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Focus on asset quality RoE could push up L T Finance stock

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Authors: JordanET Intelligence Group: After hitting a low of Rs 153.5 on March 20, the stock of LT Finance Holdings has since gained 12 per cent till May 3.

On Friday, it further gained 2.7 per cent after the company reported stellar numbers for the March quarter and for FY18.

The stock is expected to sustain the momentum considering the non-banking finance company’s (NBFC) focus on improving asset quality and the return on equity. The company’s FY18 performance shows its strategy to move away from loss - making segments and increase focus on more lucrative verticals including rural, housing and select wholesale financing is paying off. Two years ago, the company was saddled with non-performing assets from lending segments including construction equipment, gold loans, commercial vehicles, and leasing activities.

In FY18, exposure to this defocussed book was reduced to Rs 1,540 crore compared with Rs 4,931 crore in FY16. During the period, the focused loan book expanded to Rs 82,114 crore rom Rs 53,290 crore. The exercise has helped in improving the asset quality.

At the end of March 2018, the gross non-performing assets as a percentage of total advances (GNPA ratio) reduced to 4.8 per cent from 7.1 per cent a year ago.

The net NPA ratio dropped to 2.3 per cent from 5 per cent during the period.

The company is also keen to increase the provisioning for bad loans.

In the March quarter, it increased it to 52.5 per cent of total bad loans from 31 per cent a year ago and from 15 per cent two years ago. Apart from improving the efficiency of its lending activity, the company has also focused on fee income as a measure to support profitability.

It shot up by nearly three times to Rs 1,404 crore in the two fiscals to FY18. The effect of these factors was visible in the company’s overall performance for FY18.

Income from operations increased by 20 per cent year-on-year to Rs 10,021 crore while net profit grew by 40 per cent to Rs 1,459 crore.

The return on equity (RoE) improved by 272 basis points to 15 per cent after considering the capital infusion of Rs 3,000 crore in March.

The company has a target to report 18 per cent RoE by FY20. At the Friday’s closing price of Rs 176.3, the stock was traded at the trailing price-book (P/B) multiple of 2.6.

This is lower than the P/B of 3-5 for some of the other NBFCs.

The valuation gap is likely to reduce considering the company’s sustained improvement in asset quality and profitability.




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