratings , quality. In terms of sqft deliver company look at 5 Million sqftdelivery . In Noida close to 8 Million sqft. CAT-B will be in range of 2.5 Million sqft and other things similar.
  • On ILFS is there any rating downgrade of these SPV ?
    • No
  • Did company is a sole lender for three project of Supertech ?
    • Yes
  • Did retailer taken home in the project managed by L&T Did he have to take Home loan from L&T only ?
    • No it is not compulsory but company try and on an average 35 % get converted.
  • In Real estate , How much is Construction finance and LRD ?
    • Construction finance is close to 80 % on residential space , 10 % to office space construction finance and rest 10 % is Early stage approval finance.
  • Of construction finance how much would be supertech whole charge ?
    • It is 93 % of project and company is soleand wherever company is joint also it is with companies like HDFC.
  • On Macro division do company have any target in mind or is it just a number where as and when company will feel to create provisions ?
    • At this point of time it is just a beginning company has just created 200 Cr andright now it is more ability base . Company prepared a paper also and presented to various forum also that this is a ability base provision not a need base provision. If it will be need base than provision coverage will be their under GS-3 and by definition there cannot be a target.
  • There is restate in part of balance sheet and P&l so is there any part apart from IND-AS ?
    • No it is only IND-AS .

Management Comments

  • Company is controlling all the exposure in a way that company will not have any losses from both of this exposures. All headwinds will act as an opportunity for company like L&T Fianance to sgow differential performance

(Investor_No_1) #29

Excellent details! Did you write all.by yourself after attending the concall or got this detailed information from any website? Thanks


(smehta) #30

on my own sir. after attending