Stock Pick From The Finance Sector

HERE IS WHY:

• A diversified and balanced product portfolio 
• Improving asset quality and recuperating margins 
• Strong contender for a proposed banking license

A strong management bandwidth and a well-diversified but balanced product mix with immense growth opportunities is how one can describe L&T Finance Holdings (L&TFH). However, the list of factors for recommending L&TFH doesn’t end here. L&TFH, a holding company offering diverse range of financial products and services through its wholly-owned subsidiaries, has an improving asset quality, recuperating net interest margins and looks like a prime contender for the expected banking licences to be provided to NBFCs. On the valuation front, the price to book value of 3.65x seems to be on the higher side as compared to its peers. However, the consistent performers always command a premium on the bourses. Let us now understand the company in detail.

L&TFH operates across the corporate, retail and infrastructure finance sector. It also has access to wealth management services, mutual funds and investment advisory services. Its wholly-owned subsidiaries comprise of L&T Finance, L&T Infrastructure Finance, L&T Capital Markets, L&T Investment Management, L&T Housing Finance and L&T FinCorp. This sort of diversification is the biggest advantage for L&TFH. The strategy of maintaining a diversified product mix has played well for it in recent times as it reduces dependency on any one segment. It is no wonder then that despite the difficult economic scenario, it has managed to post good growth in advances. The company’s consolidated loans and advances for FY13 have increased to Rs 33309.9 crore, showing a YoY increase of 29.80 per cent. 

The noticeable factor here is that despite the company’s strong growth in advances, the management has been able to sustain its asset quality. While many other NBFCs are facing issues of higher delinquencies, L&TFH has witnessed a miniscule increase in NPAs. The net NPAs as of March 31, 2013 stood at 1.26 per cent as against 1.17 per cent in March 2012. However, the NPA scenario has improved significantly as compared to 1.56 per cent in December 2012. Further, the increase in NPAs was mainly on account of the legacy portfolio of Family Credit, which it has acquired recently.  

In a scenario where most financial institutions are facing margin pressures, L&TFH has managed to sustain its NIM at 5.44 per cent for FY13 (5.51 per cent in FY12). The commendable aspect is that this improvement has been witnessed in the March 2013 quarter, where the NIM stood at 5.64 per cent (5.25 per cent in December 2012). The NIM has now bottomed out and is likely to move northwards. 

Even the management has suggested that the “margins are expected to be stable or witness a marginal improvement due to a likely improvement in the interest environment. The asset quality continues to be under stress and may show an improvement in the second half of FY14”. 

We also expect a good traction from the investment management and MF division. Though the investment division has made losses in FY13 putting some stress on the company’s consolidated performance, a better performance is likely from FY14 onwards. With a robust management bandwidth and a strong balance sheet, L&TFH would be a strong contender for the proposed banking license. As and when this happens, it will definitely provide an impetus to the company. 

On the financial front, the company posted a PAT of Rs 603.10 crore on a consolidated basis for FY13 as against Rs 466.20 crore in FY12. We thus recommend that investors buy the scrip at the current levels with a target price of Rs 95.