Stock pick of the week: Why there are better days ahead for L&T Finance
Increase in its loan book, provisioning for NPAs, business restructuring and likely jump in earnings in the coming years has made L&T Finance analysts top pick.
Despite the ongoing restructuring, L&T Finance Holdings’ gross loan increased 14% year-on-year (y-o-y) in the fourth quarter of 2016-17, contributed mostly by an impressive 20% y-o-y growth in its core segments— housing, wholesale and rural. While housing finance reported a y-oy growth of 28%, wholesale and rural financing grew 19% and 16% respectively. The company’s net interest income and net profit for the quarter also grew 21% and 34% respectively.
Improvement in asset quality is another point that needs to be mentioned. Though gross nonperforming assets (NPA) grew 9 basis points to 4.95% in the fourth quarter, the company made excess provisions and brought down its net NPA by 93 basis points to 2.89%. This voluntary provisioning include `186 crore charged to this year’s profit and another `352 crore from the benefits it gained due to the merger of group entities L&T Finance, L&T Fincorp & L&T Family Credit. With this additional provisioning cushion, L&T Finance Holdings is ready for a smooth transition to the 90 days NPA recognition regime. Analysts also expect that its gross and net NPAs will go below 4% and 2% respectively by 2018-19.
The company’s well articulated business restructuring strategy is also progressing smoothly. For example, L&T Finance Holdings’ ‘defocused assets’—assets not core to its business— came down 46% y-o-y and account for just 4% of the company’s total loan book, as of March 2017. Once its non-core business becomes negligible, L&T Finance Holdings plans to focus more on wholesale infrastructure lending. With high growth in lending and NPAs under control, the company may witness an earnings jump in the coming years and analysts expect a 36% earnings compound annual growth rate between 2016-17 and 2018-19. Return on equity has already improved from 10.8% in 2015-16 to 14.7% in 2016-17 and the is expected to go above 17% by 2018-19.
Despite the recent jump in its share prices, L&T Finance Holdings is expected to attract good investor interest in the future too because of its expanding business and improving profitability.
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