Prabhudas Lilladher Suggests Buy This Mid Cap L&T Group Stock, Sees 10% Potential Upside

Leading brokerage firm Prabhudas Lilladher placed a buy call on L&T Finance Holdings Limited (LTFH) for a target price of Rs 88 per share. It sees a potential upside of up to 10% considering the given target price. The company reported the highest-ever quarterly retail disbursement of Rs 102.38bn in Q2FY23 vs Rs 89.3bn in Q1FY23. With a market cap of Rs 19,808.14 crore, it is a mid-cap financial sector stock.

L&T Finance Holdings (LTFH) is a leading, well-diversified Non-Banking Financial Company (NBFC) with a focused range of financial products and services across rural, housing and infrastructure finance along with mutual funds. The company is promoted by Larsen & Toubro Ltd. (L&T), one of the largest conglomerates in India. L&T Financial Services (LTFS) is the brand name of LTFH and provides financial solutions to a diverse set of customer base through its lending and non-lending businesses.

Stock Outlook & Returns

On NSE, the stock's current market price of the stock stood at Rs 80 per share as compared to its last traded share price of Rs 79.55 per share. Its 52 week low level is Rs 58.50 as on 7 March 2022 and the 52 week high is Rs 92.20 as on 22 April 2022, respectively.

 The stock in the past couple of months has performed well as it surged 0.5% in a week, 5.26% in a month, and 10.42% positive returns in 3 months, respectively. However, in a year, it has given negative returns of 1.48%. In the past 3 and 5 years, the stock has given negative returns of 10.26% and 59.02%, respectively.

Sequential growth in retail loans with consumer loans seeing a 31% QoQ growth; home loans growth excluding LAP shows a strong 9% QoQ growth

Loan book at Rs 900bn grew 2.3%QoQ and 3.6%YoY, on account of strong 9% QoQ growth in retail book. Rural book saw a strong growth of 9% QoQ, supported by 10% QoQ growth in micro loans. Strong 31% QoQ growth was seen in consumer loans. Company achieved highest ever quarterly retail disbursement (Rs 102 bn) up 15% QoQ, retail business now forms 58% of portfolio. 6% QoQ growth achieved in home loans including LAP is a strong positive. LAP portion saw a 2% QoQ degrowth. Calculated NIM improved to 7.63% vs 7.14% in Q1'23 due to higher retaillization of loan book ROA improved to 1.55% in Q2FY23 from 1.02% in Q1FY23.

Asset Quality shows marginal improvement

Q2FY23 Gross Stage 3 assets came in at 4.02% (lower than our estimates of 4.05%) as compared to 4.08% in Q1FY23 and 6.48% of Q2FY22.NS3 also reduced to 1.85% from 1.87% in Q1FY23.LTFH is carrying additional provisions (including OTR provisions) of Rs11bn (1.3% of standard assets) over and above the ECL provisions.

Outlook

"We maintain our 'BUY' rating in anticipation of company continuing to increase retail portion in their overall book to at least 60% by end of FY23 which is currently at 58%. On the OTR front Rs4.22bn of retail finance loans that had moved to 90+dpd have been fully provided for and the management believes the impact of OTR in unsecured loan business is over," the brokerage has said.

It added, "LTFH's Q2FY23 earnings (PAT at Rs4.0bn) stood above our estimates (PLe: Rs2.8bn) on account of lower provisions and better than expected AUM growth. Overall loans at Rs 900.9bn grew 2.3% QoQ and 3.66% YoY, higher than our estimates of Rs 898bn. Rural loans saw strong growth of 9% QoQ/30% YoY, whereas wholesale business saw a 5% QoQ sequential de-growth in line with management strategy to shift focus to retail. Housing Loans (Home Loans+LAP) witnessed strong growth of 6%/13% on QoQ/YoY basis bettering the 4%/6% growth shown in Q1FY23, thanks to a strong 8.7% QoQ growth in home loans."

Buy for target price of Rs 88 per share

Commenting on the valuation of the stock, the brokerage has said "We believe that LTFH has walked the talk in terms of retail loan growth, but will have to sustain this growth momentum in second half of FY23 and also continue to grow its overall AUM as it has managed to do in Q2'23. We reckon that LTFH valuations will improve when proportion of retail loans continue to go up over the course of FY23 and asset quality continues to be stable. Against this backdrop, we maintain our 'BUY' rating and maintain our TP at Rs88 valuing the core business at 1x Sep'24E PABV."

 

Disclaimer

The stock has been picked from the brokerage report of Prabhudas Lilladher. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.